Budget offers some tax relief, but inflation control needs stronger measures: Economists

Reducing taxes on selected goods may provide some relief, but its overall impact on inflation is likely to remain limited, economists have said in their initial reaction to the proposed 2026-27 fiscal year budget presented in the parliament today (11 June).

An effective solution requires coordination between fiscal and monetary policy, market management, and macroeconomic strategies, rather than tax measures alone, they said.

They noted that while avoiding additional tax burdens and expanding social protection are positive measures, the 19% expansion of the budget could still sustain inflationary pressure. Better expenditure reprioritisation could help achieve more effective inflation control.

Sayema Haque Bidisha, economic professor at Dhaka University, said fiscal policy plays an important role in controlling inflation, but it is not the only instrument.

"Some attempts have been made to ease pressure by cutting source taxes on selected essential goods, but this is a very modest measure in terms of impact on inflation," she said.

She added that reductions in duties and various taxes in certain areas could provide broader support, along with efforts to boost domestic production, particularly in food and agriculture, which may help stabilise prices.

However, she cautioned that the expansionary nature of the budget could have mixed effects on inflation dynamics, making overall impact uncertain.

Bidisha also highlighted monetary policy, noting that the policy interest rate has remained unchanged at around 10% for a long period, despite growing pressure from businesses to reduce borrowing costs.

She said market management is equally crucial, as intermediaries often push prices higher than justified during budget periods, requiring stronger governance and oversight.

The economist also pointed to the importance of the energy sector. "Adjustments in fuel and electricity pricing have direct inflationary effects through transport and production costs."

M Masrur Reaz, chairman of Policy Exchange Bangladesh, said the budget avoids adding tax pressure on citizens and businesses, but stronger measures are needed to tackle inflation.

"If prices are increased uncontrollably at different stages of the supply chain, the benefits of tax reductions will not reach consumers," he said.

Reaz said increasing the minimum tax-free income threshold slightly was a positive step, though the rise could have been larger to create a meaningful impact. He also welcomed the expansion of social safety net programmes and higher allocations.

However, he pointed out that the budget also missed opportunities in some strategic areas. The budget size has increased by around 19%, indicating an expansionary approach.

"Although higher development spending is necessary, a more limited increase or reprioritisation could've helped keep inflationary pressure in control," he said.

He warned that a large budget deficit and ambitious revenue targets could increase future dependence on bank borrowing.

"This may restrict credit flow to the private sector. At the same time, increased money supply through government spending could keep inflationary pressure elevated," he said.

Masrur said measures such as avoiding higher taxes, reducing some duties and expanding social protection were positive steps. 

"However, more coordinated and strategic initiatives are needed to directly reduce inflation, particularly stronger coordination between fiscal and monetary policies," he added.