Budget FY2026-27: Big promises, bigger deficit

The first national budget under the BNP government led by Tarique Rahman is, in many ways, a political statement as much as a fiscal document.

Unveiled against a backdrop of stubborn inflation, sluggish private investment, banking-sector fragility and mounting public expectations following the BNP's sweeping election victory, the FY2026-27 budget seeks to project confidence and a decisive break from the economic drift that characterized much of the previous decade.

Yet beneath the record spending plans lies a fundamental question: can Bangladesh afford the ambitions it has set for itself?

Finance Minister Amir Khosru Mahmud Chowdhury has proposed a Tk 9.02 trillion budget for FY2026-27, up from the revised Tk 8.49 trillion outlay of the outgoing fiscal year. The deficit is projected at roughly Tk 2.26 trillion, or about 4.1% of GDP, making it one of the largest financing gaps ever contemplated by a Bangladeshi government.

The sheer scale reflects both inflation-driven expansion and the administration's determination to show voters that democratic change will deliver tangible economic benefits.

The government has targeted GDP growth of 6.5% while aiming to reduce inflation to 6.5%, a significant improvement from the double-digit price pressures that have weighed on households for much of the past two years.

"The target is designed to ensure stability, enhance purchasing power, and improve living standards," Chowdhury said while presenting the budget in parliament.

Selling optimism

The budget's political appeal is easy to understand. Tax relief has been extended to several sectors. Personal income tax rates remain relatively moderate. Incentives have been expanded for investment in strategic industries such as energy and solar power.

Social protection spending has increased. Public-sector salaries are set to rise. New initiatives promise support for entrepreneurs, creative industries and technology-driven enterprises.

Taken individually, few of these measures are controversial. Collectively, they amount to one of the most expansive economic agendas proposed by a Bangladeshi government in recent memory.

The difficulty begins when these promises encounter fiscal arithmetic.

The government expects to collect Tk 6.76 trillion in revenues, including Tk 5.64 trillion through the National Board of Revenue.

That target implies a dramatic acceleration in tax collection in a country where the tax-to-GDP ratio has remained below 8% for years and where repeated reform efforts have yielded only modest gains.

Officials argue that the answer lies not in imposing major new taxes but in collecting existing taxes more efficiently. The government's strategy rests on modernizing tax administration, expanding compliance, reducing evasion and curbing corruption.

In principle, the argument is difficult to dispute. Bangladesh undoubtedly leaves substantial revenue uncollected. But turning that potential into actual receipts is another matter.

The country's revenue machinery has long been hampered by bureaucratic inefficiency, weak enforcement and entrenched vested interests. Governments of every political stripe have promised modernization. Few have delivered transformational results.

This matters because the budget simultaneously reduces tax burdens in several sectors while expanding expenditure commitments. If revenue collection falls short of projections—as it frequently has in the past—the government will face an uncomfortable choice between cutting spending, increasing borrowing or both.

The administration appears aware of this risk. One of the most notable changes in this budget is the attempt to impose greater discipline on public investment.

The Annual Development Programme has been set at approximately Tk 2.95 trillion, but future projects will be screened according to four criteria: economic viability, employment generation, regional balance and implementation readiness.

The message is clear: Bangladesh can no longer afford prestige projects that generate headlines but fail to generate returns.

The financing challenge

Even if revenue targets are achieved, the government still faces the challenge of financing a deficit exceeding Tk 2 trillion.

Domestic borrowing offers one solution, but it carries risks. Economists have long warned that heavy government borrowing from local banks crowds out private-sector credit. When the state becomes the banking system's largest customer, businesses face tighter access to capital, higher financing costs and weaker investment prospects.

That concern is particularly relevant today. Private investment remains subdued, industrial expansion has slowed, and businesses continue to grapple with elevated borrowing costs under Bangladesh Bank's tighter monetary stance.

Chowdhury acknowledged those challenges in his budget speech, saying: "Elevated interest rates, persistent energy constraints, weakening investor confidence, and governance challenges have together dampened private-sector investment."

As a result, policymakers appear increasingly inclined toward foreign financing.

The government is expected to seek substantial support from multilateral institutions, development partners and foreign lenders. Reports circulating in policy circles suggest Dhaka could pursue between $10 billion and $12 billion in external financing and budget support over the coming year—an unprecedented figure by Bangladesh's standards.

This is where economics begins to intersect with politics.

The BNP government has increasingly framed its vision around building a more comprehensive welfare state. Expanded social protections, larger safety-net programmes and broader public support mechanisms feature prominently in the budget's narrative.

Politically, the approach makes sense. After years of economic hardship, voters are demanding relief. The government wants to demonstrate that democracy can produce not only political accountability but also economic security.

The challenge is that international lenders are often more comfortable financing productivity-enhancing reforms than underwriting broad-based welfare expansion. Large-scale external financing typically comes with conditions related to fiscal discipline, subsidy rationalization, tax reform and public-sector efficiency.

The larger the borrowing requirement, the greater the likelihood that those conditions will become politically sensitive.

A high-stakes wager

This creates a potential contradiction at the heart of the government's economic strategy.

The administration is attempting to combine lower taxes in selected sectors, expanded welfare commitments, higher public spending and fiscal sustainability. Each objective is individually desirable. Pursuing all of them simultaneously may prove considerably more difficult.

None of this means the budget is doomed to fail. Indeed, some of its most innovative elements suggest a government trying to reposition Bangladesh for a changing global economy.

The Tk 10 billion initiative for the creative economy signals recognition that future growth cannot rely exclusively on garments, remittances and traditional manufacturing. Support for technology, digital entrepreneurship and knowledge-based industries reflects an effort to broaden the country's economic base ahead of its graduation from least-developed-country status.

Ultimately, the first budget of the Tarique Rahman era is less a conventional fiscal document than a statement of intent. It seeks to reassure voters that the new government intends to govern ambitiously rather than cautiously.

It assumes that stronger growth, improved tax collection and greater external support can create enough fiscal space to finance a broader social contract.

Whether that assumption proves correct will determine not only the success of this budget but potentially the trajectory of the BNP government itself.

For now, the budget represents a wager: that Bangladesh can spend more, tax less in strategic areas, expand welfare commitments and still maintain macroeconomic stability.

If the government succeeds in translating those ambitions into productive investment and durable growth, it could mark the beginning of a new economic chapter.

If it fails, the record deficit—not the record spending—may become the defining legacy of the first budget of the Tarique Rahman era.