Proposal to raise salaries amid revenue strain heightens severe macroeconomic risks

Staff Correspondent

Amid weak revenue growth, sluggish investment and mounting debt service pressures, the proposal to significantly increase the salaries, allowances and pensions of government employees has raised fresh questions about fiscal sustainability. If the recommendations of the National Pay Commission are implemented, an additional expenditure of over Tk 1.6 trillion will be added annually, which could put a major strain on the country’s existing revenue structure, economists believe.

In the current economic context, where the government is under pressure to meet regular operating expenses, adding such large fixed expenses could create new risks for budget deficits, debt dependency, and inflation.

The additional expenditure incurred in the major adjustments in the salary, allowances and pension structure as proposed by the Pay Commission will not be a one-time expenditure but will have to be borne annually as a permanent operating expenditure. The total additional expenditure, including the related additional allowances and welfare benefits, will be around Tk 1 lakh 8 thousand crore.

According to economists, such spending creates long-term pressure on future budgets, because once the salary structure is increased, it cannot be reduced.

The proposed budget for the fiscal year 2025-26 is Tk 790,000 crore. Of this, operational expenditure has been estimated at more than Tk 535,000 crore. Tk 136,000 crore has been allocated for the salary and pension sector, which is a significant part of the total budget.

On the other hand, the National Board of Revenue (NBR) collected an average of about Tk 30,000 crore in revenue per month in the first six months of the current fiscal year. Accordingly, the government will need about three and a half months of revenue to cover the proposed additional expenditure—which raises big questions about its feasibility.

Analysts believe that it is difficult to ensure such a large revenue collection in the short term in a situation where the tax-GDP ratio is still low, tax coverage is limited, and structural reforms in tax administration are not visible.

The issue is becoming more sensitive in the political context. With the elections coming up, various parties are promising to increase spending on health, education, employment and social security. As a result, there is a fear of increasing pressure on revenue from both operational expenditure and social sector expenditure at the same time.

According to experts, failure to manage such two-pronged spending pressures risks shrinking development spending, widening the budget deficit, and increasing debt dependency.

Dr. Zahid Hossain, former lead economist at the World Bank’s Dhaka office, said there is no clear source of funding for the proposed expenditure. According to him, this is not just a large expenditure – it is a permanent expenditure that will have to be borne every year.

He believes that even if implemented in stages, an average of several tens of billion taka will have to be provided annually. Meeting this expenditure by borrowing or providing funds from the central bank could increase the interest burden and pressure on inflation.

According to him, the government will then have the option of increasing revenue or cutting spending in other sectors. But it is difficult to increase revenue by a large amount in the short term, and cutting development spending could harm economic growth in the long term.

The Pay Commission has recommended a new 20-step pay structure. It proposes to increase the minimum basic salary from Tk 8,250 to Tk 20,000 and the maximum salary from Tk 78,000 to Tk 160,000. If implemented, this structure will add a large amount of additional expenditure to the existing expenditure for about 1.4 million government employees and 9 million pensioners.

In addition, there are proposals that will create multiple financial obligations, including health insurance, allowance restructuring, and expansion of welfare benefits.

Former Finance Secretary Mahbub Ahmed said that past experience has shown that the recommendations of the Pay Commission are usually not implemented 100% or all at once. After scrutiny at various stages, they are implemented step by step in line with the government’s financial capacity, and many proposals are revised or limited.

According to him, the current economic reality also requires a similar process.

Analysts have assessed that if implemented, a large-scale wage increase could widen the budget deficit, which would require the government to borrow more from domestic and foreign sources. This would increase interest payments and risk a large portion of the future budget being tied up in debt service.

At the same time, if operating costs increase, there is a risk that allocations for development spending will shrink, which could affect the pace of infrastructure development and growth in the long term.

On the other hand, increasing reliance on the central bank to finance the deficit could also intensify inflationary pressures, further increasing the cost of living for the common man. As a result, wage growth is not just a matter of income adjustment; it is also directly related to overall economic stability, financial discipline, and the path of future growth.

It is certainly necessary to review the salary structure of government employees, taking into account the cost of living, inflation, and social security issues. However, if it is not consistent with revenue capacity and macroeconomic balance, then in the long run, the entire economy may have to bear the impact.

Therefore, experts advise—large-scale spending commitments without a clear outline for revenue reform, spending priorities, and step-by-step implementation can be risky.