The government will fail to balance its budget in fiscal years 2010/11-2014/15 (July-June) as it confronts a host of domestic challenges ranging from shortages of power, water and gas to the need for welfare spending. Public expenditure is divided into non-development spending and development expenditure, the latter being administered under an annual development programme (ADP). The ADP channels funds into projects aimed at achieving improvements in areas such as education, healthcare and infrastructure. The government would post much larger deficits were it not for the fact that, owing to capacity constraints, successive governments have under-utilised the ADP budget. This is not true of non-development spending, 60% of which is accounted for by civil service pay, interest payments, and grants and aid to local governments, with a further 10% used to subsidise basic goods and services. The government's determination to continue to subsidise food and energy will place considerable strain on the public finances in 2011-15. But the maintenance of subsidies will help to support poverty-alleviation efforts and will greatly reduce the risk of social unrest.

Attempts to narrow the fiscal deficit are likely to be hampered by weak revenue collection. Bangladesh's collection rate for direct taxes is among the lowest in the world. One reason for this is the tax system itself, which is complex and features scores of exemptions, making it conducive to corruption. Revenue will be boosted slightly by improvements made to income tax and value-added tax (VAT) collection, but these gains are likely to be limited by the government's determination to keep scores of tax exemptions in place.