What are taxes and government spending?
Running a government costs money: salaries for teachers, doctors and police, roads and bridges, hospitals, subsidies on power and food, and interest on past borrowing. Most of that money comes from taxes. There are two kinds. Direct taxes fall straight on income or wealth, such as income tax. Indirect taxes fall on spending, such as VAT and import duties, and they are hidden inside the price.
The decisions the government makes about earning and spending, how much tax to take and where to spend it, are called fiscal policy. Its main document is the yearly budget. When spending is larger than income, the government borrows to cover the gap, called the deficit.
Say Rafi is a student with no income, so he does not file an income tax return. He still pays tax. Mobile top-ups, a restaurant bill, shampoo from the shop: VAT or duty is built into the price of many things. And the subsidy at his university, the road his bus uses and the street lights at night are paid for with that tax money. Almost everyone in the country pays tax in some way and benefits from public spending.
Why it matters to an investor
- A direct effect on your return: tax rules on interest, dividends, savings-certificate profit and capital gains can change with each budget. What is left after tax is what counts.
- An effect on interest rates: a bigger deficit means more borrowing. Heavy borrowing from banks can push up treasury bill and bond yields and interest rates in general.
- An effect on companies: where the government raises spending, or which products get new duties or VAT, changes sales and profits across sectors. That is why the stock market watches budget day closely.
- An effect on prices: changes in VAT or import duty change shop prices, so they show up in inflation too.
Where the government’s income comes from
In Bangladesh, most tax is collected by the National Board of Revenue (NBR). According to the Financial Express, the NBR collected about Tk 3.70 lakh crore in FY2024-25. Of this, VAT was about Tk 1.41 lakh crore, income tax about Tk 1.29 lakh crore and import and export duties about Tk 1.00 lakh crore: roughly a third each.
How much tax the government raises compared with the country’s total income is measured by the tax-to-GDP ratio. By the IMF’s figures, total tax revenue in Bangladesh was about 6.9% of GDP in FY2024-25. Various reports note this is low even within South Asia. A low tax-to-GDP ratio means the government has to rely more on borrowing to pay for its spending.
Where government spending goes
Budget spending is broadly seen in two parts. Operating spending is the running cost each year: salaries and pensions, subsidies, running offices and interest on debt. Development spending, mostly the Annual Development Programme (ADP), goes into projects such as roads, bridges, power plants, schools and hospitals, which can raise future output.
One large cost is worth looking at on its own: interest. The proposed budget for FY2026-27 set aside about Tk 1.27 lakh crore for interest payments, out of a total budget of about Tk 9.38 lakh crore. These figures change every year; the latest are in the Ministry of Finance’s budget documents.
How fiscal policy works
- Spending more or taxing less (expansionary): more money reaches people and the market, so demand and jobs can grow. But the deficit and borrowing grow too, and if the economy is already running hot it can add to price pressure.
- Spending less or taxing more (contractionary): the deficit shrinks and price pressure can ease, but demand and growth may slow somewhat.
- How big the effect is depends on where the money is spent, what state the economy is in, and where the borrowing comes from. Economists disagree on its size.
Worked example
- The total budget is about Tk 9.38 lakh crore. The total revenue target is about Tk 6.95 lakh crore. 6.95 ÷ 9.38 ≈ 0.74. So about Tk 74 of every Tk 100 spent is meant to come from revenue.
- Within that, the NBR’s tax target is about Tk 6.04 lakh crore: 6.04 ÷ 9.38 ≈ 0.64, or about Tk 64. The remaining Tk 26 or so (a deficit of about Tk 2.43 lakh crore) is to come from borrowing.
- On the spending side, interest is about Tk 1.27 lakh crore: 1.27 ÷ 9.38 ≈ 0.135. So about Tk 13.50 of every Tk 100 spent goes on interest on past debt alone.
Result: about three-quarters of the budget comes from revenue and a quarter from borrowing, and a large slice of spending goes on interest. These are proposed targets; actual collection and spending at year-end can differ.
Source: UNB, 11 June 2026
See the numbers as a table
| NBR taxes | Other revenue | Borrowing | |
|---|---|---|---|
| Per Tk 100 | 64 | 10 | 26 |
Common mistakes
- Thinking “I don’t file a return, so I don’t pay tax”. Through VAT and duties, almost everyone pays tax.
- Taking budget targets as actual results. Revenue collection often falls short of the target.
- Judging a budget by its total amount. More important than the big number is its size relative to GDP and where the money goes.
- Rushing to change investments on budget day after hearing about one tax change, without knowing the full rule or when it takes effect.
Government income comes mainly from VAT, income tax and duties; when it falls short of spending, borrowing rises, and that borrowing affects interest rates and your returns.