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The Sunday Times Economic Analysis

By the Economist

Plan future budget strategy now
The more the budget is discussed and clari fications given, it is clearer that the budget
has confused objectives, uncertain strategies and unlikely results. In a sense this budget is not that different to many recent budgets, except that the private sector by and large and the International Monetary Fund have found the budget a good one. Their favourable response may very well be a reaction to the unparalleled mismanagement of the previous government rather than a response to the specifics of the budget proposals and expectations of better times.

The clarification on the withholding tax on savings interest is a good example of this confusion and the inability to achieve the intended result. When the budget was presented the tax was hailed as one intended to give an incentive to savings by reducing the rate of taxation. At the same time it was expected to yield higher revenues through better compliance.

When it was pointed out that the de facto position was that most savers do not declare their savings income and that therefore it was in fact a new tax on savings and a burden on the lower incomes an amendment was made. Savings of Rs. 72,000 earning an interest of less than Rs. 6000 per year would be exempt from the withholding tax.
It is common knowledge that this would result in the splitting of savings and avoidance of the tax by the affluent savers as well. This is certainly inconvenient but profitable to the saver. The ultimate result is that the intended increase in tax revenues would not be forthcoming.

The dilemma of the government is that it has to increase revenue and at the same time give the impression that it is not heaving new burdens on the people. The economy and particularly the treasury were painted as being in a parlous situation. Yet there was no effort to impress upon the people the need for higher taxation and better compliance. Even the introduction of the VAT was characterised as an act of reducing the burden of the tax on the lower income consumer through a lower 10 per cent VAT on essential commodities, while it was a higher 20 per cent for other goods and services. This sounds a reasonable differentiation in tax rates, but since the VAT is expected to yield higher revenue it is unlikely to be a relief to the taxpayer in general.

Expenditure cuts were the most disappointing. Public expenditure is higher in 2002 at Rs. 345.7 billion. Samurdhi continues to absorb a high expenditure. The Samurdhi minister who considers it an achievement to have extended the benefits of Samurdhi to 58 per cent of households and has publicly said that he would extend it to 70 per cent of households is surely at variance with the concept of proper targeting of the poor. The Finance Minister's hope of targeting the really poor is unlikely to be realised. The expenditure on defence too remained high. It was only Rs. 1 billion less than in 2001 and absorbs as much as 20 per cent of total expenditure.

The government's defence must surely be that in spite of the peace efforts that we must be prepared for war. The government could justifiably claim that it has little leeway in the next nine months to cut expenditure, as most expenditure is committed expenditure. Therefore the intentions expressed in this budget are not for this year but for the future. If this is so it is best that the government works out the modalities straight away. The government must be reminded that the best expressions of fiscal discipline are contained in President Chandrika Bandaranaike Kumaratunga's Economic Policy Statement of 1994. Yet the result was just the opposite of those intentions. We hope the lesser eloquence on fiscal discipline of Minister Choksy would result in better compliance. Fiscal discipline, containment of the budget deficit, accountability of public expenditure and targeting of welfare expenditure are undeniably good intentions of the government. What we need are actions to implement these if not this year at least next year.

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