deficits starving the country of development expenditure
Last week we dealt with one of the two fundamental
economic problems that vex the Sri Lankan economy-the underlying
and inherent balance of payment difficulties that have been masked
by the aid inflows, the debt repayment moratoria and the deferred
payment arrangements on oil.
The balance of payments was also aided substantially
by the increased remittances of Sri Lankans from abroad that wiped
about 75 percent of the trade deficit. These factors, some of which
were of fortuitous circumstances may lull the country into a complacency
that could aggravate the external balance in the long run.
Today we turn to the other fundamental economic
problem, which is the continued high budget deficits that have led
to a large public debt, starving the country of much needed development
expenditure while generating inflationary pressures.
This problem has been recognised by successive
governments. Budget speeches and other statements have indicated
a desire to rein in the deficits, but the fact is that budget deficits
have exceeded the desired levels. The 2005 Budget announced a projected
deficit of 8.2 percent of a Gross Domestic Product (GDP) and many
statements indicated that the deficit would be at that level. Yet
the final figures showed a deficit of 8.7 percent. The budget deficit
of 8.7 percent of GDP was financed through domestic resources to
the extent of 5.2 percent of GDP and through foreign resources to
the extent of 3.5 percent of GDP.
The Central Bank Annual Report and statements
of the ministry of Finance have pointed out that the deficit, excluding
tsunami expenditure in 2005, was 7.3 percent of GDP. While this
is an explanation of the part of the deficit, it makes no difference
in its impact whether it is due to this additional expenditure or
|Rising costs of oil imports and the practice
of not passing the full increase to consumers could be a further
burden on public finances
The actual out turn of the deficit being higher
than indicated in the Budget has been the story over the years.
In 2004 it was not different. The deficit exceeded the approved
budget deficit by 7.5 percent to reach 8.2 percent.
This is not a recent phenomenon. Governments have
been unable to keep current expenditure within the amount of government
revenue for the year for quite some time. For some time the deficit
was enhanced by an increased defence expenditure, while in other
years additional expenditures especially on welfare measures and
subsidies have resulted in the over run in public expenditure. Frequent
elections in recent years have not helped public expenditure control.
Making matters worse, the oil price hike has led to subsidies for
both the Ceylon Electricity Board and the Petroleum Corporation.
The additional expenditure on the employment of graduates and the
public service salary increases have been additional unbudgeted
Electoral politics is such that governments have
tended to incur expenditures in addition to what they have budgeted
and there have been inadequate commensurate revenue increases.
The deficit is budgeted to rise to 9.1 percent
of GDP this year. If it turns out to be higher we could be reaching
unhealthy double-digit proportions.
The problem arises due to inadequate revenue collection
as well as excessive expenditure. Revenue collection has been quite
inadequate over the years.
It has been less than 15 per cent of the GDP and
was on a downward trend for sometime till the last few years. Last
year saw a ray of hope in revenue collection. Revenue increased
to 16.4 per cent of GDP in 2005, which was higher than even the
expected 15.4 percent in the revised Budget 2005. In 2004, the tax
revenue increased to 14.3 percent of GDP from 13.9 percent in the
It would be necessary to keep this increasing
trend to raise revenue to around 20 per cent of GDP. In fact the
level required, in line with current expenditure would be 21 percent
of GDP that may be a difficult to achieve immediately but must remain
a goal of fiscal policy.
This is so as total expenditure amounted to 25.1
percent of GDP in 2005, which was higher than the anticipated expenditure
in the revised Budget for 2005. Current expenditure of 19.1 percent
was higher than the budget target of 18.4 percent in 2005. Public
investment too increased to 6.3 percent in 2005 from 4.8percent
of the GDP in 2004.
While the overall magnitude of the Budget deficit
is a problem, the more substantial issue is the reasons for such
a high deficit.
On the expenditure side we are overburdened with
a great deal of unproductive expenditure such as the high wage bill
and pension payments, debt servicing costs, defence expenditure
and wasted welfare expenditures. These costs and subsidies defray
losses in public corporations that absorb about 80 percent of the
government's current expenditure.
Consequently the capacity of the government to
spend on capital expenditure is curtailed.
Successive governments have failed to address
this problem seriously, postponing it to subsequent regimes. The
problem becomes even more serious as the public debt rises and interest
costs that now absorb 27 percent of government current expenditure
keeps rising. Although the public debt as a proportion of GDP has
declined somewhat owing to the revaluation of the external debt
due to an appreciation of the rupee, the aggregate figure has increased
and is likely to increase this year.
There may be an increase in defence expenditure
and the rising costs of oil imports and the current practice of
not passing the full increase to consumers could be a further burden
on the public finances.
In these circumstances there is little likelihood
for a fiscal consolidation that is imperative for growth.