The budget for 2011 to be presented tomorrow is critical for the achievement of the economic goals of the President’s second term of office. It is through the budget that the economic programme of the government could be implemented. The foremost objective of the President’s second term of office is to achieve rapid economic development, reduce unemployment, mitigate poverty, reduce inequality and regional economic differences and improve the social welfare of the people. Tomorrow’s budget would be critical for the achievement of these economic and social development aspirations. The Budget should be a pointer to the directions in economic policy in no uncertain terms and provide the incentives for investment and economic growth.
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The manner in which the government manages the public finances is an important determinant of medium term and long term growth in the economy. The challenge facing the government is to increase revenue from its very inadequate level and align its expenditure more in line with what it could mobilize as revenue. Both tasks are by no means easy.
Recent fiscal experience has been that of revenue falling below the expected levels and expenditure rising above the budgeted amount. Another characteristic feature has been that the budgeted figures and the outcomes have been very different. During the time of the war the usual plea was that war expenditure necessitated an over run on expenditure.
This was only partially correct, as there were overruns in other expenditure as well. Now there is no reason why budgeted figures should not be conformed to. In the light of the recent lack of credibility in budget estimates, it is essential to present a realistic budget that is the final financial outcome for next year.
In its most recent statement after the article IV consultations the Executive Directors of the IMF said there was “a window of opportunity” to establish a strong foundation for economic growth. The IMF said "The current favourable environment offers a window of opportunity to address remaining macroeconomic challenges and build a strong foundation for private-sector-led growth," The IMF is of the view that this needs three conditions. "This will require continued fiscal adjustment, a more efficient capital market, and an improved business environment." The 2011 budget would have to do much of the required readjustments to achieve these.
All three of these issues have to be addressed, but the foremost among them is the need for the government to spend in line with revenue. The government must rein in expenditure and increase revenue. In the words of the IMF “Sri Lanka's state spends much more than it can extract as taxes from citizens, appropriates their savings and pushes interest rates to high levels making it difficult for citizens to borrow to build a house or run a business, a process economists call crowding out.” Containing the fiscal deficit is the means by which the economic conditions conducive to development could be achieved.
The private sector and foreign investors await definite moves to reduce the budget deficit in 2011. They would not accept the figures presented in the budget uncritically as time and again budgets have presented unrealistic figures that indicated a containment of the budget that economists and the business community did not believe would be the final outcome. This should not happen again in the interests of the economy.
On the side of government revenue there is a need to bolster revenue. The revenue collection of only 15 per cent of GDP is quite inadequate and falls far short of what should be expected with the per capita income of the country. The Taxation Commission that presented a bulky report to the government has no doubt addressed this vital issue. Increasing revenue collection has always been a thorny issue for finance ministers the world over. The increase in revenue collection has to be such that they are not disincentives to enterprise. In fact the business community is expecting a tax regime that would lower taxes for the corporate sector and for incomes of individuals. The expectation is that the 2011 budget will broaden the tax base and cut tax rates. On the other hand, tax holidays that have been abused and not served the intended results are expected to be removed. The expected tax amnesty may also rake in some additional revenue.
Cutting government expenditure poses a serious problem, perhaps an intractable one. One of the difficulties lies in debt servicing costs being more than revenue. There is no immediate solution to this. The solution to this problem lies in phasing out debt over time. Recent foreign borrowing has added to the debt servicing costs. Improving the trade balance and balance of payments should be the means of increasing foreign reserves rather than foreign borrowing at high rates. Domestic borrowing has to be reduced by decreasing the fiscal deficit. Once moves are made in this direction, debt servicing costs could be reduced. The fact that the debt to GDP ratio is declining is not of much relief as the debt servicing: GDP ratio at over 80 per cent is high. More pertinent is the fact that debt servicing costs (capital repayments and interest payments) absorb more than the revenue of the state and therefore continued indebtedness is inevitable.
One of the important areas of cutting down expenditure lies in reducing losses in public enterprises, particularly the Ceylon Electricity Board (CEB). Sri Lankan Airlines, Mihin Air and Ceylon Petroleum Corporation (CPC). Reforms in the administration and financial management of loss making enterprises are vital. Efforts to reduce the loss in the Electricity Board are most encouraging. It is also heartening to note that the government intends to sell its newly bought share holding in Shell Gas (now Litro). Further sale of some portions of state owned enterprises could raise funds as well as reduce losses that are a burden on the state coffers.
We hope this is the beginning of similar moves to reduce losses in state enterprises.Prudence in public expenditure has not been a virtue of the government. In a context when the government is incurring large fiscal deficits, an expectation is that ostentatious spending is cut as a means of reducing expenditure. This has not happened. While essential social expenditure such as in health education and scientific research are inadequate, other state expenses are exorbitant.
The growth of the economy during the second term of the President will depend on the modalities of the forthcoming budget. The containment of the fiscal deficit, the changes in taxation and the thrust in economic policies it signals is critical to achieving victory in the economic war. |
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