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2015 budget: Political impulses stronger than economic imperatives
View(s):The practice of discussing proposals with a cross section of people and interest groups before the preparation of the budget is ostensibly a good one. It could elicit people’s difficulties and some budgetary proposals may take these into account. However, such popular discussions are likely to be mostly requests for reliefs without due consideration of fiscal resources or national priorities.
These representations are likely to bring out the hardships faced due to increasing living costs, difficulties faced due to bad roads in their villages, difficulties of selling produce at reasonable prices or inadequacy of schooling facilities and teachers in the village schools. These may awaken the Government to economic and social realities of rural communities and may perhaps lead to direct interventions by the President to resolve them. Whether the budget would redress the underlying causes for these problems is another matter.
Popular representations would focus on the high cost of living, despite the official rate of inflation coming down. The factors that have caused the increases in prices of basic items such as dhal, sugar, potatoes, milk powder and such basic items of food have been the regressive taxation of the Government that has increased tariffs on these items. The import duties on several of these were reduced last week perhaps in response to these representations. These tariffs were not imposed to protect farmers but owing to the need to increase government revenue that is woefully inadequate for its expenditure.
Interest groups
Many interest groups that make representation tend to ask for tax concessions and advantages for their businesses rather than address macro-economic issues that have an overriding impact on the economy such as bringing down the fiscal deficit, reducing indebtedness and increasing government revenue. The private sector has been complimentary about past budgets describing them as developmental and progressive budgets in public but criticise them within closed doors. They have failed to evaluate the priorities of government spending and point out the factors for inadequate private investment. For whatever reason, corporate bodies are reluctant to make frank and forthright comments on these issues that are critical to healthy public finances.
Fiscal deficit
These representations are not likely to discuss the central issues in public finances. The inadequacy of government revenue to meet expenditure was so severe that total government revenue was inadequate to even meet debt servicing costs in 2013. Therefore all government expenditures, current and capital had to be met through further borrowing. Therefore the Budget for 2015 must find the means by which the fiscal deficit is reduced to at least 5.5 percent in 2015, while at the same time finding the fiscal space for public expenditure that would meet priority areas of public expenditure.
Election year
It is particularly difficult to reduce the fiscal deficit in 2015 that is an election year. Additional expenditure with an eye to gain popularity would increase government expenditure in unproductive activities. It is likely that salaries and other benefits of public servants would be increased and large numbers recruited into the already bloated public services. On the revenue side unpopular measures of taxation would be avoided. Consequently the fundamental problem of inadequate revenue to meet expenditure may even become worse.
The fiscal deficit has been kept down by loss-making public enterprises borrowing from banks. It is however the total expenditure of the Government and its contingent liabilities that should be taken into account in assessing the fiscal deficit as it is the consolidated deficit that has adverse long term impacts on economic stability and growth. The large deficit between aggregate demand and aggregate supply would continue and threaten economic stability and long term growth.
Two pronged strategy
The reduction of the large fiscal deficits requires a two-pronged strategy of increasing revenue and decreasing expenditure both of which are undoubtedly difficult to achieve. The revenue to GDP ratio of 14 per cent of GDP in 2013 is below levels of countries with Sri Lanka’s per capita income. Tax avoidance and tax evasion are important reasons for this low revenue collection. Increasing revenue depends very much on the realistic nature of tax reforms, the administrative capacity and integrity of tax collectors. The government should tax luxury consumption of high income earners who avoid direct income taxation in diverse ways by designing taxes that cannot be avoided.
Wasteful expenditure
It is essential for the Government to have a strong resolve to desist from imprudent expenditure. Public money must be spent on the basis of national priorities. Losses incurred by public enterprises must be reduced by enhancing their efficiency. Reforms of public enterprises are an important means of expenditure cuts. The massive expenditure on infrastructure projects whose gestation periods are long, and in some instances whose returns are doubtful, should be curtailed.
Decreasing debt
In as much as the large servicing cost of debt is an important reason for increasing the fiscal deficit, the containment of the fiscal deficit would be the means by which the reduction of the public debt could be achieved. The containment of the public debt is crucial in reducing the fiscal deficit, as debt servicing costs are the highest item of government expenditure. By not containing the fiscal deficit and reducing the public debt, the country is on a dangerous course, especially as public expenditure has high unproductive and wasteful expenditures and revenue collection is tardy.
Conclusions
Although discussions with the public before formulating the budget are a good exercise to gauge public needs, it will not help address the fundamental fiscal problems. There is a need to increase government revenue by reforms in taxation and more effective tax administration. Reducing wasteful public expenditure and reduction of losses of public enterprises are essential to reduce the fiscal deficit.
All these factors weigh heavily particularly on the low income groups and their future generations. It is, however, difficult to expect steps to be taken to contain public expenditure in an election year. Political compulsions are stronger than economic imperatives.