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Budget 2015: Serious erosions of public accountability
View(s):Favourable features and fundamental fiscal flaws
Revenue shortfalls, expenditure overruns and increased fiscal deficit
Commenting on the budget is easy as the fundamental fiscal flaws are almost the same as in previous budgets. It is difficult because the final fiscal outturn is likely to be different from the budget figures. This divergence between budget figures and final outturn makes a mockery of parliamentary accountability of public finances – a principle which stands as a cornerstone of parliamentary democracy.
The most serious fiscal concern is that expenditure is likely to increase considerably while a corresponding increase in revenue is unlikely. The budget has considerable increases in expenditure and inadequate evidence of enhanced revenue. Consequently the projected fiscal deficit of 4.2 per cent of GDP is unlikely to be realised. The increases in expenditures would be inflationary, if financed through money creation that has been well managed in the last three years.
Expenditure
The Opposition’s criticisms of the budget have been mainly on the giveaways as salary increases, reduction of prices, increases in subsidies and other benefits. Some of these were needed for people to cope with the increasing cost of living, despite the low rate of official inflation. However, these handouts, though inadequate to improve the livelihoods of low-income households, are a fiscal burden. Whatever the motivation for these giveaways and however justified they may be, the huge increased expenditure is a burden on the public finances. Further expenditures during the next few months in addition to those mentioned in the Budget could increase expenditure even more.
Prioritisation of expenditure
Notwithstanding increases in expenditure, the prioritisation of government expenditure leaves much to be desired. The bulk of budget expenditure is largely on four ministries. Expenditure is high on salaries and wages, debt servicing, defence, infrastructure development and presidential expenses, but other ministries have an inadequate share of the cake.
Notwithstanding these criticisms, there are also some commendable changes as well. A frequent criticism of government expenditure is that while physical infrastructure expenditure is high, expenditure on social infrastructure and human capital is inadequate. This is a serious constraint to longer term economic development.
The 2015 budget has addressed this issue to some extent by increases in expenditure on education and health. There are allocations for improving education and health and development of science and technical education. These are moves in the right direction. However there is a possibility that these expenditures may not in fact be incurred to the extent stated in the budget owing to revenue constraints. Frequently the allocations of funds for education, health and social welfare have not been released when the fiscal situation deteriorates as one means of reining in expenditure is to not release allocated funds for these. One hopes that this would not happen. If fiscal stringency requires curtailment of expenditure then should expenditure cuts should be in large physical infrastructure and wasteful expenditures.
Revenue
While government expenditure is likely to increase substantially, the tax proposals presented in the Budget do not give confidence that revenue would be increased substantially. Therefore further tax measures may be introduced by gazette notifications after an election. While these would enhance revenue, it is an erosion of parliamentary accountability.
While retaining the tax structure, especially corporate tax rates, adds to business confidence, there were avenues of raising revenue through higher taxation on “conspicuous consumption” of those evading direct taxes.
Revenue collection
Revenue shortfalls are a serious weakness in public finances. The Central Bank in its “Recent Economic Development: Highlights of 2014″ — released to coincide with the Budget — has drawn attention to this serious flaw in no uncertain terms. It has advised the Government that it should remain committed to fiscal consolidation to enhance welfare of citizens. It drew attention to the shortfall in revenue this year that is likely to increase the fiscal deficit.
The Central Bank cautioned that “Fiscal management in 2014 remained challenging mainly due to the shortfall in government revenue percentage of GDP despite government expenditure being maintained as a percentage of GDP during the first half of 2014 in line with the budgetary estimates”. And that “Government revenue as percentage of estimated GDP declined to 5.4% in comparison to 5.6% of GDP in the first half of 2013.
A decline was observed in the collection of excise tax on petroleum products and cigarettes/tobacco and Economic Service Charge (ESC)”. It also noted that, “Meanwhile, total expenditure and net lending as percentage of estimated GDP declined to 9.2% during the first half of 2014 from 10% of GDP during the same period in 2013. Accordingly, the overall budget deficit during the first half of 2014 was 3.7% of estimated GDP compared to 4.3% of GDP recorded during the first half of 2013 and the annual target of 5.2% for 2014.” These adverse trends are likely to continue unless remedial measures are taken to ensure better tax collection.
Foreign financing of debt
The Central Bank also drew attention to the increasing foreign borrowing to finance the deficit. “During the first six months of the year, the overall fiscal deficit of Rs. 371.8 billion was financed mainly through foreign sources, which accounted for 65.1% of the total financing requirement. As a result, during the first half of 2014, net foreign financing increased significantly by 65.5% to Rs. 242.1 billion while net domestic financing decreased by 44.1% to Rs. 129.7 billion in comparison to the first half of 2013.” The increasing foreign debt is more than a serious concern. It is a deepening crisis.
Last word
The divergence between budget estimates and final outturn and extra budgetary expenditure and revenue collection are serious erosions of public accountability that is a fundamental tenet of a parliamentary democracy. The expenditure overruns and revenue shortfalls imply a further deterioration in fiscal discipline, increase in public debt and debt servicing costs and a continuing difficulty in achieving fiscal consolidation.
The prioritisation of government expenditure leaves much to be desired owing to the disproportionate allocation of funds to ministries and over expenditure on large physical infrastructure projects that have left inadequate fiscal space for vital developmental expenditures on education, research, technical and tertiary education, health care and protection of vulnerable groups in the population such as the increasing proportion of the elderly.