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Interim budget’s new thrusts in fiscal policy
Five features of the Interim Budget are new thrusts in fiscal policy. There is clear reversal of regressive taxation, elimination of wasteful and ostentatious public spending, imposition of heavy taxes on conspicuous spending, recognition of the need to invest more on social expenditure and targeting of a lower fiscal deficit of 4.2 percent of GDP.
There was more seriousness and accountability in the preparation of the budget than in the recent past. However, the new taxation proposals showed signs of hastiness and inadequate thought.
Regressive taxation
Tariffs on essential food items were a regressive feature recently. The reasons adduced for these taxes were that they were incentives for local production. However the constraints to local production were not low prices, but other reasons varying with each commodity. These tariffs on food increased prices of essential foods and were a burden to the poorer sections of the people. While the reduction in tariffs on sugar, milk powder, wheat flour, uludu and other items of food would reduce the costs of living, the price of dhal, which is a significant item in local diet, should have also been reduced.
Revenues lost by reduction of tariffs on essential foods are made good by cutting government expenditure and through taxes that fall on the rich. This shift away from regressive taxation that fell on the poor is most welcome.
Wasteful expenditure
A feature of recent budgeting is large allocations for spending on infrastructure projects, extravagant expenditure of the President, grandiose schemes and excessive foreign travel of large delegations. The drastic reduction of such expenditure provides huge sums of money to offset reduction in import tax revenues and reallocation of funds for health, education and social welfare.
Reorienting priorities
The increased allocations of 3 per cent of GDP for health, and intent to spend 6 per cent of GDP for education over time are significant changes in prioritisation of public expenditure. Hitherto the large expenditure on the development of high cost infrastructure, defence expenditure and presidential expenses did not allow adequate fiscal space for essential social expenditure. However, mere increases in expenditure without reforms in education and health will not bring favourable outcomes.
Health
The shortage of drugs at government hospitals was clear evidence of inadequate expenditure on public health. Better facilities, equipment and drugs at hospitals would improve health of the poor and contribute towards a healthier nation. Adequate preventive measures, as the President has pointed out, are the priority with respect to kidney problems in the North Central Province and many other diseases. Increased allocations are needed for geriatrics and increasing illnesses associated with the country’s ageing population.
Education
Despite the objective of making the country an education hub, inadequate funding for primary, secondary and tertiary education was a serious drawback in developing a knowledge based society and an economy founded on higher technological capacity. It may not be possible to expend 6 per cent of GDP in the current year, but the commitment to increase expenditure is a move in the right direction.
Higher expenditure on education though necessary is inadequate to achieve quality and relevant education. Increased expenditure is necessary but insufficient to develop education that would contribute towards higher productivity in the economy.
The proper prioritisation of education expenditure is as important. Education reforms must go hand in hand with increased education expenditure.
Physical infrastructure and equipment of remote and small schools must be improved and qualified teachers are needed. There is a need to enhance education in mathematics and science in schools, as at present only about 10 per cent of schools have facilities to teach science. Consequently higher education too is tilted towards subjects that are of lesser significance for increased productivity.
There have been reforms in tertiary education, but much more has to be done in the revision of curricula, improvements in language skills and information technology capacities, as well as shift from rote learning to innovative, scientific and rational thinking.
New taxes
Taxation measures have been hastily put together and several taxation measures are flawed and have negative features. Several proposed taxes may be disincentives for investment. Progressive taxation measures could be devised to ensure higher revenue without disincentives for investment.
There are two bad precedents in the interim budget’s taxation: retrospective taxation and arbitrariness in taxes by imposing a tax on so-called super profits. A company can make money due to its increased efficiency and innovation and not necessarily through corruption.
As the Ceylon Chamber of Commerce pointed out the interim budget slapped punitive billion rupees taxes on some companies violating time-honoured basic principles of nondiscriminatory and non-retrospective taxation and some taxes were “distortionary and entity-based and may send confusing signals to investors leading to a reallocation of resources.”
Some taxes may require reconsideration, modification and perhaps even change. What needs to be done is to revamp and increase the coverage of corporate, personal and indirect taxes in a progressive manner with heavy expenditure taxes on luxury consumption items rather than ad hoc and targeted taxes. One of the ways to begin a rational and efficient taxation system is to make public the Presidential Taxation Commission Report that has been shelved and discuss its proposals.
Fiscal deficit
The intent to reduce the fiscal deficit to 4.2 per cent of GDP is commendable but difficult. While expenditure cuts would help in reducing expenditures, it is not certain that the ad hoc taxation measures proposed in the budget, as amended and implemented by a weak tax administration, would yield adequate revenue. The likely increase in oil prices too would reduce revenues. Furthermore, GDP is likely to grow slowly owing to less infrastructure development, lower corruption, lesser increase in public employment, disruption of economic activities due to elections and uncertainties in policies.
Conclusion
The interim budget has taken several steps in the right direction. These include the redressing of the regressive taxation, the cutting gown of wasteful and ostentatious public spending, and the reorientation of public spending to increase social expenditure. These objectives have to be pursued with resolve and determination.
The populist interim budget is a small price to pay to achieve huge progress on the political and constitutional front to achieve good governance.