Daunting challenges for the 2016 Government budget makers
Budget 2016 of the coalition government will be presented in November after a year-long political struggle for power which resulted in a totally neglected economy and worsening macroeconomic fundamentals in 2015. As a result, fiscal consolidation has become a critical challenge, particularly accelerated further away; maybe around roughly more than 50 per cent operational fiscal deficit, US$8.2 billion trade deficit, sizable amount of balance of payment deficit and declining foreign reserves.
Considering the extent of all those hazardous economic problems handed over by the last regime, it is interesting to observe whether the new government with diverse ideologies and political interests is capable of addressing these fundamental economic challenges and capable of installing first step for economic stability and growth and diverting the country in the right direction from its first budget.
Under the present economic situation, preparing a realistic budget for 2016 is a huge, daunting challenge due to decades-long structurally inconceivable impediments: particularly massive fiscal deficit; unbearable public debts and adverse trade deficit which are fundamentally affecting whole economic operation in the country. Hence the budget may be one step of a long term vision-plan aimed at economic stability and making a fiscal space for fruitful investments by the government and private sector, rejuvenating growth potential in the economy.
During the last 10 years, the government has taken over almost all the economic activities and the private sector was left out from major economic activities. As a result, government tax revenue base year by year begun to minimise while government failed to run economic activities profitably.
The ultimate result was that government had to borrow funds even to run the government. There are debt-powered highways, world class airport, airways, sea ports, cricket grounds, observation towers and mixed-use city development centres, floating-markets and a Colombo Harbour City Project. All these projects are made out of borrowed funds and the cost of future generations’ tax money. In reality, the beauty of the ‘5 star’ economy can be seen when great grandsons and daughters are repaying debts taken and enjoyed by their grand-fathers’ prodigious development during generations in the future.
Fundamental economic challenges for budget makers
The first challenge of the 2016 budget making is finding solutions to three fundamental economic problems: Huge fiscal deficit, related accumulating public debt burden and aggravating big trade deficit which are having the trickle-down effect towards other numerous economic difficulties in the economy.
The 2016 budget needs to be a basic one year policy statement of a long-term corporate plan, capable of solving those basic fundamental economic problems. Treasury funding situation is almost practically empty and it needs to collect taxes and duties and more borrowings even to meet the day to day expenses and debt repayments. Very often, when the fiscal gap is financed through issuing brand new currency, it has resulted in pushing the economy for a disastrous situation,
The Government is faced with serious fiscal problems, which need urgent solutions for example reducing the operating fiscal deficit through cutting wasteful, extravagant and unproductive expenditure and applying strict fiscal discipline in the Government owned institutions commencing from 2016.
The budget has to come also out with suitable solutions to minimize the public sector debt burden and provide appropriate proposals to accelerate private sector investment instead of government undertaking everything through debt-related investments.
The budget should come out with pragmatic economic policy measures with the objective of creating public-private partnership for rejuvenating a fruitful productive economy.
Enhancing revenue base and
controlling borrowing trend
It is imperative to enhance the revenue base through empowering and enhancing the private sector to engage in economic activities and alternatively minimising the Government involvement in economic activities. Similarly, major policy changes are suggested to attract private sector for engaging in outward-oriented productive activities enabling the government to tax their economic outcomes.
Government revenue needs to cover 3/4th of expenditure subject to a series of policy applications. Three major policy package areas are suggested here;
n Firstly, the budget should come out with a rational and effective pragmatic taxation system in order to catch the tax evaders and high income receivers and enhance the collection to 20 per cent of GDP by 2020.
n Secondly, replacing borrowing-led- investment by FDI and PDI (private driven investment) and enhancing tax revenue from FDI & PDI related economic activities progressing from 2016 to 2020 and improving the revenue up to 25 per cent of the GDP by 2020. Accordingly, by 2020, government revenue can be increased to around 75 per cent of the expenditure, making the broader fiscal space for development activities.
n Thirdly, going through first and second policy application successes, reducing the ultimate borrowing volume to 50 per cent to 40 per cent of GDP level and relieving the government-debt burden.
Creating outcomes-oriented expenditure system
Government budgetary expenditure was 18.3 per cent of GDP in 2014 and expected to be around 20 per cent of GDP in 2015 when you consider the politically cultivated extravagant outflows from Treasury such as 100 days-relief measures, salary hikes, commodity purchase-price increases, tax concessions and many more relief packages together with debt repayments. In addition, the interim political budget in 2015 resulted in adverse fiscal impacts, created extremely dangerous outcomes in the economy today.
However, allocations for compulsory huge expenditure votes such as salaries and allowances, pensions, security and law and order expenses, debt repayments and interests, transfer to public institutions, politically promised subsidies etc are unavoidable budgetary outflows. However, the Government needs to propose a “gradual unproductive expenditure relief programme” commencing from the 2016 budget linked to a 5-year medium-term fiscal policy programme.
In the meantime, allocation for human resource development, especially for education, TVET sectors, health services and social protection etc should be gradually enhanced. In addition, policy directives of the coalition government budget essentially need to be focused on good governance measures and control measure to eradicate losses, malpractices, misappropriations and waste taking place in the public sector.
Budgetary implications of massive foreign debts
In February 2015, the new Government complained about an almost empty Treasury and a large volume of liabilities left and payable bills worth of around Rs. 400 billion for on-going development work of the last regime. According to evidence, the previous regime has invested borrowed funds in many unproductive infrastructure projects without justification. However, the present Government too obtained a massive volume of debts for continuation of this ongoing trend.
As noted above, previous regime continued to borrow foreign debts to finance mega projects that did not yield returns, sizable outcomes, increase exports or reduce imports and the new Government too so far failed to change the borrowing trend. Hopefully total government debt may have increased more than $80 billion economy by the end of 2015. The budget has to have strategies to shrink borrowing requirement to most comfortable levels. However, in reality the new budget also has to have sizable allocation for repaying debts associated with white elephant projects like the Hambantota port.
For this project itself, the Treasury had to find money to pay debt installment and interest of around Rs. 7.2 billion for a year. The Treasury has to collect this from the public as taxes annually without contribution from the project for generations.
The Mattala airport is also another example costing taxpayers another Rs. 7 billion a year. There is no guarantee that these investments would produce sizable returns even in the future. According to the estimates, the new budget should have compulsory debt repayments, around Rs. 20 to 30 billion a year for similar foreign-debt-based infrastructure developments without income/return and contribution to the economy. Therefore the following reform policies are suggested to be introduced, starting from the 2016 budget, if the Government wishes to create one million new jobs by 2020.
Budgetary reforms to create
1 mln jobs
In achieving the fiscal targets suggested earlier, a wide range of reforms are needed to be introduced in the budget 2016, aiming at enhancing productivity, efficiency, institutional capacities and outcomes, targeting growth and more essentially the human resource development. The objective of generating one million jobs is imperative and depending on the success of these reforms.
Public sector productivity targeted structural reforms: Most urgently the 2016 budget onwards reforms aiming at fiscal consolidation are an essential requirement. In addition to the suggested expenditure and revenue reforms, necessary policy directives are needed for enhancing productivity, efficiency and value for money outcomes out of every rupee allocation
Reforms are vital in high cost areas particularly defense services, provincial administration, public transport, law and order, contribution to loss making enterprises, etc and also in productive areas such as education, TVET, agriculture, health, fisheries and utility services. The ultimate outcome of these reforms is to made available required resources for productive areas in the economy and bring down the aggravating fiscal deficit and reduce the borrowing limits. If it is possible to reduce operational fiscal deficit by 100 per cent by 2020 together with borrowing limits, achieving the set human capital development target is an easy objective.
Human capital development
reforms: The budget should be the first annual base plan link to a 5-year human development corporate strategy for generating one million jobs by 2020. Achieving the medium-term visionary target, making the appropriate resource allocation may be worthwhile to include in the budget itself covering the following;
a) Resource investment: In education and TVET and introduce continuous outcomes-oriented reforms that improve the quality and relevance of education for the new world demand. Educational allocation of Rs. 185.9 billion is a positive move but it has to have a proper medium term policy formulation at a high level authority.
b) Linking school/university education with TVET education: It is important to improve labour quality, quantity and pay attention to high-tech knowledge based areas while obtaining the NVQ level international recognitions.
c) Investing and allocation for health services: For improving the quality of labour force covering physical and mental health, nutrition and medical care the allocation of Rs. 174.1 billion in the budget is encouraging news but operational linkages to human development plan need to be built.
c) Introducing labour-force market reforms: In order to keep the labour force similar to international standards and enhancing the structure, mobility and global competitiveness, labour market reforms.
d) Recognising and empowering
private sector participation: Making the private sector as the education reform partner and TVET provider as well as the employment provider and beneficiaries while playing the facilitation role by the government are vital requirements,
e) Enhancing facilitation services: In deriving comparative advantages associated with human capital in the local and international labour markets, the Government has to be responsible for facilitation in TVET while the private sector takes up the challenge of shaping the pattern and placement in the job market, mobility towards urban and international markets
Public-private partnership reforms: The Government has to move out of shouldering all the economic activities and allow and empower the private sector to partner in business activities subject to a code of ethical conduct in Sri Lanka. The Government has to be a regulator, facilitator and gap filling partner. Accordingly, gap-filling mass-economic activities like Railway, CTB, Insurance, electricity, water, petroleum, etc will come under the state while allowing the private sector to compete, making the state sector efficient and profitable.
Reforms to uneconomical-debt-based projects: The Hambantota port-type projects are re-organised under a new vision as income and employment generating centres under international investors help. For example activities such as ship building, repairing, dismantling, training, free-port, etc are probable solutions for cost sharing basis and relieving the debt burden.
Public sector debt and external
finance sector reforms; Reduction of the massive debt burden is the topmost priority in order to avoid a debt crisis and related disastrous implications in the country. The following reform areas are suggested, essentially linked to the budget programme commencing from 2016:
a) Short term measures: In addition to the measures mentioned above, firstly one needs to mitigate this serious problem avoiding borrowings at high interest rates and obtain assistance for soft-concessionary loans while redeeming high interest loans. Secondly, as suggested, implement cost-sharing innovative programmes with the debtors and if possible go for debt rescheduling and concessionary terms and conditions. Thirdly, limiting future loans only for projects which are generating high returns, increasing export earnings or reduce imports.
b) Medium-term measures: Firstly develop friendly multilateral and bilateral relationship with large-debtors and go for partnership business arrangements and replacing debt based ventures with FDI arrangements. Secondly create conducive-export development policies to earn foreign exchange and strengthen the external finances in order to serve the debt repayments. Budgetary allocations are to be made available for developing export production, services, diversification, product development, market expansion, opportunity creation and maintaining competitive exchange rates. Thirdly, allocation for enhancing remittances from foreign employment and encouraging contribution from Sri Lankans living abroad for development.
Way forward
The ultimate objective of the budget is to generate a sizable human development capable of generating more than one million jobs and creating a decent standard of living for Sri Lankans. It is a challenging task for the Maithri-Ranil Government with different ideologies and political interests. The success depend on the strategies and policy implementation applied for achieving fiscal consolidation and reforms on the areas suggested. The new budget should come out with pragmatic economic policy reforms and strong political will for rejuvenating the economy progressively and clearing the way forward for a growth and prosperity for all of us.
(The writer is a freelance economic consultant after retiring as the Director General (Economic Policy Planning) in the Ministry of Rural Economy in 2006. He was attached to the Ministry of Finance: General Treasury from 1988 to 2002 and has wide experience in Treasury operations. He could be reached at palithaeka@yahoo.com)