Columns

If the former president’s astrologer Sumanadasa Abeygunawardena got it wrong and came a cropper predicting Rajapaksa’s political future by gazing at the stars then Prime Minister Ranil Wickremesinghe was spot on — as he says himself — and hit the bull’s eye when it came to prophesying the doom that awaited the Rajapaksa regime by simply glancing at the bottom line of Lanka’s balance sheet.

MISSING IN ACTION: Ravi Karunanayake

Throwing into the dustbin the Government’s maiden budget’s tax proposals presented last year in Parliament by Finance Minister Ravi Karunanayake and replacing them with his own modified set, Prime Minister Wickremesinghe told Parliament on Monday that he knew in 2014 the bad economic news that lay in store for the nation and realised then that the Rajapaksa Government’s days were numbered and would not last the fall of 2015.

“It was I who stated first that there would be a national election in 2015,” Wickremesinghe told the House. “I said so at the beginning of 2014. In truth, I made my prediction very much before Sumanadasa Abeygunawardena made his predictions. Sumanadasa Abeygunawardena made his predictions on the basis of formations of stars and planetary constellations. But I made my predictions after analysing the economic situation in the country. After analysing the way the Rajapaksa was mismanaging the country’s economy, I realised that there was no future for that government after 2015.”

MAN OF THE HOUR: Ranil Wickremesinghe

But can he foretell what the future holds for his own government come First of January next year? Especially when he revealed in Parliament that the government’s maiden budget had been made and presented in Parliament last November without the Finance Ministry having the foggiest of what Lanka owed the world. “We did not have proper or complete records of the amounts of loans taken at the time we prepared the budget,” the prime Minister unabashedly confessed to the House.

Oh, dear, oh dear, oh dear! What a monumental goof-up. A persona may be up to his neck in debt but as long as he knows the extent of his total liabilities there is still hope left to put his house in order and, even swimming against the tide of his creditors’ claims, to emerge salvaged with his head above the water line. But when he is all at sea as to the volume of his debt and neither knows nor cares as to whom he owes and how much then all the grandiose plans he makes based on a vague figure of debt his tortuous mind has conjured up will come to nought and sink him when his titanic iceberg of debt hits him unaware.

It’s the same for the nation. Only far worse. The Prime Minister’s startling revelation this week would have sent shock waves through the international lending institutions to discover that here is a country clueless as to its financial position but still having the temerity to ask for more.

Fortunately for the Finance Minister Ravi Karunanayake, he has been blessed with a guardian angel in the form of the new economic seer, namely, the prime minister who has not only come to his aid, albeit four months late, not only with a shovel in one hand to clear up the ghastly mess made but also with a wand in the other to conjure up an instant panacea to overcome the debt burden which, as the Prime Minister told the House, is Rs, 8,475 billions, which amounts to 74.9 percent of the GDP. That is the country’s total outstanding loans at the end of 2015, according to the latest documents.

According to the latest documents? You mean there’s more to be unearthed? If there were any magic left in the wand Ranil wielded with so stern a countenance when he presented his proposals based on the new debt figure, would it not have taken flight and fled to a more robust staff than see its mystic powers flop on the shifting sands of uncertainty?

The Prime Minister, however, maintained a stiff upper lip and ignored the risk of what happened to Ravi Karunanayake happening to him. Blaming the Rajapaksa regime at the outset for mismanagement of the economy, he said the country has fallen into a debt trap of Rs. 9.5 trillion. The challenge now he said was how to get out of it. Even as George Soros, the billionaire money market player who once brought down the Bank of England with his ruthless manipulation of the British sterling, had advised the government on his recent visit to Lanka, the only solution was to ‘increase national production with the utmost care in spending.’

Ranil’s new proposals were in the main to increase Value Added Tax to 15 per cent. He wished to withhold proposals with regard to corporate taxes and non-corporate taxes for one year and to continue the rates proposed in the budget 2015 for those two taxes. Tax relief granted to some sectors will be removed. Such action, he said, was essential to ‘maintain GDP at 5.4 per cent and the economic growth rate at 6 per cent in 2016.

But then he announced a drastic reversal of Government policy, a paradigm shift in UNP’s economic philosophy. He proposed to re-impose capital gains taxes which his uncle J.R. Jayewardene had removed in 1987 from the general tax framework and which not even the left of centre SLFP led by Chandrika and Mahinda had ever re-introduced.

Is this proposal to exhume capital gains taxes after it had been entombed for the last thirty years wise? How much will such a tax raise in actual terms? To what degree will it flag down the natural dynamism of a nation on the move? Has such a stale socialist policy room to co-exist with the natural entrepreneurism vital to kick start the economy and get it running, no matter the weight of the tax burden? When what is wanted is morale to be high to brave the challenges ahead and transcend the many obstacles the nation may face economically, won’t such a negative tax put a damper on the collective spirit and have a negative impact of any economic recovery?

The Prime Minister stated that there has been growth in private capital in the country during the last decade. But is it such a bad thing? Something which is anathema to the capitalist UNP? Successive governments including the present coalition have called upon the private sector to be the engines of growth. But how on earth can the private sector be the engines without sufficient private capital to fuel the ventures? Or would the answer be for the state to gobble up this surplus private capital by taxing it mercilessly and to spend it on maintaining government owned white elephants?

Merely by reducing the rich to destitution does not make the poor richer. The old communist theory of ‘tax the rich and feed the poor’ has long been discarded. It is the creed of the envious. It only makes the ‘haves’ join the ‘have nots’ and thus turns society into one utopian classless society where all are equal in penury’s well. It sucks out the driving motivation of all mankind: self interest, self improvement. No wonder that the Prime Minister’s uncle, President J.R. Jayewardene, removed capital gains taxes from the general tax framework as one of his last acts in office in 1987. For twenty nine years it has been the case. So who is the secret economic new red goblin who has ill advised the prime minister to resurrect the old socialist vampire and allow the phantom to suck the life blood of the capitalist order and render it moribund?

For nearly forty years now the nation has been officially called the Democratic Socialist Republic of Sri Lanka but beneath the veneer of maintaining the ‘politically correct’ title, in practise what has been followed are downright capitalist policies. We may not have let the robber barons come yet, even as President Jayewardene said he was prepared to do to uplift the economic life of the nation, but we have come very close to it. Or else what does the worldwide general invite issued with a blank cheque of incentives to international investors possibly mean? Is it prudent for the leader of the ruling party so traditionally wedded to capitalism to suddenly remove his green glove to show his left hand is Marxist red?

Times may be hard and the future appears even bleaker. And the people may have to be asked to tighten their belts even further around their shrivelled and shrinking waist. But there are a great many measures that can be used to re set the course of the nation’s economy. Introducing capital gains tax will not be the answer for in actual terms the income so received by the treasury will be negligible. But it would have been extracted at a heavy price. It is merely the easy short term solution proffered by unimaginative minds, their vision as bare as the nation’s coffers.

Not even the die-hard radicals in the communist JVP have even whispered it to be re- introduced throughout these last thirty years. They themselves may have benefitted from it and come to the conclusion that the fruits of labour must belong to the grower, the flowers of the nursery to the gardener and the dividends of investment to the risk taker.

Money received from the sale of land does not stay hoarded under one’s bed. It is either consumed or invested in the enterprises or in the stock market or saved in fixed deposits. It returns to the economy and increases its dynamism. If this money is taxed and people are inhibited as a result from selling then such money will remain tied up and will result in a stagnant economy with no money to make it whirl. Thus it is indeed surprising to see in the midst of a studied thirty year silence from socialist and communist forces, the very Moses of private enterprise suddenly seeking to divide the settled waters of opinion by clamouring to tax capital gains.

The Prime Minister ascribes the lack of capital gains tax as being the reason for higher property values. But then he forgets that one of the cardinal principles of economics holds the law of demand and supply to be paramount. This is the means through which the price is set. Any other way is only artificial and will be unsuccessful. Land, stockholdings are also commodities like any other and the free trading of it without the imposition of a penal tax should be encouraged to promote a dynamic market which will then determine the correct trading price. The proposal to introduce capital gains after a thirty year period will bring only short term benefits, if at all. It will not pull us out of the quagmire but will, in the long run, assist in dragging us further into it. Furthermore it will send the wrong signals to the right parties we are trying to woo.

It should not trouble us at all that we are one of the few countries that do not to have any capital gains tax at all. We should consider ourselves fortunate even as Singaporeans are, for in that trading Mecca — which many wish Lanka to become — there are no capital gains taxes. Generally, the gains from the sale of a property in Singapore are not taxable but it may only become liable to be taxed if the individual buys and sells property with a profit seeking motive. Profits or losses derived from the buying and selling of shares or other financial instruments are viewed as personal investments. These profits are capital gains and are not taxable.

Other countries may have such capital gains taxes. Let them. Rather than possess a ‘follow the foreign leader’ debilitating mentality, Lanka should do what is best for Lanka in all matters. It should not matter in the least whether other nations sing two or three national anthems and sings of its unifying power or whether other nations have federal states and swear by it. The need to justify our actions on the basis other countries are doing it must be shunned. Lanka’s solutions must be tailor made for Lanka’s own problems. Ranil Wickremesinghe should reconsider the advice he has been given to reintroduce capital gains tax by economic dullards who can think no further than the easiest way out without considering the negative impact.

And, whilst all these proposals are presented in Parliament by the Prime Minster, where does all this leave Ravi Karunanayake? Did he not read the tea leaves in his morning cup and discern the trends four months ago that Lanka’s cupboard was bare as his Prime Minister had been able to predict it will be with aplomb two years ago? Alas, he was not present in parliament on Monday to answer these questions, even if asked. Perhaps it doesn’t matter anymore. But what the nation will like to know is who is really responsible for the country’s finances? At whose table does the Lankan rupee initially stop before it rolls to the president’s desk? If there is anyone wearing the finance minister’s shoes this morning, however ill fitting they may be, will he please stand up?
Meanwhile, the joint opposition this week called for a no confidence motion against Ravi Karunanayake for the second time within a year. As can be recalled he was sworn in as the Finance Minister in January 2015 soon after the presidential election and again in September last year after the general election in August.

“In any other country the Finance Minister faced with such a situation would have resigned immediately,” Colombo District MP Bandula Gunawardena declared at a media conference on Tuesday after the Prime Minister had revamped the budget presented last November. “The Joint Opposition had started collecting signatures for the no faith motion against Ravi Karunanayake,” he added.

Whether the joint opposition can muster sufficient numbers to force Ravi Karunanayake out of office remains to be seen. But all the signs seem to portend that they may well be able to depend on at least one sure vote from the other side of the political divide.