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The 2021 budget presented to Parliament last Tuesday by Prime Minister Mahinda Rajapaksa as the Finance Minister, contained the usual plethora of promises, proposals and programs for economic development, social uplifting and welfare.

It was based on the concept of developing a self-reliant national economy that focuses on the social and economic uplifting of rural people and the agrarian economy that was articulated in President Gotabaya Rajapaksa’s ‘Vistas of Prosperity’ policy statement targeting people-centric economic development and welfare for the people.

Economic context

This budget has to be implemented in a dire financial situation and inhospitable economic conditions globally and in the country. These conditions are likely to continue into most of next year. The unfolding global and domestic COVID situation and unpredictable economic conditions will have a decisive impact on the economy, society and fiscal out-turn for 2021.

Fiscal bind

The government’s committed expenditure for salaries, pensions and interest payments absorbs the entirety of government revenue. In 2021 these expenditures are higher than in the past with employment of large numbers in new government jobs, employment of unemployed and unemployable graduates being given jobs, additional expenditure on containing COVID-19 and welfare costs of those affected by the lockdown measures, unemployment and income deprivation.

It is in this dire fiscal and economic bind that the government has proposed expansive economic development and social uplifting programmes. Realising the ambitious “vistas of prosperity” in the next four years, though desirable, would be much more than a challenging task.

Fiscal outturn

According to budget estimates Government revenue for 2021 is Rs. 1,961 billion and government expenditure is expected to be Rs. 3,525 billion. The budget deficit is expected to be Rs. 1,564 billion that is nine percent of estimated GDP. This continued high deficit is partly due to the Government wanting to give a fiscal stimulus to increase private investments that has fallen to an estimated 27.6 percent in 2019.

Tax concessions and increased Government expenditure are expected to revive economic growth. Revenue collection has fallen to as low as 13 percent of GDP that is one of the lowest revenue collections in the world.

Our predilection is that the fiscal deficit would be higher than estimated owing to revenue shortfalls, expenditure overruns and the likely negative or very low economic growth in 2021.

Fiscal deficit

The government has accepted the need to achieve a lower fiscal deficit of five percent of GDP by 2024. This can be achieved only by a reduction in the Government’s development expenditure and under expenditure in several items of budgeted expenditure, a revenue enhancement strategy and drastic reduction of losses of state owned enterprises.

The curtailment of development expenditure means an under achievement of the Government’s economic and social development objectives. Therefore a revenue enhancement and loss reduction of SOEs are crucial to achieve fiscal consolidation. Perhaps the budget for 2022 will spell out a fiscal consolidation strategy.

Budgetary expectations

At the best of times, budgetary expectations and outturns have diverged significantly. A consistent feature of the country’s fiscal performance has been expenditure overruns and revenue shortfalls. Neither the expectation of a fiscal deficit of 6.7 percent for 2020 nor the fiscal deficit of five percent for 2024 are likely to be realised, especially with the shrinkage of the economy this year and in the next.

Promises

As expected, the budget for 2021 was a reiteration of the promises made by the government to achieve a people-centric development of the national economy that gives priority to rural economic and social uplifting. The budget has envisaged a very comprehensive programme for the development of the underdeveloped rural economy. Its programme of economic and social uplifting of the rural economy includes an extensive housing programme, providing drinking water to all, renovation and improving of 100,000 km of roads and development of aquatic resources and improving irrigation facilities. These are much needed programmes. Finding the financial resources is the issue. Even without considering the ambitious program of rural uplifting promised in the budget, Government expenditure is high and absorbs much more than the revenue of the Government.

Estimates

The estimates given in the budget for 2021 gives a revenue of Rs 1,961 billion and Government expenditure of Rs 3,525 billion. The fiscal deficit is therefore Rs 1,564 billion that is expected to be 9 percent of GDP.

As in the past, these are unlikely outcomes. Government expenditure is likely to be higher and revenue shortfalls are expected. The financial bind and the continuing expenditure to contain the virus and prevent hunger and starvation will no doubt seriously jeopardise the fulfilment of many of the budgetary proposals.

Larger fiscal deficit

There are several reasons for expecting a larger fiscal deficit.

First: There is an inbuilt committed of large expenditure on salaries, pensions and debt servicing that cannot be reduced, but could increase.

Second: There is a huge expenditure on over 300 loss making state owned enterprises that are not likely to be reformed and may have higher losses.

Third: Expenditure on containment of COVID-19 and needed welfare expenditure could be much higher. It is on top of these that the Government has an ambitious programme of rural infrastructure development.

Revenue

The ability to raise revenue in the disrupted economic conditions is bleak. Although the Government is likely to revise several taxes to gather in a larger amount of revenue than in 2020, there is a strong likelihood that there would be a shortfall in revenues. Both indirect taxes and direct taxes are likely to fall. The likely lesser incomes mean lower direct tax revenue.

Indirect taxes too are likely to fall with lesser consumption, import controls and lower import duties on essential items. The tax to revenue ratio would however benefit statistically from the lower GDP (the denominator) in the calculation though the amount of revenue would be lower.

Concluding reflection

Achieving the Government’s expansive economic development and social uplifting programmes in the current depressed economic conditions and fiscal constraints is difficult. Many of the programmes mentioned in this budget have been programmes announced in budgets several decades ago. If one half of the programmes are realised by the end of this Government’s regime, it would indeed be a task well done in economic conditions and the fiscal bind that the country is in. Realising the ambitious ‘Vistas of Prosperity’ in the next four years would be much more than a challenging task.