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The 2022 Budget was passed by a two-third majority this week with 153 MPs voting for it.The debate on the second reading of the 2022 Budget followed the familiar pattern of Government MPs praising the budget and Opposition MPs condemning it. Neither the Budget nor its debate addressed the key economic problems and financial predicament the country is in.

Parliamentary debate

Regrettably, the parliamentary debate on the budget hardly addressed key economic concerns of the country. Only a few MPs focused on the key economic issues facing the country and the needed solutions to them.

Even at the best of times, when excellent budget presentations were made, they were followed by political mudslinging with only a few members making an analysis of the budget. This year’s debate too has followed this pattern. There were only a few, very few, relevant assessments of the Budget and the state of the economy. Most speeches were political outbursts for and against the Government.

Constructive discussion

Meanwhile, there was a spate of constructive discussions on the merits and deficiencies of the Budget. Several think tanks, reputed audit companies, academics and other interest groups have made valuable comments in the print and electronic media. The Government should take note of these when implementing its policies.

Protests and demonstrations

At present, large numbers of people are protesting and demonstrating against the unavailability of food, gas, kerosene and other essentials and their high cost. Farmers around the country are protesting about the lack of fertiliser that has destroyed their livelihoods. Fortunately, in response to these protests there appears to be a reversal of the Government’s impractical organic fertiliser policy.

These are clear statements on the state of the economy. It is in this background that the parliamentary debate on the 2022 Budget took place. Yet, the 2022 Budget hardly addressed the key economic concerns of the country.

Budget

The annual budget of a country is the cornerstone of the country’s economic strategy and policies. It should outline the state of the country’s economy, highlight its problems, spell out the solution to them and indicate the ways and means by which the government would finance its expenditure. The forthcoming year’s expenditure must be laid out and the manner in which it expects to find the revenue to finance it should be disclosed. The revenue proposals in particular should be realistic and clearly explained.

Conspicuous omissions

The 2022 Budget was conspicuous in the omission of a comprehensive discussion of the country’s economic conditions and the state of the country’s foreign reserves that are at a dangerously low level of less than US$ two billion.

The Finance Minister recognised that the Government finances were in a critical state and that it was unable to give relief measures. Nevertheless, the 2022 Budget did not have meaningful steps to reduce government expenditure.

Political statement

The budget lacked key features of a budget. It was mostly a political statement rather than an economic and financial analysis followed by meaningful strategies to solve the country’s pressing economic and financial problems. Admittedly, he identified some of the core financial problems, but the Budget hardly indicated steps to resolve them.

For example, the Finance Minister acknowledged that the state finances did not permit additional expenditure and relief measures. Yet, the defence budget and other politically motivated expenditure were enhanced. On the other hand, much needed social expenditures on health, education and social welfare were either inadequate or curtailed.

Cosmetic cuts

There were cosmetic cuts in expenditure on MPs petrol allowances and pension entitlements that would make little difference to overall government expenditure. The need to reduce the huge losses of 300 state owned enterprises (SOEs) wasrecognised, but there were no indications of a reform agenda.

State enterprises

Unless the huge losses of the 300 SOEs amounting to around Rs 1000 billion are reduced substantially, government expenditure cannot be pruned adequately. Neither the budget speech nor the government has a thought out programmeof reforming SOEs.

Reform of SOEs

As in the past, there is hardly any prospect of reforming state enterprises. The easiest and best option of decreasing government expenditure by privatising loss making state enterprises is not an option owing to political disadvantages and ideological reasons. The government has no reform programme for state enterprises in the current wave of political unpopularity.

Revenue

On the other hand, there were no tax reliefs as in the previous budget. Instead, there was imposition of a tax surcharge on super profits of business enterprises that had profits exceeding Rs two billion in 2020 and banks and finance companies with profits exceeding Rs two billion in 2020.

Retrospective taxation

The retrospective taxation of companies has serious flaws. It erodes their capital and undermines investment plans, increases investor uncertainty and is a disincentive for share market investors and foreign investment.

Increased revenue

In spite of these deficiencies, these taxes are likely to bring in higher revenue and be an important source of government revenue.

Fiscal Deficit

The Government expects the fiscal deficit to be reduced from 11.4 percent of GDP in 2021 to 8.8 percent of GDP in 2022. However, expenditure overruns and revenue shortfalls are likely to result in a double digit fiscal deficit.

Fiscal outcome

The Finance Minister’s assurance that there would be no supplementary estimates is likely to wither away with essential relief measures as the plight of farmers and consumers increase.

Summing up

In as much as the budget recognised some of the critical economic conditions and the need to contain expenditure, reform state enterprises and prune wasteful and unproductive expenditure, there were no concrete policies to address these.

The Government should take note of the constructive assessments and criticisms of the budget of business chambers, accountancy firms, think tanks and academics and take corrective measures to mitigate the problems the country is facing.

Conclusion

Budgets are the cornerstone of a country’s economic policies. Unless and until governments prepare budgets that ensure adequate revenue through a reform in taxation that yields a much higher revenue and curtails government expenditure by structural reforms, there is little prospect of economic stability and growth.