Financial Times

Delicate economic balancing act
The economic policies outlined in the UPFA's election manifesto and recent pronouncements of ministers and bureaucrats indicate that the new government is likely to loosen spending controls resulting in a wider budget deficit and possibly increased borrowing. The private sector and the market has expressed fears that profligate spending by the government on populist economic programmes might destabilise the economic recovery that was underway, fuel inflation and reverse the declining trend in interest rates.

The new finance minister, Sarath Amunugama, is reported to have said that his ministry would do away with what he called its obsession with lowering the budget deficit and adopt a more development-oriented focus.

Such policies of 'deficit financing' are in fact not new. Under previous UNP governments, in which former prime minister Ranil Wikremesinghe was a cabinet minister, budget deficits for much of the 1980s were in the double digits and in 1980 hit 23 percent, when inflation also leapt to 26 percent. Interest rates were also high at the time. This, it should be noted, was before the war, and long before fighting reached high intensity levels in which almost a billion dollars or five percent of GDP was spent annually on defence.

Even Britain is having difficulty in keeping its budget deficit under control given swiftly rising spending and lower-than-anticipated tax receipts. It was revealed last week that Britain's public sector deficit hit a nine-year high in the financial year just ended

The question is whether the country can afford to run consistently high deficits, unlike rich Western nations, and whether such policies could result in dangerous practices such as irresponsible spending that could destabilise the economy.

The Budgetary Position Report of the Ministry of Finance issued just before the election revised the estimated budget deficit from 6.8 to 7.3 per cent of GDP, owing to shortfalls in revenue and additional expenditure. The Central Bank itself has warned that any further increase in government expenditure without a corresponding rise in revenue could raise the budget deficit further, thereby requiring additional borrowing.

The fertiliser subsidy alone is expected to cost the government more than a billion rupees a year. The government cannot afford to neglect the agriculture sector. Although subsidies such as this have come in for much criticism, it is well known that countries with market economies themselves heavily subsidise their own farmers, such as the USA, EU states and Japan. This is one of the pressing issues at the WTO trade talks. Hopefully, if this government's policy of improving agriculture works, it should be in a position to progressively reduce such subsidies.

The government is yet to spell out in detail how it intends to finance the envisaged increased spending and raise more revenue especially when there has been a shortfall in expected revenue.

No doubt the government has to fulfil its election pledges and adopt economic policies that would provide some relief to the masses, not just the corporate sector alone. This was the message the voters sent in this election by opting for a change of government.

Obviously the voters felt that the benefits of peace and the economic recovery were not trickling down to them fast enough and that much of the benefits, if not all of it, were enjoyed by the corporate sector, which reported phenomenal increases in profit.

The previous UNF's regime's neo-liberal policies, focused on deregulation and privatisation, were perceived by the electorate as benefiting the rich and the corporate sector. The trickle down effect was either not happening or taking too long to have an impact. Hence the need for increased government spending to bring about a more immediate impact on the lives of ordinary people.

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