The Sunday Times Economic Analysis

The Sunday Times Economic Analysis By the Economist

Budget 2005: The proof of the pudding
The Secretary to the Treasury has said the correct things. If Budget 2005 keeps to the principles enunciated by him, then our fiscal policy would be on the right track. But as it has so often happened in the past, the intentions and the realisation are so different. The Budget figures and the final out-turn are often quite divergent. The intentions are good, but the outcome is unsatisfactory.

The proof of the pudding is in the eating of it. We can hope that his intentions would be realised. The roadblocks are however quite formidable. Dr. Jayasundera has promised a budget that would enhance public investment with an emphasis on rural and provincial infrastructure investment. The rationale for this is threefold. It is more cost-effective as the capital expenditure would be less in relation to the expected results; it is vital for the growth of agriculture, agriculture- based industry and rural industrial development and services; and it is needed for a more balanced economic growth to reduce regional disparities.

All these are undisputed. He has pointed out that it is less costly as the nature of the investment is such that it would use local low cost methods and that the participation of people in these projects would reduce costs. The total costs on the rural and provincial infrastructure development are expected to be in the region of Rs. 10 to 20 billion, This is small in relation to overall budgetary expenditure. Further, such investment, it is assured, would not compromise the development of national infrastructure projects, such as highway development.

Another noteworthy feature of the Budget is that it would attempt to reduce the current account deficit and attempt to even eliminate it. This is indeed a commendable objective. Secretary Jayasundera has emphasised the need to reduce public borrowing so as to ensure that the private sector would not be crowded out of the market for their investment funds. The retention of a low interest regime is also a stated objective of the next Budget.

The other important objective of the Budget is to increase revenue collection. It is intended to reverse the declining revenue collection of recent years to achieve a revenue collection ratio of around 17 per cent of GDP. There is a hint that the present tax structure would remain more or less in tact, but the efficiency of revenue collection improved.

Better enforcement is expected to bring about this result. All these objectives are indeed indisputable. The question at issue is whether they could be achieved. First of all there is the continuing international difficulties caused by the oil price hike.

Government expenditure could rise as a consequence. Then there are the pressures for increased expenditures. Salary increases for public servants are promised. New government recruitment and further subsidies are likely. Can these be resisted? The public investment programme is very much dependent on foreign aid. Are we assured of these in the current context? We have to ensure that the aid flow continues at the required levels on the one hand, and that there is quick disbursement and utilisation of funds. In the past these have been lacking and the capacity to utilise or absorb foreign aid has been dismally low.

The Secretary has assured us that this has changed with the setting up of the Department of Budget Implementation and Foreign Aid Monitoring. It is quite easy to set up new departments, it is quite another to ensure their effectiveness. There are also several other factors that may impinge on the good intentions. First of all higher revenue collection is dependent on the administrative capacity and integrity of the Inland Revenue Department. By the end of September they have even failed to send the forms for Income Tax Returns for 2003/2004. And tax collection in 2004 is below the budgeted figure. Strikes and disruption of work are likely to impede implementation of projects. Fiscal consolidation is a cornerstone of good fiscal management and the foundation for long term growth.

This has also been stated as an important objective of BUDGET 2005. However, the continued political uncertainty is not conducive to proper fiscal management and 2005 is expected to be an election year. Next week's column would discuss the inherent difficulties in achieving fiscal consolidation.

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