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.
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
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.
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.
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.
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.
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
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.
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