Financial Times

Budget - tough balancing act
The government has a delicate balancing act to perform in its forthcoming budget as it is being assailed from all sides by numerous crises and unforeseen developments some of which are beyond its control.

It is in the difficult position of having to raise social welfare spending while at the same time trying not to impose a bigger burden on the people. Unfortunately, the government was hit by a number of shocks soon after coming to power such as the unprecedented high oil prices that has increased living costs and the intransigence of the LTTE terrorists which has delayed sorely needed foreign aid.

To be fair by the government, despite pressure from its supporters and the JVP coalition partner it has taken some bold but unpopular steps in recent weeks such as raising fuel prices and curbing vehicle imports. These it was compelled to do in the face of the harsh reality of skyrocketing oil prices, a widening trade gap, depreciating rupee and ballooning budget deficit.

With the re-election of George W. Bush as US president, the turmoil in the Middle East can only be expected to get worse and this portends ill for oil prices which are seen hitting the $60 per barrel level come winter. We are now paying double for oil than a year ago and will probably end up having to pay much more in future.

Export growth momentum is slowing down and there's further trouble ahead with the end of textile quotas which will result in more unemployment and lower exports.

With interest rates on the rise the cost of funds will go up, discouraging business from investing and expanding which in turn means that job creation will be affected. The government is hoping to limit borrowings in the local market so as not to drive rates up and borrow offshore but it remains to be seen how effective this will be. Businesses for long have complained of high interest rates and particularly hard hit were small and medium scale enterprises which lacked the contacts and collateral to get favourable rates from banks. Some form of concessionary financing schemes for SMEs are likely to be announced in the budget given the keenness of the JVP which draws significant financial and electoral support from this base.

All signs point to the rich and the corporate sector being taxed more and already the grumbling has started. Fears have been expressed that this will depress growth, that higher taxes will affect corporate profits and that all this will bring to an end the bull run on the stock market. Also, the capital markets are anticipating new taxes that could dampen its growth.

But money market players have been making super profits in recent years and the last crop of company results indicate that the listed corporate sector too is having a boom time reporting record profits. Therefore, the private sector cannot really begrudge the government a bigger share of the spoils if it wants to raise taxes to increase spending and ease the burden on the poor.

It only seems fair that they shoulder a bigger share of the burden given the phenomenal returns of many of our top corporates- some from ill-planned privatisation of state enterprises which has enabled them to make windfall profits.

Despite the bind it is in, the government will find that sympathy for it is limited given its profligacy with regard to expanding ministerial ranks - almost all ruling party members hold some ministerial post or the other - and scant disregard for basic norms of decency and the law by leading lights in the ruling party.

Back to Business