Financial Times

Private sector wary of 'Robin Hood' budget
A host of revenue raising measures largely targeting the rich and corporate sector are expected in the government's maiden budget this week as it struggles to fulfil election pledges in an economic environment that turned hostile when oil prices rose to unprecedented levels and LTTE intransigence delayed peace talks and foreign aid.

Economists and business leaders were wary about the anticipated 'pro-poor-tax the rich' budget in which the government would have to do a delicate balancing act to raise enough money to spend on urgent social welfare programmes aimed at helping the poor, but at the same time not alienate private sector investors whose money is required to increase economic growth.

Analysts said the government has a tough task in keeping the budget deficit under control, reining in inflation and keeping the rupee stable given its weak finances and the hostile economic environment. More incentives to encourage exports, especially in agriculture, are anticipated on November 18 to earn foreign exchange, raise farmer incomes and create employment. Incentives are also expected for small and medium enterprises as well as the tourism sector.

One of the proposals recommended to the government is to ensure that every employed person has a tax file, apparently on the lines of what is prevalent in some countries. This aims to ensure every one submits a return even if they are not eligible to pay tax.

Dimuthu Abeyesekera, CEO, Asha Phillip Securities, said he believes the budget will aim to collect revenue through taxes as the government is badly in need of money. "The government has already resorted to some of the obvious options like taxes on vehicle imports and the cess on non-essential consumer imports the government believes are consumed by the rich," a private sector economist said.

"When privatisation no longer is a source of revenue, then taxation becomes a stronger method to raise revenue to meet expenditure commitments." The government's expenditure commitments have a very strong rural and welfare component with significant increases in spending on health, education and poverty alleviation.

One economist said it is a difficult budget but certainly not the 'gloom and doom' scenario painted by the UNP. He pointed out that in the 1980s, when Ronnie de Mel was finance minister, Sri Lanka had budget deficits of 14-15 percent and inflation running at 22 percent when the public investment programme was at its peak, driven by the accelerated Mahaveli development project. Some stockbrokers described it is a 'Robin Hood' budget, where the state robs from the rich and gives the poor.

"The budget is not aiming to improve the economy, but trying to stop the growth in companies by taxing them haphazardly," said one stockbroker said, adding that the budget has lost its confidentiality, as everyone knows most of what it entails.

"The shocking surprises stage is over," he said, adding that many will try to evade the anticipated capital gains tax, if possible. Others, however, expect a growth-oriented budget. Gihan Rajapakse, general manager, Eagle NDB Fund Management Company Ltd., said the rural sector of the country has to be supported and food production given more emphasis.

"Economic growth requires consistent policy and clarity. If not the country will not have business confidence, because businesses will not be able to plan long term," he said adding this was particularly true of the tax structure.

"We think it will be a budget where the small and medium industries will be taken care of," said Asoka De Z. Gunasekera, president, National Chamber of Commerce. Naren Godamunne, vice president of DFCC Stockbrokers, said that given the current difficulties, the government might be forced to increase corporate taxes, may be even by a small percentage, to raise revenue.

Increasing excise duty on liquor and cigarettes are the usual means of raising more revenue while there is speculation of a capital gains tax on share market activities.

The options open to the government to cut spending appear limited given its commitments to increase social welfare spending and not pursue economic reforms such as privatisation and reducing the state sector workforce.

"The government would have to focus on reducing wastage in expenditure," said Godamunne. "With no privatisation in the pipeline and also no job lay offs in the state sector, those avenues of reducing costs would be minimal. "If peace talks start and foreign aid flows come through then to a very great extent most problems would be solved."

Dr. Saman Kelegama, Director of the Institute of Policy Studies, said one area for cutting expenditure is provincial councils. "There's no need for an extra layer of administration," he said. "I strongly believe there's a lot of duplication and overlapping between the provincial councils and central government. Provincial councils still depend on a block grant from the central government."

The Ceylon Chamber of Commerce has said peace and political stability along with law and order were imperative to restore economic stability. NCC's Gunasekera said proposals to enforce taxes on those who own a car, credit card and mobile phone were completely ludicrous. "I think it is a crazy idea since a plastic card is used for safety and not because one is rich."

He said a car is not a luxury item anymore, but essential to the middle class. He said even the fishmongers use mobile phones, which clearly shows that owning a mobile phone does not qualify a person to be on the tax bracket.

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