The Sunday Times Economic Analysis

The Sunday Times Economic Analysis By the Economist

The missing link: Political accountability in budgets
A weariness has crept in after over two weeks of debate and discussion on the Budget. Nevertheless one important facet of fiscal policy requires to be stressed. Is there political accountability in budgets presented by governments? Does Budget 2005 violate the fundamental principle of political accountability? In the fullness of time will we find out that the figures in the Budget were fiction and that the principle of political accountability was grossly violated?

The chances are that this would be so with this budget as in budgets that have been presented to Sri Lankan parliaments for many years. The Budget was a notable political success for the government and the Finance Minister, in particular. The mass rally in Kandy was an attempt to capitalise on this popularity and build a political base for himself.

However, discordant voices from his own political colleagues detracted from the huge popularity he expected. Yet it was to be expected, as his colleagues are rivals for the "manapas" in the Central Province. It is however the financial and economic out-turn that we are concerned about. If it is widely different from the estimates presented to Parliament, then it is a Budget lacking in political accountability.

For decades Sri Lankan Budgets have not succeeded in conforming to the proposed expenditure nor obtained the expected revenues. Consequently the proposed programmes, particularly of a development nature, have not been implemented. Similarly, on the revenue side, there have been shortfalls in revenue collection. Consequently Budget deficits have been larger than estimated in the Budgets and fiscal discipline has been lacking.

Supplementary estimates have financed large amounts of expenditure, while ad hoc tax measures such as higher taxes on postal rates, alcohol and cigarettes have been resorted to during the fiscal year to make up the shortfall in revenue.

The end results of these have not been satisfactory either from the point of view of the country's development or the fiscal balance. Budget deficits have been higher than estimated and have increased the public debt. Presenting Budgets that vary from the final fiscal outcome is a violation of political accountability.

Like the budgets of the past, Budget 2005 too may turn out to be lacking in political accountability. Budget 2005 attempts to increase revenue by Rs.77 billion to Rs. 389 billion in 2005. This is an increase of about 25 percent from the anticipated revenue for 2004. The revenue proposals coupled with the ineffectiveness in revenue collection do not provide a basis for this expectation. The shortfalls in revenue have been a fundamental weakness in Sri Lanka's public finances. For many years the governments have not only been unable to collect adequate revenue for their current expenditure, but they have been unable to even collect the revenues estimated in the Budgets.

The Budget proposals do not contain pragmatic tax revenue proposals. The new tax measures have not taken into account the revenue collection mechanisms and administrative capacities. The most unlikely tax revenues are the income taxes. The proposal to bring into the tax net tax dodgers on the basis of several criteria of expenditure may have given the impression of new tax payers contributing handsomely to the public coffers.

In fact in a country where direct taxation has failed to collect adequate revenue so far, it is unrealistic to expect that the new criteria would enable the Inland Revenue authorities to increase its tax collection efficiency. It is unlikely that the new tax measures would result in a sudden increase in income taxes by Rs. 12 billion or 27 per cent from the anticipated Rs. 43 billion for this year. The revenue collected in 2003 was only Rs.39 billion.

There is considerable doubt that the revenue proposals would achieve the desired result of the government to raise revenue collection from the current 15.6 to 17.2 percent of GDP. An increase in tax revenue would have been more likely had the Budget proposed the more practical approach of tax collection at the source of payment.

A moderate rate of taxes at source could have gathered more. The problem of equity could then have been resolved by these taxes being in the nature of withholding taxes that could be set-off against personal taxes at a progressively higher rate as is the case with employment incomes.

When the Budget for 2006 is presented we would know whether the estimates for 2005 have been correct and whether the government has been accountable. Then we will probably have another rosy Budget that will not lead to any better political accountability in the future. History will keep repeating itself.

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