Budget 2007: A modest recognition of fiscal realities

If Budget 2007 is indicative of a genuine effort at fiscal consolidation, it is a step in the correct direction. Yet as in past years we have to await the final outcome rather than rely on the figures presented in the Budget Speech

The unrealism in the budget is seen in that inflation is expected to be contained at 8.5 per cent with an expected budget deficit of 7.5 per cent that is likely to increase if war expenditures are not contained

By the Economist

Budgets have become increasingly predictable. The fundamental fiscal problems that were highlighted in these columns the last two weeks are not addressed in a realistic way though the rhetoric indicates that they are.

The figures presented in budgets tend to be unrealistic. Expenditure figures are downplayed, revenue figures are unrealistically high and consequently the final budgetary outcome is significantly different from that presented in parliament. An optimistic picture of the economy is outlined, hopes of rapid economic growth are generated and bonanzas are given to the poor, public servants and the retired and consequently the fiscal burdens increased.

Scenes in Parliament on Budget day

In short budgets have become pieces of fiction. The deliverer of the budget must seem a magician who could pull out of the budget box goodies that are not simply available. This scenario has been played out so often that the budgets credibility has been eroded. The expectations are not the bright days outlined in the budget speech but the inevitable rises in the cost of living that people have to face. And much of these problems arise out of bad fiscal management.

Budget 2007 did display a little difference--hopefully a significant one for the evolution of fiscal policy of the future. Whether the difference arose owing to the agreement with the UNP or was part of the maturation process of the President, it may be difficult to say. The significant difference was that the economic performance was not as glowing as before. There was a modulation in tone and temper. Even the figures though somewhat inconsistent were not heavily exaggerated, only somewhat overstated. There were implications that may not have been readily clear to the ordinary reader or listener, yet some economic realities were underlined. It was certainly not a budget that promised "Blood, sweat and tears", yet one that seemed to say this is all that you can expect as my hands are tied. It was a budget that said, between the lines, that 'this is all I can do because you are not allowing me to take the correct course of action'.

There were some significant differences in this Budget from that of the previous one. No more ambitious ideas of public spending and huge subsidies, no talk of programmes to develop information technology, no new programmes to employ graduates and inflate salary bills. In some cases such as policies on information technology dispersion it is likely that last years programmes would be continued and there was no need to repeat it. In the case of graduate employment the policy was to implement the promised programme in the last budget rather than expand it further. Even a degree of trimming of the programme was observable.

The President appears to recognise the need to implement reforms in loss-making public enterprises but implied that it is not possible to implement them because of the opposition of trade unions and some minor political parties.

At least the recognition that these reforms were needed may be a first step to their reform in the future. The bitter pill is that since the government is unable to reform, the people must bear the burden. A few policy changes would also reduce losses and some responsibilities have been placed in the hands of the workers of these enterprises as well.

The revenue estimates for 2007 are perhaps more realistic than in previous years owing to a better performance and methods of revenue collection last year and some reforms in administration. Nevertheless the containment of last year's deficit to a revised 7.2 per cent is unlikely in view of the large defence expenditure.

The unrealism in the budget is seen in that inflation is expected to be contained at 8.5 per cent with an expected budget deficit of 7.5 per cent that is likely to increase if war expenditures are not contained. Perhaps this estimate is based on an optimistic expectation of international prices of oil declining. With the depreciation of the rupee import prices are likely to rise and inflationary pressures would be inevitable.

As announced before the Budget presentation, the theme of Budget 2007 was to be infrastructure development. This component of the Budget is perhaps the least realisable as in the past. The intentions to develop the country's economic infrastructure are indeed indisputable. There is no prospect of achieving higher rates of growth without a significant improvement of infrastructure. The Budget envisages the development of highways, power plants, airports, ports and electricity. There are also plans to improve the housing stock. Whether these would be achieved due to financial constraints and weak capacities to implement the programmes is the real issue and concern. Going by past performances these good intentions may remain in planning documents for quite some time.

If Budget 2007 is indicative of a genuine effort at fiscal consolidation, it is a step in the correct direction. Yet as in past years we have to await the final outcome rather than rely on the figures presented in the Budget speech.