Budget 2008: What the economists say

The Sunday Time FT spoke to three economists about the proposed Budget 2008. Given below is an overview and some individual comments.

What’s good: Most people, economists and average citizens included, are happy with the government decision to focus on domestic industry development - in the context of enhancing food security and industry expansion outside the western province.

What’s bad: The lack of specific provisioning to contain cost of living and to rationalise public expenditure.

Cost of Living: The general view is that the budget has a tendency to increase the cost of living. This, despite the government decision to reduce taxes on petrol, increase domestic food production, provide a rice subsidy for plantation and neighbouring areas and to exempt Co-operative Societies from taxes to distribute essential commodities.

Economists and business persons mainly cited the government’s poor track record so far in containing the rate of inflation, as reason for their opinion.

Impact on business: The budget focus is seen as mainly promoting import substitution industries, rather than export industry or services sector development.

Overall tax increases are anticipated mainly in indirect taxes and not direct taxes – something businesses can be happy about. However, many business people said they did not mind paying taxes, provided they knew that politicians and tax collectors were not robbing the tax money.

In fact most business people felt taxation for welfare services like education and health and for infrastructure development is a ‘must’ for the country provided the money goes where it should.

Impact on peace: No one is happy with spending more money on war but the general attitude is that security expenditure is unavoidable.

Dr Muttukrishna Sarvananthan, Principal Researcher, Point Pedro Institute of Development:

What’s good: The emphasis on regional development, domestic industry development, SME development, these things are good.
What’s bad: The increase in public expenditure and the increase in the indirect tax component. This will increase cost of living.
Cost of living: There is nothing specific to contain cost of living. Tightening monetary policy is not working. So the government has to reduce public expenditure and reduce indirect taxes.

They should increase direct taxes instead of indirect taxes.

Impact on business: The cost of borrowing may increase because of increased public expenditure.

Impact on peace: Tax concessions to east is positive but indications are that conflict in the North will intensify.
Dr Saman Kelegama,

Executive Director, Institute of Policy
Studies:
What’s good: Strengthening the domestic industry base, which means the supply side of the economy will be strengthened. This is very positive, particularly at a time when international food prices are increasing. But even otherwise, having an adequate food supply is a positive thing.

What’s bad: I would have liked to see some indications in the budget about reforms to loss making state enterprises.

Cost of living: If food production can be increased, prices of food will reduce and will cushion the cost of living. Of course, food production takes time, but in the meanwhile, if the government can mobilise the cooperative system effectively to give food at lower prices, they can use it to cushion the cost of living.
Impact on business: The budget is mainly ‘Import Substitution Industrialisation’ focussed or neutral.

Impact on peace: The budget invests in overall stability including security.

So the investment in security should be looked at, as an investment in peace and stability. The government is also trying to attract investments into the East. The greatest contribution that international agencies and donors can make to peace in Sri Lanka is to invest in the East.

Dr Sirimal Abeyratne, Senior Economist, University of Colombo:
What’s good: Encouraging domestic production is good but we must remember that we are a small country and cannot isolate ourselves from the rest of the world.

What’s bad: We are moving towards larger government but there are no specific proposals on how to rationalise public enterprises. The government has also increased public investment but the problem is, we do not have efficient systems with capacity to absorb the investments. So there are project offices set up and vehicles and people running about spending the money but very little actually gets done.

Also, our largest expenditure is payments on loans. I expect this to increase as the government has got another US$ 500 million loan, from the bond issue.
This is the easiest and most dangerous way to get a loan, because the money is not project bound and there is no accountability on how the money is spent.
Cost of living: The current basket of goods used to calculate the rate of inflation is very outdated. The rate of inflation is now around 20%, but this is based on a basket of goods in the 1950s.

Lifestyles have changed since then, but the basket of goods does not include many items that are essential costs today, like health, education, electricity and even a telephone. In my opinion the cost of living should be higher than what is stated.

With the current budget, there is no reason to expect a substantial decline in the cost of living, given the world price trends as well as the increase in government expenditure.

Impact on business: The tax system has become very complicated. Around 80% of tax revenue comes from indirect taxes. It should be other way around.
Impact on peace: The 5 year tax holiday for investments in the East is good but the East has lost its investor class, its assets and its skills. So without addressing these basics a tax holiday may not generate results.