The discussion on whether the IMF stand-by facility should be continued or not has clouded the really important issue of consolidating the country’s public finances. There can be no controversy whatsoever that a large fiscal deficit of the magnitude reached last year of nearly 10 per cent of GDP is detrimental for the economic development of the country. It is therefore imperative that the large fiscal deficit is brought down to modest proportions irrespective of IMF conditions. Further, in the conditions prevailing at present, it is quite realistic a goal for the government to achieve a fiscal deficit of about 7 per cent of GDP this year. No doubt there are serious difficulties in the path to fiscal consolidation that have to be resolved.
There are several reasons why there are new opportunities for fiscal consolidation. To begin with, there is an opportunity for the government to prune down defence expenditure. The escalating defence expenditure was quite justified as long as the country was fighting a relentless war. The strength of the army had to be progressively increased and adequate armaments were essential. There was a need for expensive hardware to counter the enemy’s sophisticated strategies, and accountability of such expenditure tends to be difficult. For these reasons the escalation of defence costs was justified.
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It was a financial burden that the country had to bear for its security and national integrity. Now that the war has ended, there is no reason whatsoever why defence costs could not be brought down significantly.
No doubt there are areas in which the possibility of pruning down expenditure is limited. This applies to what is known as recurrent expenditure or committed expenditure. The wages and salaries of the forces is a clear example of this. No one would suggest that the strength of the army be curtailed immediately. Nor can this be done. May be in the long run some economies could be achieved. On the other hand, the huge amounts incurred in the purchase of hardware need not be incurred now. Saving on such items could bring down defence expenditure significantly. Since these were import expenditure, such curtailment of expenditure on hardware would be a relief to the balance of payments as well.
A close scrutiny of defence expenditure with a view to cutting down those expenses that are not vital should also be attempted. The aim should be to target defence expenditure to a much lower amount this year and then taper it down in the following years. One expects to see lower defence expenditure whenever the budget for 2010 is presented. An even larger curtailment must be attempted in the budget for 2011. There is no longer a rationale for supplementary estimates to increase defence expenditure during the course of the year.
The second opportunity lies in the reform of public enterprises. Several large public enterprises are a huge burden on the public coffers. The Minister of Power has said he would reform the Ceylon Electricity Board and the Petroleum Corporation that are two of the three leading loss making corporations. Last year the Petroleum Corporation suffered a loss of Rs. 12,300 Million, while the Electricity Board made losses of Rs. 7400 Million. SriLankan Airlines was in second place with a loss of Rs. 12,200 million. The losses in the Petroleum Corporation in the first quarter of this year are reported to be a massive Rs. 15 billion. Sri Lanka Railways, Posts and Telecommunication and the Sri Lanka Transport Board together lose over Rs. 12,000 million. Apart from these there is Mihin Air with a loss of Rs 983 million last year. These losses have become endemic in the public finances of the country.
All these losses are not necessarily due to inefficiencies as pricing policy has much to do with their losses. This is especially so with respect to the Railways, Bus transport and Posts and Telecommunications. Some degree of subsidization of these services may be necessary as a relief measure to the lower income groups. However there is little doubt that a part of the losses are due to poor administration of these public corporations. It is these losses due to inefficiencies that must be eliminated first. There may also be methods of rationalizing the subsidy with a view to cross subsidization and reduction of subsides.
There is a general consensus that the government indulges in much conspicuous spending. This is so with respect to expenditure on Ministers. The curtailment of the cabinet to 41 members will reduce some of this expenditure. Yet the entourage of security and vehicles and expenditure on petrol must surely be very high. The government must look to ways and means of reducing wasteful expenditure and government ministers should adopt a simpler style of living that is more consistent with the fiscal stringency faced by the country.
The constraints faced by the government in reducing expenditure arise from several causes. First and foremost, there is severe opposition to reforms in public enterprises from trade unions and political parties and even within the government. There are also ideological reasons why certain types of reforms cannot be attempted. The government’s opposition to privatization is the clearest example of this. Other policy measures too may be impractical due to political reasons.
The massive mandate of the government should however strengthen its political resolve to overcome these constraints. In as much as there are constraints in the implementation of measures to cut expenditure, there are pressing needs to increase expenditure as well. This is especially so with respect to social infrastructure expenditure that has suffered much due to fiscal constraints for many years. The public health service is badly in need of medical equipment and better maintenance. Shortages of drugs at government hospitals for critical conditions are a serious black mark on the free medical services. There is little doubt that expenditure on both health services and education are needed. These required expenditures, if funded adequately, would raise expenditure by much.
Then there are the huge costs in rebuilding and resettlement that has to be incurred. The extent of the expenditure is such that it would be difficult to finance these from the government’s coffers. The government would require foreign funding in the form of outright grants. As soon as the war ended there were promises that materialized in some commitments to a much more limited extent and disbursements are not as much as expected. A fresh thrust to make the reconstruction effort an international one must be attempted. Thereby the extent of the reconstruction effort could be more in line with the needs of these war devastated areas and at the same time it would not be a fiscal burden. These constraints on the curtailment of expenditure imply a need to look at the other side of the fiscal equation, that of revenue.
Government revenue has been decreasing in recent years and especially last year. Government revenue at around 15 per cent of GDP is an unacceptable low amount. With the resuscitation of the economy and expected tax reforms it is hoped that the tax/GDP ratio could be increased to between 20 and 25 per cent of GDP. Without a budget for 2010 this may be a tough task. One hopes that the Budget 2011 will ensure that government revenue is raised to these levels and the tax collection mechanisms are improved to reduce tax evasion and tax avoidance.
Increasing expenditure on essential services and development expenditure must be accompanied by serious efforts at judicious reduction of expenditure in areas that are not productive to the economy. At the same time increasing government revenue is vital. There must be recognition that development of the economy must be on the basis of sound economic policies and that the containment of the fiscal deficit is a vital component of such policy. |
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