Mini budget 2022: Is it down-to-earth?
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President Ranil Wickremesinghe presents the budget.
The historical record of presenting the government’s annual budgets in Sri Lanka is no different from reading a collection of “fairy tales”. They often carried catchy titles. I am quoting just a few of them here: Pro-poor budget, Development budget, Vision for the Future, Enterprise Sri Lanka, Empowering the people and Nurturing the poor, Vision for development, Vistas of Prosperity and Splendour.
Then they brought about – sometimes ‘out of the blues’ – the promises of “auctioning unavailable resources” to offer handouts to people. At the end of the day, understandably, most of the budget proposals were left either unfulfilled or at most half-done!
It was customary too that the revenue targets were “over-estimated” and expenditure targets were “under-estimated” often resulting in a ballooned “over-spending” problem. Then we have also seen, occasionally, the downward revision of budgetary numbers painting a rosy picture. For instance, if you read the budget deficit in 2005, it was 8.5 per cent of GDP, as per the Central Bank Report 2006; and if you refer to the subsequent publications, you would see the same number had declined to 8 per cent and, later again to 7 per cent.
As we have seen in our recent writings in this column, “over-spending” was fundamental to the country’s current economic crisis. After all, an unprecedented economic crisis is where the economy of the country ends up landing in its journey through the fairy tales!
I take this opportunity, to shed some light on the Interim Budget 2022 that was presented this week. And as we all know, it was presented in the midst of a heightened economic crisis of the country; if the problem of “over-spending” has been a root cause of the current economic crisis, then the Interim Budget should be a budget of the crisis targeting the problem at its source.
A budget in crisis
It is also envisaged that the Interim Budget was the foundation for the comprehensive forthcoming November budget for the year 2023. Thus, the Interim Budget gives a glimpse of what is to come in another few months’ time.
Revised budgetary estimates in the Interim Budget too have moved far beyond the original estimates presented in the previous budget of the year. As we anticipate, government revenue is lower, and expenditure was higher than their original estimates. Of course, we never expected to have a bad economic downturn for this year, which was not seen at the time that the original budget for 2022 was being prepared a year ago. As all our economic forecasts and expectations have gone from bad to worse in 2022, an Interim Budget reflecting the current realities was needed.
Since the country’s real GDP is expected to contract by 8.7 per cent this year, budgetary management would be a challenge much more than it was assumed to be at the beginning of the year. This challenge is reflected through the budgetary numbers. While the total government revenue is estimated to be Rs. 2,084 billion, total expenditure is more than doubled the revenue; it leaves an exorbitant budget deficit, rising above total revenue.
There are more worries: Interest payment on outstanding public debt alone is Rs. 1379 billion and as the single largest recurrent expenditure item eats up three-fourth of the tax revenue, leaving out just one-fourth for all other expenses. Total recurrent expenditure is estimated to be Rs. 3620 billion, leaving nearly a primary deficit of Rs. 954 billion; this implies that the government has to continue borrowings even to cover interest payments, public sector salaries, and subsidies and transfers.
Conflicting objectives
While the Interim Budget is a clear reflection of the economic crisis, understandably it should have twin objectives, which may be contradictory. On the one hand, the budget should be aimed at correcting its long-standing “over-spending” problem which requires fiscal consolidation at both ends – revenue and expenditure. On the other hand, as the economic crisis has impacted upon businesses, incomes, and livelihood of the people resulting in increased poverty levels, the government should spend even more than it used to, contradicting the former.
One of the fundamental problems in the budgetary management in Sri Lanka has been its weak income tax system and the complicated commodity tax system; as a result, the income tax share continued to remain as small as 20 – 25 per cent of the total tax revenue, whereas 80 – 75 per cent is collected from VAT, import duties and other commodity taxes.
The Interim Budget anticipates an increase in income tax share to 30 per cent primarily by lowering the income tax threshold. It has been suggested to register all the people above 18 years of age for paying taxes, which would improve the income tax revenue. It doesn’t, however, say anything about an improvement in the tax system and its efficiency.
Income tax share in Sri Lanka remains low, mainly because Sri Lanka has not taken any significant step to record and keep updating information of people’s income and wealth; if it had been done. Of course, I am sure many would have been faced with a problem of exposing and explaining their income sources and wealth status! This is, indeed, going to be an answer to the country’s rampant corruption, bribery and commissions.
Lack of tax buoyancy
Since there is little information available to the government about people’s income and wealth, the easiest way to tax them would be to impose taxes on their spending. Sri Lanka’s indirect taxes on goods and services such as VAT, import duties, excise duties and others, remain complex and in multiple forms and rates.
As the tax revenue is low and declining over time, it has been habitual for the government to try to raise tax revenue through ad hoc revisions in indirect taxes at every budget as well as off the budget all the time of the year. It has created risks and uncertainty for doing business on the one hand and paved the way for corruption on the other hand.
Tax revenue of the government keeps rising as per economic growth and income growth, without any changes in tax rates. Although it is the main feature of an established efficient tax system, the countries which do not have such systems established often try to raise tax revenue by changing the tax rates and making the tax system complicated.
Cutting down expenditure
The government has already taken steps to do away with subsidising fuel and electricity, which is a major step towards reducing their budgetary burden. But the prices have to be competitive too, because they should not cover up the costs of internal inefficiencies leading to cost-disadvantage of the economy. This is where the competition and regulator can play a major role.
While electricity and fuel supply is already moving in that direction, the Interim Budget proposes that state-owned enterprise reforms are a huge step that Sri Lanka has to take for both reducing their burden on the budget and improving their contribution to the growth of the economy.
After the initial privatisation attempts in the 1990s, Sri Lanka has been struggling for reforming or managing state enterprises without much success. It was in this context that the Budget has proposed to establish a new unit to reform the state enterprises.
Undermined reforms?
While reducing the public sector workforce is also important for cutting down the government’s wage bill, it’s also necessary to look into the economic contribution and productivity of the existing workforce as well as the government institutions.
Much of the issues for reducing expenditure as well as raising government revenue is a wish list that may be taken up for reforms and implementation in the future. With the IMF staff agreement and the resulting improvement in Sri Lanka’s international perception and investor confidence, the danger is whether the importance of such reforms would be undermined again within the next few months.
(The writer is a Professor of Economics at the University of Colombo and can be reached at sirimal@econ.cmb.ac.lk and follow on Twitter @SirimalAshoka).
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