(Mis)understanding of budgets!

Panel discussion at the Daily FT Colombo University MBA Alumni 2021 Budget Forum – Pic by Ruwan Walpola

Budgets are presented by every government and every year except under unavoidable special circumstances. Normally, Sri Lanka had chosen 5 November as the day for presenting the budget to Parliament. However, 2019 was an exception due to several reasons.

The Commissioner of Elections issued the gazette notification on 18 September 2019 calling for nominations for the Presidential Election closing on 7 October and the Presidential Election on 16 November 2019. The new President was declared elected on 17 November 2019. The President addressed the Parliament on 3 January and announced his policy statement to the fourth session of the eighth Parliament.

The new Cabinet was appointed while the Parliamentary majority was in the hands of the Opposition. This situation was hardly conducive to even pass an Appropriation Bill in Parliament and the President dissolved Parliament on 2 March, calling for General Elections to be held on 25 April. 

The country was severely affected by the COVID-19 pandemic during this period and the full attention of the Caretaker Government as well as the elected President remained focused on this issue. The President after the General Election held on 5 August addressed the new Parliament and presented his Policy Statement which was followed by a debate. The new Government presented its first Budget for 2021 on 17 November. 

I began this write up after watching a high profile discussion on the 2021 Budget, organised by MBA Alumni Association of the university, with the participation of key personnel from the top business circles in Sri Lanka and the invited attendance of the State Minister of Finance Ajith Nivard Cabral and the Secretary to the Treasury S.R. Attygalle, moderated by Nisthar Cassim, Chief Editor of Daily FT, televised live on 20 November.

My views are based on some ground realities that exist extensively spread across the social web, hardly focused by any in elite symposiums, but concerning a large majority of citizens facing worse conditions of life. There is unfortunately no public forum to offer them solace to voice their plight of being subject to great inequalities that radically undermine meritocratic values on which democratic societies are based. 

Modern theories of economic growth and knowledge diffusion have been successful in discarding old revolutionary economic concepts, but have failed to contribute meaningfully to moderate the ever growing disparity between capital accumulation and inequality in society. A constantly widening gap between the rates of return on capital and the growth of output and income paves the way to serious income inequalities. Those who are victimised by this vicious development live in expectation of how democracy can control this situation to ensure that the general interest takes precedence over private interests.

To the satisfaction of many, Cabral touched on this aspect in this forum by referring to a few of the Budget proposals dealing with more humane issues such as the human-elephant combat, non-availability of drinking water to many, basic road and transport facilities for those living in isolation, etc. He appeared to be a little out of gear to that sanctimonious forum sounding like ‘kings and cabbages,’ but many thanks to him for divulging the priority concerns of his Government which we wholeheartedly endorse.   

Common people’s expectations vs. business expectations

The common people have many expectations and a budget is looked up to as a means of granting some concessions and relief to them, while the more affluent are battling with the Government to keep their monopoly in business. They make statements such as some did at this forum discussion, “governments should not engage in business,” while ordinary people look up to the Government differently. They believe that the Government should maintain essential services and the people have a democratic right to consider this as a responsibility of the government. 

In fact, many businesses thrive on the services that the Government has to provide for the people. Those constructing bridges, roads and houses should remember that it is the business of the Government to maintain the services to the people that provides them these business opportunities. Businesses make profits and build capital for themselves while the Government spends the public finances to pay for those.

This underlying thinking emanates from a Neo Liberal claim that advocates maximum market freedom and minimum intervention by the State. According to this theory, the role of the Government should be confined to creating and defending markets protecting private property and defending the realm. All other functions left to be discharged by private enterprise, which will be prompted by the profit motive even to supply essential services. This theory has led to a serious disparity in the distribution of wealth. 

It is not a case of the top 1% accumulating a massive shift of wealth but confining it further to the top tenth of the top 1%. The popular demand behind this concept is to press for minimal taxes, dismantling of public services and social security, de-regulation, union breaking as pre-conditions that require making the elite richer and all others sink or swim.

In their approach to appease the Government they took a highly hypocritical position by praising the Budget for being consistent. Consistency is a thing to be seen after sometime. We cannot forget that the very first thing that the new Government did after coming into power is to offer some heavy tax concessions. But before long they reversed them. 

It is the circumstances that make any government to stick to one policy line. Under compelling circumstances, it may so happen that they have to change from what is declared. Then the consistency will disappear. There will be a few to blame then but many to praise for addressing what is currently imperative instead of continuing straightjacketed. 

The business world is more in the forefront seeking and asking concessions. When they fail in business it becomes the responsibility of the Government to bail out them. When they are doing well they want tax concessions. Those in the poverty line are not eligible to these supports to the same extent or even proportionately. The bailouts given to failing businesses are considered as essential economic measures while any support extended to maintain the day-to-day life of an ordinary citizen is considered as a big burden. The debate by global high profile elite involving politics about distribution of wealth has gone on for a long time in a prejudicial manner with suppressed facts.

Tax structure of the Budget

One of the main concerns of the forum was the new tax structure of the Budget.

It is noteworthy to examine who default paying taxes. The poor are prompt because they pay their dues at source. But when it comes to the big business world there are many marketing gimmicks they resort to, for tax avoidance. They evade much more than they pay. It will be prudent for the Government to make an assessment of the pending Income Tax cases before courts. The result will no doubt be shocking and astonishing. 

In one instance a foreign commercial bank has challenged a tax imposition totalling over Rs. 1.8 billion on the bank, and the matter has been dragging in courts for nearly seven years without a settlement. How many non-corporates have taken their tax disputes before courts? May be none, because they cannot afford litigation as done by the corporates.

More than 90% of Government revenue is from tax. Out of this the Direct taxes amount to only about 12 to 15%. The rest is from indirect taxes which come from excise duties, VAT and tariffs. Consumers of all sorts fall into this tax component. The 2018 tax composition will show this position as follows:

Personal income tax: 16% (self- compiled based on their turn over and profits)

VAT: 24% (includes in many goods and services provided and borne by consumers) 

Excise tax: 25% (levied on drugs, alcohol, petroleum products and motor vehicles)

Tariffs: 16% (tax paid on selected items of imports and exports)

Other taxes: 19% (tax on property, estate, gifts, etc.)

The income tax proportion in the tax revenue is well below 15%. The highest-ever income tax proportion to the tax revenue was recorded at 35% in 2007.

Strictly going by its definition an indirect tax is explained as: “An indirect tax is collected by one entity in the supply chain (usually a producer or retailer) and paid to the government, but it is passed on to the consumer as part of the purchase price of a good or service. The consumer is ultimately paying the tax by paying more for the product.” Accordingly, all our purchases for consumption include an element of indirect tax. When this proportion in the tax revenue basket goes up ordinary citizens have no forum to protest.

Estate workers’ wages

We also observed how some of the panellists reflected on the increasing of daily wage of the estate workers to Rs. 1,000 by the Government in the Budget proposals. They were talking about the ups and downs of the tea and other commodity prices stating that during low price eras it is not possible to meet this wage level as an overhead. 

While they were concerned about the economics of scale affecting the profit margins of the owners, the extremely poor estate labourers toiling hard how to live up with bare minimum essentials to human life are worried about the means of their life support. Attitudes and perceptions have to rise above the fluctuating price systems which has neither limits nor morality.  The required adjustments might be unpleasant and complicated for the landowners but they have to respect Government policies taken with far-reaching considerations in the national interest.

Banking sector

They also discussed the banking sector. Banks are concentrating on their net margins and overall profits. People are concerned about affordable banking services. During the epidemic period banks were provided with the highly-elastic facilitations that the CBSL could offer. The lending rates were lowered with the CBSL guaranteeing interest subsidies. The liquidity of the banks were freely liberated by lowering the mandatory deposits to be maintained. 

Banks were expected to play a dynamic role in supporting the contracting business and prevent them from falling. It is reported that more than Rs. 200 billion was released to the economy through this process. These are extremely favourable mechanisms for banks to operate under difficult situations. 

The two State banks were set up by the Government to support the economy by engaging in the development process. But they too have entered in to the profit margin race along with other banks and have drifted from the original objectives. Hence a large section of the population in the lower income categories have missed the opportunity of availing the extended facility by the Government to revive their economic activities. 

It has to be stated that the Government did not set up these banks to earn profits through them. But today they have become liabilities adding to the burdens of the Treasury. Restructuring these State banks enabling them to function as development-oriented State sector institutions should be a priority in the economic reform program encompassed in the Budget.

Democracy and development

I wish to quote from a paper of the UNDP, on Democracy and Development, which states as follows: “The effectiveness of institutions and the soundness of democracy politics are acknowledged as catalysts for development. Democracy creates the enabling environment in which policy choices are subject to the control of free and responsible citizens capable of holding Government and State institutions accountable for their implementation.”

Those involved in the Government’s policy making process while engaged in ‘good enough governance’, should also concede to the concepts of citizen’s voice and participation as essentials to development equally important as the business community and key institutions. Any lapse on the part of the Government to address deep poverty and inequalities of income and wealth distribution will tend to undermine the people’s faith in the Government and will eventually threaten the very foundation of democracy.