Finance of the Budget

Friday, 7 November 2014 00:01 -     - {{hitsCtrl.values.hits}}

By A.D.V. de S. Indraratna The second reading of the Budget is over. The Government has won it by a majority of 100 votes. The final reading is expected in about three weeks’ time. There had been a mushrooming of seminars and discussions on the Budget during the whole of last week of October. Many of them examined the Budget from the viewpoint of how it affected their organisers. Workers’ unions and the public looked at it from how it affected their livelihoods. Hardly a few looked at it from an overall macro point of view. I do not wish to look at the individual proposals and pass judgement. I will rather look at the Budget (or the entire Budget arithmetic), as a whole, examine it as a fiscal instrument in the mid-term development framework, and indicate any policy implications, as I see them, for consideration of the policymakers and the relevant public officials. For this purpose, I shall first rearrange Budget 2015 in accounting format, as shown in table 1. Revenue as a percent of GDP In the backdrop of the preceding three budgets, I see in Budget 2015 several healthy trends: From 2009 until 2013, revenue as a percent of GDP has been declining; this trend was reversed this year, 2014, with its revenue increasing by 17% to 14.4 of GDP from 13.9% of GDP in the preceding year. This rising trend was maintained in Budget 2015, with even a further increased revenue estimate of 14.9% of GDP. On the other side, the recurrent expenditure apparently could not be cut due to increasing salaries and wages and subsidies and transfer incomes of Rs. 146 billion, some of which, if I may, might have been prompted due to trade union pressure and electoral and political compulsions. Nevertheless, the budgeted increase in recurrent expenditure has been kept less than the increase in revenue, thereby working out for a current account /revenue surplus of 1.1% of GDP, for the first time in the last few years (barring 2014 in whose revised estimates a very marginal surplus of Rs. 8 billion is expected). This is certainly a healthy trend, and should not be allowed to be interrupted by going in for too many supplementary estimates of current expenditure. Cutting current expenditure Be that as it may, I may add a caveat here: Given the above circumstances, current expenditure could be cut, if firm positive action were taken to reduce corruption, waste and ostentation, in the public sector, thereby increasing the current surplus further. The Prime Minister himself has suggested one way: cutting down the number of Parliamentary sittings. This would no doubt reduce the cost of sitting fees and subsidised meals and refreshments, etc., and Parliamentary overhead costs. There would be other bigger cost cutting items, which a Parliamentary Committee itself is best allowed to sort out. Positive action in this direction would further enhance the current account surplus and correspondingly ease the burden of financing the capital budget. Budget deficit Another healthy feature of this Budget is that the trend started in 2010, of bringing down the budget deficit yearly, has been maintained by budgeting for an overall deficit of 4.6% of GDP. I have advocated as far back as 2011 (see my latest book, ‘Policy Issues for Sustained Development for Sri Lanka’) that to make Sri Lanka the ‘Wonder of Asia,’ one of the several targets should be a budget deficit of 3% in 2016 or failing which, 2017). The Government should be able to reach this target in 2017, if it continues with this trend. Infrastructure investment Coming to the capital budget, it is gratifying to note that despite the Government’s effort to maintain the declining trend in the overall deficit, the planned infrastructure investment has not been reduced; on the contrary it has been increased by more than 20% to more than 5% of GDP and along with the increase in education and health of 54%, the total public investment has been planned to increase to 6.2% of GDP from 5.6% of GDP in the preceding year. In my view, even this is not enough if Sri Lanka wishes to be the ‘Wonder of Asia,’ especially in the education sector. It would be healthier, of course, if any increase in public investment were to be financed with increase in public savings (see below). Public investment I have advocated that public investment should be around 7% by 2017 so that with the recommended private sector’s increased contribution of around 28% of GDP, Sri Lanka will achieve a target of around 35% of GDP in total gross investment of the country. However, Sri Lanka cannot afford this increased investment by increasing foreign debt further as I have argued elsewhere (op.cit). It must come from greater mobilisation of domestic resources, and increased FDI. Debt burden Already we are heavily indebted. In 2013, as I have shown elsewhere (see op.cit), our debt burden, as measured by the debt service ratio, was around one fourth of the total export receipts of goods and services. The estimated interest payment on debt for 2015 is as high as 425 billion, only second to salaries and wages, and is likely to increase the debt burden further. If on the other hand, had it been possible to keep it at half of this sum, for instance, it would be possible to bring down Sri Lanka’s overall deficit to less than 3% of GDP, a target expected to be achieved under the present scenario by around only 2017 or 2018. In fact, the debt, in particular the heavy foreign debt, is the villain of the piece. It is quite evident when we examine the provision made for financing the overall deficit, as shown in Section III of the above Budget Account. Other than the Rs. 202 billion to be set apart for repayment of the existing foreign debt, the total foreign debt including the foreign investment in Treasury Bills and Bonds account for 56% of the total overall deficit in 2015. And with the Rs. 230 billion domestic borrowing, three-fourths of the total public investment is to be met by debt, only the other one-fourth being met by domestic resources. As I have argued elsewhere (op.cit), this sort of scenario would not be sustainable and must cease. Increased public investment must be financed by increased domestic resources, not by increasing foreign debt. By the time of the 2017 Budget, if not able to swap the above position, at least half the public investment will have to be met with increased domestic resources, i.e., with the budget deficit around 3% of GDP, by increasing public savings/increasing the revenue surplus. That will enable the Government to refrain from increasing the borrowing limit as has happened now. This is indeed necessary for sustained growth and development of the country.