Resistance to austerity measures in Budget 2017 crucial

Monday, 7 November 2016 00:01 -     - {{hitsCtrl.values.hits}}

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By Himal Kotelawala

Calling the upcoming Budget 2017 an “austerity budget”, a group of economists and activists yesterday accused the Government of attempting to decrease expenditure by as much as 10% through IMF and World Bank influenced economic policies by way of addressing the Budget deficit.

Addressing the media,last week the Alliance for Economic Democracy (AED) called on the public to challenge and resist this “neoliberal economic trajectory” which the group said will greatly increase the economic burden on the people. The austerity measures included in the Appropriation Bill publicised on 20 October, it said, will further dispossess the people of their hard earned rights of free education, free health and other social services and aggravate inequality in the country, leading to an inevitable rise in racial and other tensions.

Speaking at the event, Economist Ahilan Kadirgamar raised concerns about the upcoming budget which he said is going to be one of the most significant budgets in recent history.

“We are very much concerned about the upcoming budget. It is a major shift from the history of budget-making in this country. It’s going to be one of the most austere budgets,” he said.

“The actual spending of the State is going to decrease. State services are going to be shrunk. The Appropriations Bill makes it very clear that there is going to be across-the-board cuts for almost all the ministries,” he added.

The Appropriation Bill for 2017, according to AED, has a total allocation amounting to Rs. 1,819 b compared to total allocations in the Appropriations Bill for 2016 amounting to Rs. 1,941 b. 

Since 1991 and 1992 when there was a 0.5% decrease in expenditure in the wake of the JVP insurrection and in 2001-2002 and 2002-3003 decreases of 4.3% and 3.6% respectively following the LTTE attack on the Bandaranaike International Airport, this is the first time there has been a drastic decrease in Government expenditure.

“Under no circumstance do we have a fall in the budget, because you have to increase it every year to account for inflation. To add to that, the State Minister of Finance has said that they intend to cut budgetary expenditure by 10%. This can reduce growth,” warned Kadirgamar.

Prime Minister Ranil Wickremesinghe’s recent economic policy statement also reflected these austere measures.

“He’s talking about further liberalisation, including trade pacts like ETCA and the International Financial City. All of these policies are going to increase the burden on the people, while decreasing taxes and giving many subsidies to corporations,” charged Kadirgamar.

Value Added Tax (VAT) is being increased at a time when indirect taxes are already very high, with very little talk of increasing direct taxes like income tax, corporate tax or even capital gains tax, he said.

Kadirgamar and other AED members suggested that the upcoming budget is reflective of conditions put forward by the International Monetary Fund (IMF) in its agreement with the Government that was signed in June this year. One of the key conditions imposed by the IMF was a significant reduction in the budget deficit, and the Government has no choice but to either increase revenue through financialisation, trade liberalisation and public private partnerships or decrease expenditure by cutting costs.

A gazette notification by the Ministry of Strategic Development and International Trade was approved by the Cabinet on Wednesday, said Kadirgamar, providing concessions for tax including VAT for the proposed Financial City up to eight years as well as a 25 year break on corporate taxes.

“They’re giving all these concessions to corporations including the Port City while increasing the burden on the people,” said Kadirgamar.

“Austerity budgets have failed in many countries. The continuing crisis in Greece is related to this kind of budget,” he added.

A rise in racial tensions can be another unintended consequence of austerity measures, he warned.

“Extreme chauvinist and nationalist forces become very strong when there are these kinds of cuts affecting the people,” he said.

“It is important that working people, trade unions, teachers and students take up these issues and challenge the Government to reverse this austerity budget, while ensuring that no room is given for chauvinist and populist forces to hijack this cause,” he added.

When asked by Daily FT how the State should decrease the budget deficit if austerity measures and trade liberalisation are not the way to go about it, Kadirgamar said that direct privatisation or even PPPs and equity swaps are only temporary solutions that only offer a one-time gain.

“If they want to make it sustainable, they have to increase revenue. But they don’t want to increase revenue through taxation because their whole strategy is through trade liberalilsatioin and deepening financialisation including the Port City. Since they’re looking for international capital to come in, they’re giving it all kinds of tax breaks. In other words, because of the IMF conditions, we have to keep decreasing the expenditure. The consequence of all of this is going to be an increase in inequality in this country,” said Kadirgamar.

Quoting Nobel Prize winning economist Joseph Stiglitz, Kadirgamar said PPPs have only ended up in subsidising corporations by the Government.

“It doesn’t really bring in any revenue to the Government. This has been the experience internationally too,” he told Daily FT.

Senior Lecturer at the Colombo University Nirmal Ranjith Dwasiri shared his views.

“PPPs only serve to give subsidies to the private sector. There is no assurance of revenue to the State,” he said, likening it to selling family silver in times of a crisis.

“You’re basically selling State assets. In the process, the State will gain some finances, but often, the process of privatisation also leads to fire sales where the actual value of the asset is not gained, it is sold at a much lower price. There again corporate private interests make a huge profit,” said Kadirgamar.

There is also room for large scale corruption in privatisatoin deals, said Dewasiri.

“Through financialisation, there is room for bigger corruption that can happen in a legitimate framework than there was through the bond scam,” he said.

Kadirgamar reiterated the need to increase direct taxes and develop exports in order to increase Government revenue.

“They talked about capital gains tax. Now they’re not talking about it. There has to be production and exports but who is going to invest in viable investments? Many of these investments they’re talking about are speculative investments. Not productive investments. Investments in real estate, in the Port City, etc. are here to do financial transactions and extract what money people have. This is not going to really increase exports,” he said.

Kadirgamar said the state has to have a more direct involvement in industrial policy.

“Many economists are now starting to say around the world that the State has to have a role in industrial policy in ensuring that there is the kind of production and exports that can be taken forward. We don’t have any kind of State policy like that. The only thing they’re going to do is open the capital markets and open up trade, and they assume production and export will somehow increase. They’ll find that this prediction is very wrong and in three to four years we’re going to find ourselves in a much bigger crisis,” he warned.