Some strengths and more weaknesses of Budget 2018

Tuesday, 21 November 2017 00:00 -     - {{hitsCtrl.values.hits}}


  • Where are the estimates for Provincial Councils? 
  • No clear investment in R&D 
  • Export promotion is admirable 
  • Targeted deficit is reasonable 
  • But taxes heavy on ordinary people 
  • Condominium VAT contradicts ‘free market’ 
  • Excessive liberalisation of shipping and logistics is questionable 5% GDP growth and 6 inflation are not promising

Under the prevailing circumstances, Budget 2018 may appear reasonable on paper. Government expenditure is kept under reasonable control and the deficit is expected to be 4.8% of GDP. In addition, as the maiden Budget of new Finance Minister Mangala Samaraweera, the delivery of the Budget was praiseworthy and the rationale explained is very clear, whether one agrees with it or not, or regardless of however flawed it is. 

The rationale 

Although the rationale is called the ‘social market economy,’ it is more towards ‘neo-liberalism’ than anything else. This is in a context where ‘neo-liberalism’ is failing or going into reverse gear in many countries including its mother nation, America. 

The newest setback was when the Canadian PM Justin Trudeau, simply excused himself from signing the Trans Pacific Partnership (TPP) earlier this month in Vietnam. This was after President Trump’s withdrawal. 

‘Social market economy’ is primarily a German concept, good for that country. Although theoretically sound, when applied to a developing, still Third World country, there are some obvious discrepancies. 

The still subsistence agricultural sector can get completely neglected as has happened in the Budget as well as in Vision 2025. The policymakers should not live in Ivory Towers, however sweet their theories might be to them. 

In his preamble, Samaraweera was correct in saying that Sri Lanka was lagging behind in development after independence compared to other Asian countries because “we were fighting with each other on the basis of political ideologies, ethnicity, religion, and even on the basis of caste.” 

However, he was doing the same by attacking the ‘socialist mindset’ of others outside the chambers. Even in the Budget speech, his excessive emphasis on ‘free enterprise, sweeping liberalisation and globalisation’ can be considered ideological, inviting a fight and not pragmatic. He has also adamantly stated that ‘liberalisation is not negotiable’ referring mainly to the so-called shipping liberalisation. 

Debt and revenue 

Referring to the difficulties that the Government was facing in 2015, the Minister was correct in saying, “The major challenge we had to face was the rapidly and continuously falling Government revenue and a mountain of debt.” But this is the tail-end of 2017, and the Budget is for 2018. Has the Government been able to rectify the revenue situation and has he proposed anything promising for the future? These are questionable when we go through the revenue proposals and figures. 

We know in respect of the debt of the Hambantota porta ‘debt-equity swap’ was implemented. But why couldn’t the Government negotiate, at least at the same time, a ‘debt-aid swap’, meaning a cancellation of some debt as aid to the country? That could have been possible, especially in a context where the port was leasing out to the same sources. 

The foreign debt stock or ‘mountain’ by 2015 had two main components: (1) loans taken for the war and (2) loans taken for some infrastructure development projects. Both had some portions going into private pockets. That is what should be investigated properly without vacillation. More importantly, there are some who have benefitted more economically from those infrastructure developments. They should pay more and the Government should get more revenue to invest in further development. 

Didn’t our economy expand from a $ 40 billion economy to a $ 80 billion economy after the end of the war? Didn’t our per capita GDP go up from a level of $ 2,000 to nearly $ 4,000? Who benefitted more? They should pay more in terms of direct taxes. However, according to the present Minister’s or Government’s ideology, the ordinary people should largely cover 82% of the tax revenue (Rs. 1,659 billion) through indirect taxes, in contrast to income tax of largely the rich or well-off, 18% or only Rs.375 billion. 

It is a misconception that direct taxes would discourage businesses and entrepreneurs. That depends on the rate and the way you implement it. It is natural that they would be happier if the taxes on them are less. 

Even the Queen has taken measures to avoid taxes according to the Paradise Papers. However, the direct taxes also can make businesses and entrepreneurs work harder. There are also other ways of giving incentives or encouraging them. Anyway, they have to make their contribution to the economy for the benefits that they get.  

There was and is another component to public debt. That is largely domestic; loans taken through various means for day-to-day Government expenditure, including covering theBudget Deficit. The present Government also has a dismal record on this count, making the country indebted and losing through the scandalous bond scams and other means. 

The present Budget has not proposed any strict measures to curtail Government expenditure for politicians at all levels (national and provincial); for their perks, vehicle benefits or exorbitant foreign travel. 

It is true that the Government revenue has been improving during the last few years, but at a snail’s pace. Unfortunately there is no particular contribution that the present Government has made, or is making in this Budget for its improvement. The anticipated level is still 16.3% of the GDP. There is no ‘decisive turnaround’ although there is a subtitle on that in the Budget speech. 

Budget or a vision? 

The Budget appears too much of a vision than a carefully worked out income-expenditure projection for the next year. The vision is fine if it is implemented, but the country would like to know at least the approximate allocations for different sectors. If not in the speech, the table in Annex IV titled ‘Summary of the Budget (2014-2017)’ should have given that information. 

For example, what is the overall allocation for Provincial Councils? What are the proportions in terms of recurrent expenditure and capital or project expenditure for provincial councils? These figures are not given even after so much of talk about devolution, fiscal devolution and even federalism. 

The Budget has newly allocated Rs. 13,300 million for reconciliation according to Expenditure Proposals (Annex II). That is admirable, if the allocations are properly used. But the implementing government institutions are mainly the Ministry of National Integration and Rehabilitation, and the Ministry of Prison Reforms, Rehabilitation and Resettlement, or other national ministries and obviously not the provincial councils. Even the Provincial Council participation, particularly in the North and the East,is not clear. 

In the Budget figures, the total allocated expenditure by the State for 2018 is Rs. 3,001 billion. Understandably, that is the present capacity. Out of the above figure, Rs. 2,250 billion is for recurrent expenditure to mean mainly for salaries and wages, including the provincial councils. What is left for investments/projects is only Rs. 761 billion. This has been the weakness of all budgets throughout years which is not even corrected this time obviously within financial/income constraints.   

Similarly, how much is allocated for the military or national security? The Budget does not give any clue. There is much talk about the Blue Economy, declaring “our ocean bed is almost 26 times the size of our land mass with enormous potential.” However the country’s Navy is apparently not involved in this venture. 

Most importantly, the Budget 2018 and its background Vision 2025talk about a ‘knowledge economy, innovation, enterprise Sri Lanka, creating entrepreneurs, making them global leaders’ and so on. There are some admirable allocations made in this direction. However, there is no comprehensive figure showing how much is allocated for R&D in the country in this Budget. Development Research figures very poorly in the proposals.  

Throughout the years, different ministers have presented their budgets through ad hoc or personally selected formats. This has been confusing. There has been no common format at least to give a comprehensive picture and figures of the status of the Budget and allocations. This can be considered a major defect in financial management in the country. One positive aspect of this Budget is that what is said in the paragraphs is largely consistent with the proposed Budget items.  

New proposals 

The strength of the Budget can be considered in the new proposals for capital expenditure or public investment. While the total allocation is Rs. 761 billion (25% of the total expenditure), including already allocated public investments, the new allocation amounts to Rs. 182,739 million (or Rs. 183 billion), according to my calculation. There are 193 items proposed under 19 headings as given in Table 1. In the Budget proposal the totals are not given, hence is the table. 

Deriving from the ideology of neo-liberalism or social market, the Budget is heavily supportive of the private sector and foreign capital as revealed from the above proposals. Given the underdeveloped nature of the productive forces of the country – the capital accumulation, entrepreneurship and intellectual labour - those efforts cannot be completely discounted. However, what is highly questionable is the neglect or low priority given to the public sector. 

The new proposals have allocated a total of Rs. 25,300 million for‘Enterprise Sri Lanka’ (10 proposals), ‘From Local Entrepreneurs to Global Leaders’ (20 proposals), ‘Creating Enabling Environment for Foreign Investments’ (eight proposals) and ‘Harnessing Our Young Entrepreneurs’ (four proposals). 

In contrast, for the improvements in the ‘Public Sector Service Delivery’ (six proposals), the allocated amount is Rs. 3,300 million only (out of which 770 million being recurrent). It is not so much of the allocated amounts that matter. But there is no re-training or enhancement of qualifications (except IT), that has been proposed for the public servants. Foreign post-graduate training is a requirement for higher officers.  

There are allocations for the improvements in the school sector (Rs. 5,605 million), higher education (Rs. 7,340 million) and the health sector (Rs. 3,700 million). Without too much patronising talk or schemes on school education, if the initially proposed one year reduction of school years (13 to 12) by the Minister of Education was implemented, there could have been much more meaning for the now proposed STEM scheme (Science, Technology, Engineering and Medicine). What is terribly missing in the scheme is the second M (Management), before +A (Arts). 

The allocations for both university and medical/health reforms are not sufficient considering their potential role in development. There are no apparent allocations for university or medical research which isdesperately needed in the country. There are no university educational reforms proposed at all. It is doubtful whether the present proposals can bring any “world-class university education” to the country, as the Budget speech (subtitle)boastfully claims (p. 33). 

Major controversies 

The Budget, or rather the Budget speech, has proposed to amend the Sri Lanka Ports Authority Act and the Merchants Shipping Act(p. 21). This is in the context of creating a logistics hub. However, this is proposed even without consulting the Minister for Ports and Shipping, Mahinda Samarasinghe, let alone other stakeholders. The collective responsibility is apparently breached. 

What is more controversial is the statement that “restrictions on foreign ownership on the shipping and the freight forwarding agencies will be lifted.” These claims are already contradicted, while the Finance Minister maintains that “liberalisation is not negotiable”.

Equally controversial is the proposal to create an ‘independent Ports regulator’. It is like talking about ‘independence of the Judiciary! There are some rumours about vested interests involved or extremist globalist Advocacy groups listened to. Be that as it may, there is no need to completely externalise ‘freight forwarding’at the expense of local entrepreneurs. It goes against national interests and benefits to the country. Overseas partnership might be the appropriate. Already there are no apparent restrictions on foreign input and participation. 

There are other controversies. VAT is reintroduced (15%) to condominium sales, going against the ‘free market’ principles in this instance. Equally questionable is the bank transaction fee which is abolished or non-existent in many free market countries. Sri Lanka’s restricted revenue base is understandable. Therefore, various adjustments to the Excise duties on liquor can also be reasonable although the expressed justifications are fictional (about beer!). 

Under the private sector development, a Development Bank is proposed with an EXIM widow. However, it is not clear whether priority is given to EX or IM. With 1.200 para-taxes lifted, there is a possibility of a mad rush for imports, further jeopardising the trade deficit. There can be so many practical liabilities in an ‘ideologically driven’ liberalising policy, without being pragmatic or practical.  

During the Minister’s Budget speech, there is much encouragement and support given to the urban private sector(minus shipping!) and more so to the foreign investors. However, Corporate Responsibilities were never emphasised or even mentioned. 

No Business Excellence Framework (BEF) was proposed for the private sector or for the equally important public sector. Unfortunately, except for certain incentives given perhaps under pressure, a strategically unaddressed sector in the Budgetis the poor agricultural economy. 

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