Thursday Apr 25, 2024
Thursday Apr 25, 2024
Thursday, 8 December 2022 02:03 - - {{hitsCtrl.values.hits}}
On 8 December, the Ranil-Rajapaksa regime will approve a budget that can be unequivocally called the most devastating piece of economic legislation following the 1977 liberalisation. It is aimed at opening up avenues for private profiteering by crushing more and more economic and civil liberties of the people. In other words Budget 2023 is a deflationary budget which will lead to the contraction of national income, increase unemployment, increase poverty and inequality.
It is even more disturbing to note that such a regressive piece of legislation will be approved by a parliament with no public mandate. The general public is in a state of destitution.
A commercial elite encompassing the import-export sector under the direct patronage of the political establishment, instigated the ongoing economic collapse as we repeatedly pointed out in our earlier statements. The budget speech of the unelected President however, declared working people as the instigators, branding them “lazy” and “unproductive”. This is the only means of vindicating a budget that disproportionately centres the fiscal burden and the cost of the economic collapse on masses.
It proposes to relax labour laws chipping away rights of the workers who keep the entire nation and its economy afloat while fattening the spoils of a corrupt business elite. The budget aims to achieve this tremendous farcical feat by exploiting the crisis to justify new labour laws and privatising profitable state institutions at inevitably dirt cheap prices. The business elite already multiplied profits by capitalising on shortages in a collapsing economy, and by suppressing export sector wages when the currency lost 80% of its value against convertible currencies.
A budget victimising working people and the poor
As we emphasised in our earlier statements, Sri Lanka and most underdeveloped economies in general are facing a foreign exchange liquidity trap that developed over the past few decades. Its final outbreak resulted in interest rate and exchange rate mechanisms being unable to influence capital flows, sufficiently enough to strike a balance in investments and savings, without increasing unemployment, without creating hyper-inflation and finally without depressing real wages below subsistence. As a result, a large section of the population is currently thrown below subsistence, reflected by 43% of children under five in Sri Lanka suffering from malnutrition (Ministry of Health, December 2022).
In this context, the budget slashed the allocation to the Agriculture Ministry by a staggering 17% to Rs. 115 billion and the allocation to the Fisheries Ministry remains stagnant at Rs. 6.5 billion compared to Rs. 6.4 billion the previous year. Such paltry allocation comes at a time when food production and distribution should have been the foremost focus of the Government.
This indicates that the regime has no intention of addressing widespread starvation and malnutrition, and is allowing the private sector to reap tremendous margins by exploiting the acute shortages in the sector. (We will further elaborate this point later in the discussion). Meanwhile, the budget proposes to allocate Rs. 538 billion for defence and Rs. 305 billion to build more roads, highways and bridges, continuing the waste of public resources while depriving funds to the ministries capable of arresting hunger and malnutrition.
The budget will also significantly aggravate the cost-of-living problem through its proposed composition of taxes. The indirect tax component reflected by goods and services taxes is projected to rise as much as 80% next year as opposed to the 60% increase in direct taxes, reducing the direct-to-indirect tax ratio of the economy to around 29% from 30.3% in 2022. This means to say that the problem of hyper-inflation will be further aggravated once the proposals come into effect. A falling direct-to-indirect tax ratio indicates that a greater share of the fiscal burden is being paid by ordinary consumers, causing internal price levels of essentials to rise further.
A budget rewarding the real instigators of economic collapse
Failure in the interest rate and exchange rate mechanism in restoring balance in investments and savings is reflected by tremendous capital outflows throughout the last three decades or so, especially through BOI firms enjoying tax-free imports of raw materials and machinery. This enables the illicit transfer of capital through mis-invoicing and transfer pricing. It is safe to claim that outflow of capital over the past three decades is far greater than the total foreign debt of the public and private sector combined. The situation has intensified since the last quarter of 2021 where exporters have also refused to repatriate a substantial proportion of their residual export incomes, fuelling the foreign exchange crisis.
However, in spite of the issue being widely reported throughout the past two years, the budget has no proposal to address the foreign exchange crisis by enforcing strict capital controls, repatriating capital illegally transferred and raising export sector wages in line with depreciation. Budget also contains no provision for conducting forensic audits on foreign debt to identify odious debt. On the contrary, it is proposing to sell state owned enterprises while it’s repeatedly shown the business elite itself is largely responsible for the collapse. It is absurd to assume that a crisis will be resolved by handing over public assets to those who instigated it.
Further, initial pre-budget plans to revoke all BOI tax holidays and subject all export firms to a 30% corporate tax have been erased from the 2023 Budget. BOI firms will retain all the tax benefits they enjoy so far whilst other, far smaller exporters will be subjected to a 30% corporate tax. This will lead to a colossal loss of tax revenue as BOI firms account for 70% of export revenue of Sri Lanka. These outrageous tax holidays offered to BOI firms contributed to the sharp drop in tax revenue as a percentage of the GDP since the early 1990s when BOI firms started expanding, as shown by Professor Mick Moore. The expansion of BOI firms also enabled the outflow of capital through mis-invoicing and transfer pricing further escalating the decline in tax revenue as a share of the GDP.
A budget which addresses the crisis
The crisis amounts to a market failure which necessitates strict State intervention. The budget can be an instrument which eases cost of living through strengthening the currency and subsidising essentials through rationing and price controls. It must boost employment through a program of industrialisation. The existing business elite however, seems to have no interest in pursuing such proposals. In fact, they are stifling the progress of production forces by stashing away resources overseas and parking surpluses in socially counter-productive assets like luxury condominiums, villas, real estate, luxury vehicles, etc., further wasting foreign exchange in the financial system.
The State therefore should launch an industrial plan aiming the production of necessities for both domestic and possibly world markets. Counter-productive assets of the elite must be converted into tradable savings to finance the process apart from repatriating capital outflows. The collusion of the political establishment and the backward business elite in this connection, is borne out by only Rs. 2.4 billion being allocated to industrial development while roads, highways and bridges absorbing over 25% of public investments.
The budget can also address hyper-inflation depressing real wages below subsistence. Despite exchange rate losing 80% of its value this year, price of essentials shot up three to four times, significantly exceeding the rate of depreciation. This stems from the high level of income inequality – those who have higher purchasing power, both firms and individuals, stash the limited essential resources available at almost any given price.
On the other hand, importers of essential inputs like fertiliser and other agrochemicals have exploited the situation to amass a fortune by setting supply prices two to three times higher than cost prices, ripping off not only poor farmers but also the entire population. Such exploitation seems to be the general modus operandi of all business elite involved in supplying essentials. It has in turn pushed a large proportion of the population to remain on the brink of starvation and a general state of destitution.
A system of rationing and price controls of both essential inputs and final goods must be enforced to ensure justice in income distribution and ensure average incomes are not collapsing below subsistence. The steep reduction in funds allocated to the Ministry of Agriculture, however, indicates that the government is clearing further space for the business elite to reap super profits at the expense of a starving population.
A budget which must be resisted
All these factors ensure that the 2023 Budget therefore will go down in history as the most destructive and regressive piece of legislation to come before Parliament since the liberalisation of the economy in 1977. By voting it in, the Ranil-Rajapaksa regime and its Parliamentary flank will be condemning Sri Lanka’s working and poor masses to unimaginable poverty and misery whilst handsomely rewarding the corrupt business elite responsible for the present economic crisis. It is up to all Sri Lankans opposed to this to condemn and resist this budget and the cruel, callous Government proposing it.
Austerity measures, low wages, taxing the poor and the working people, cutting down state expenditure in times of crisis, rewarding the rich with tax holidays and relaxed capital control, has never pulled any state out of economic crisis. That is what history has taught us. We will go down in history as a failed nation placing thousands of people in acute misery and starvation if we do not resist this anti-people budget for the year 2023.
Swasthika Arulingam,
President,
Commercial and Industrial Workers’ Union,
United Federation of Labour
Signed on behalf of:
Ceylon Bank Employees Union, Ceylon Federation of Labour, Ceylon Teachers Union, Dabindu Union, Federation of Media Workers’ Trade Union, Mass Movement for Social Justice, Movement for Land and Agricultural Reform, North South Solidarity Group, Professionals’ Centre for People, Protect Union, Red Flag Union, Satahan Media, Sri Lanka All Telecommunication Employees’ Union, Textiles Garments and Clothing Workers’ Union, United Fishermen’s and Fish Workers’ Congress, Young Lawyers’ Association.
Professor in Economics Sumanasiri Liyanage – University of Peradeniya, Amali Wedagedara (Political Economist and PhD Student – University of Hawaii at Manoa, USA), Kalpa Rajapaksha (Economist and PhD Student – New School, USA), Dhanusha Gihan Pathirana – Economist
