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17th March 2002

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The Sunday Times economic analysis

A good budget is not a popular one 

By the Economist
A good finance minister was characterised as one who could pluck the feathers of a bird without hurting it. Minister Choksy must have already realised that such an option is not available to him. In fact if his main concern is to tax without hurting, he may succeed in only ensuring that the bird remains an ailing one. He must on the other hand see that he does not kill the birds that lay golden eggs, as some finance ministers in the past did. The finance minister's task is not merely unenviable, it is virtually an impossible one. This is owing to the financial situation we are in, the inhospitable international economic environment and the political realities of the country. The Finance Minister is in no way able to change any of these. 

Therein lies the problem. Let us deal with each one of these. The financial situation is one where the expenditures are already largely committed and cuts in them are likely to be small. The huge debt servicing cost, defence expenditure, salaries and pensions of public servants mop up about 90 per cent of tax revenues. In addition there are the large expenditures on welfare and subsidies to loss making public corporations, several government agencies and the provincial councils.

In fact all these expenditures cost more than the revenue of the government. Economies in these are not practical in the short run. True some economies may be expected from the war expenditure, but these are not likely to be very large. What is however hopeful is that the expenditures could be contained at somewhat below last two years' massive cost. This is to some extent a relief as one of the destabilising factors in recent years has been the escalating cost of the war. Readers will remember that 1999 was a year when the economy grew by 6 per cent and exports rose by as much as 20 per cent. Yet it was a crisis year especially for the balance of payments. One of the main reasons for that was the high cost of military hardware imports. The other factor was the high cost of fuel. The price of crude oil too has remained stable this year, but the cost of fuel imports remains high owing to the energy situation.

There is a need however to begin the curtailment of wasteful expenditures. One such item is a lower expenditure on Samurdhi and lower subsides to Provincial, Councils and public corporations. Regrettably the new Minister of Samurdhi or should we say the reincarnated old minister, has announced that he hopes to increase the number of recipients from the current 58 percent of households to 70 per cent. We can only hope that the Prime Minister and the Minister of Finance will put their foot down and make it a better targeted programme for a fewer number of the really deserving households. The perspective must be one of achieving whatever economies are possible in these expenditures with clear signals that these expenditures would be cut drastically in the Budget of 2003. The global economic conditions are a serious constraint to increased tax revenues. 

Our economy is very much of a trade dependent economy with the value of exports and imports being on average around 70 per cent of GDP. Corporate profits are much dependent on the profits through these exports and imports. The depressed conditions in exports particularly of industrial exports mean that tax revenues too would decline. 

The Finance Minister has hinted that there would be drastic tax reforms that include a reduction in tax rates. The logic of reduction in tax rates as a means of collecting higher tax revenue rests with a higher degree of compliance on the one hand, and the stimulation of economic activity that would result in higher taxes. 

Both these prospects are very unlikely in the Sri Lankan context. A more realistic approach would be to reduce tax evasion by a more comprehensive system of withholding taxes. A final word about our political culture that prevents the government from adopting measures that would stabilise the public finances. The current economic situation is one when there is a requirement to curtail expenditures and increase revenues. 

This implies a reduction in welfare expenditure, reduction in subsidies, reduction in the number employed in the public service, higher prices of public sector services, among others. These are all unpopular measures and the opposition is waiting for the government to make these moves to oppose it in dramatic ways.

To a people accustomed to subsidies with the government looked upon as one that is constantly giving various benefits, the withdrawal of any that they are currently enjoying is indeed a very unpopular one. The situation is particularly difficult when the government does not have a majority in Parliament and has to face provincial Council elections. In such a context it would be very interesting to see what strategies, innovations, creativity and ruses Mr. Choksy would use to fool the people. A good budget that is also popular is difficult to imagine. Then can we have a good budget rather than a popular one?



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