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
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?