2003: Waiting for things to happen
Recent budgets have become somewhat predictable.
Comment on Budget 2003 could very well be a repeat of what was said
of previous budgets. The problems are the same, the approaches are
hardly different and the fiscal problems will continue to remain with
us as long as governments are unable to take bold decisions to cut
expenditure and raise revenues through unpopular effective means.
Fiscal changes are also often not contained in the budget proposals;
they would come later. The Finance Minister is expected to perform
a financial miracle: spend more without effectively raising revenue.
budgetary outcome of recent budgets is very different to the figures
presented in the Budget Speeches. The expected outcome of Budget
2002 as presented by Finance Minister Choksy is illustrative of
this. When he presented the Budget in March this year, he anticipated
an overall budget deficit of 7.5 per cent of GDP. On Thursday he
told Parliament it would be 9 per cent of GDP.
It is more
likely that the deficit would reach 10 per cent of GDP, if the privatisation
proceeds don't materialise before the end of the year. Once again
government expenditure is expected to exceed the original revenue
estimates and revenue is expected to be much less than originally
anticipated. Will this happen to the Budget figures of 2003 as well?
The Finance Minister expects to bring down the deficit to 7.5 per
cent of GDP. This compares with an 11 per cent deficit in 2001 and
an expected, but unlikely containment of the deficit to 9 per cent
of GDP this year. Successive budgets have been good at predicting
lower deficits and not realising these. There are no specific reasons
to expect that the government would realise the lower deficit this
If peace prevails
it may be possible to contain expenditure to around the estimated
Rs 649 billion. This expenditure is however considerably higher
than the revised expenditure of Rs 402 billion for this year. More
important, could the government realise the expected revenue of
Rs 339 billion? This is an increase of Rs. 77 billion or 21 per
cent from this year's expected revenue.
out in this column last week, the budget makes an effort to cut
expenditure. The public expenditure control in defence, the reduced
costs of the public service and welfare expenditure are indeed most
welcome. Yet whether these could be implemented is another question.
In as far as
defence expenditure is concerned it is only possible if the current
cessation of hostilities last through next year. Other than the
severest sceptics, most people would tend to agree that this is
a possibility. Whatever may happen to the ultimate solution, the
peace process is likely to drag on for another year enabling the
government to contain expenditure at around the budgeted figure.
of the other expenditures requires reforms that are difficult to
As has been
the recent practice, the Finance Minister has stayed clear of announcing
unpopular taxation measures. He has adopted an approach of ensuring
that the taxes fall indirectly on the people. The imposition of
VAT on banks is an example of this. It is however likely that the
incidence of these taxes would ultimately be passed on to people
in the form of higher interest costs or service charges. It is no
doubt this expectation that led to a dip in Colombo's share prices
on Thursday. May be it was an over reaction by investors. Nevertheless
the imposition of VAT on banks may depress investor sentiment.
A more serious
issue is whether the taxation measures would be able to collect
the envisaged revenue. Once again privatisation proceeds figure
as a significant means of raising income. Disposing of public assets
at expected prices depends on several factors over which the country
has no control.
If the international
investment climate, as well as the perception of the business prospects
in the country is not favourable, these assets may have to be sold
off at low costs. It would then be a double blow. The realised revenue
would be less and there would be a loss of assets at cheap prices.
The fiscal considerations being the reasons for privatisation is
indeed an unhealthy development for the country. There are good
reasons to justify privatisation, but the need to bridge the budget
deficit with privatisation proceeds is not one of them.
of the government to bring in the anticipated revenue is very much
dependent on an economic recovery of significant proportions. The
announced new taxation measures will not necessarily bring in much
of increased revenue. It is economic growth that would enable the
government to obtain the higher revenue. Therein lies the rub.
out- turn is dependent on economic growth rather than the fiscal
measures stimulating the economy. The Budget is far too dependent
on expectations of things to happen. It is doubtful that the final
out-turn would correct the fundamental fiscal imbalances.