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The Sunday Times Economic Analysis By the Economist

Budget 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.

The final 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 year.

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.

As pointed 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.

The curtailment of the other expenditures requires reforms that are difficult to implement.

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.

The ability 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.

The fiscal 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.

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