Columns
Budgeting and balloting strange bedfellows
View(s):Political compulsions rather than economic imperatives determine an election year budget. Despite official statements that it will not be a giveaway budget, the estimates, recent policy decisions and budget proposals show clearly that financial discipline is overshadowed by political pressures to accommodate an election friendly budget. Readers could judge whether this column’s expectations written before the budget have been confirmed by the Budget.
Increased expenditure
The Treasury is incurring more than Rs. 120 billion to increase public service salaries. There is also the possibility of revising salaries of 1.3 million public servants as recommended by the National Pay Commission appointed by the President in November 2013. This expenditure may be further increased by new jobs in the public sector after the budget and before the election.
The Government is expected to provide concessions farmers, fishermen, self-employed and small businesses and may direct banks to suspend interest payments and delay loan recoveries. Under the guise of protecting local producers and promoting import substitution, the cess on maize, onions, potatoes and dairy products are likely to be increased. All these, and perhaps more such expenses, would increase expenditure beyond what the budget has provided.
Before the Uva provincial council election the Government reduced electricity tariffs and petroleum prices. These reductions were expected to result in a huge loss of Rs, 60 million. Fortunately the actual expenditure incurred may be less owing to falling oil prices and lesser dependence on thermal generation. Nevertheless similar price reductions will increase government expenditure and reduce revenue.
Government expenditure
Prudence in expenditure is an important principle of good governance and fiscal management. Unfortunately the Government’s unproductive and conspicuous expenditure is very high. The composition of government expenditure leaves much to be desired. Wages and salaries, interest payments and subsidies and transfers amounted to almost the entirety of government revenue and in some years, as in 2013, these exceeded the entire revenue collected by the Government. This huge expenditure is distorting priorities in government expenditure, increasing the fiscal deficit and increasing the public debt. Subsidies and transfers to lossmaking state-owned enterprises are a severe strain on the public finances. These enterprises must be reformed and reorganised to ensure a lesser strain on public finances.
Allocation
The allocation of public expenditure leaves much to be desired. As much as 36 per cent of government expenditure is for defence, 16 per cent for the President. Infrastructure continues to be a large part of investment. This expenditure leaves less fiscal space for education and health and social services. The need for increased expenditure on these is recognised but the allocation of funds is inadequate.
Increasing revenue
Increasing revenue is essential for achieving a better fiscal outturn. This requires a reform of taxation, reduction of exemptions, better tax administration to reduce tax evasion and tax avoidance. All these are difficult to achieve in the short run.
A fundamental problem in the country’s public finances is inadequate collection of revenue. Government revenue has been less than 15 per cent of GDP with most revenue being from indirect taxation. In 2013 revenue was only 13.1 per cent of GDP. A foremost objective of taxation should be to increase revenue to at least 15 per cent of GDP in 2015 and to 20 per cent by 2020.
Many high-yielding indirect taxes are regressive as they fall heavily on the poor. Tariffs on basic food items such as dhal, sugar and milk are ostensibly meant to encourage domestic production of these or their substitutes, but are a heavy burden on the poor. Such taxes have been necessary as direct taxation yield inadequate revenue.
Expectation of more efficient collection of income taxes is unrealistic. There should be efforts to increase unavoidable indirect taxes and withholding taxes that fall on the rich. Many taxes are rather low as they have not kept pace with increases in costs as well as the incomes of the rich. There are many taxes that are low and could be raised with some discomfort to the rich. Taxation should focus on taxing high income consumption expenditures.
Innovative taxation measures are needed to yield higher revenues in 2015. It is likely that new taxation measures would be introduced to gain popularity with rural voters. A plethora of new taxes that project an image of making the rich poorer to make the poor richer may achieve popularity but have little impact on revenue collection. Ad hoc tax revisions may also increase uncertainty and deter private and foreign investment.
Fiscal deficit
The 2015 budget deficit is likely to be much higher than the projected 4.4 per cent of GDP owing to larger expenditure and short falls in government revenue. The only prospect of reining in the deficit is from higher taxation measures after the expected elections. Meanwhile increases in government expenditure would widen the fiscal deficit. As in previous years, the gap between fiscal expectations and financial realisation is likely to be larger than those of the budget.
The government, however, expects to reduce the budget deficit from 5.2 per cent of GDP this year (2014) to 4.4 per cent in 2015, 3.6 per cent in 2016 and 3.0 per cent by 2017. The target for 2015 is unlikely to be achieved owing to the high government expenditure on salaries and wages, job creation, higher subsidies, likely handouts and losses of public enterprises that remain unreformed. With a plethora of benefits and increased expenditure, the expenditure may exceed the budgeted Rs. 1,650 million owing to the extra expenditures announced in the budget speech as well as others that may be given later in the year.
Rhetoric and reality
The Budget should increase expenditure where it is needed and curtail expenditure that is wasteful. reining in government expenditure so that the fiscal deficit is brought down is vital for the country’s economic development. However political compulsions are likely to increase expenditure and the fiscal deficit will swell beyond the targeted 4.2 per cent, especially when one also considers the liabilities to the banking sector. Therefore once again fiscal consolidation will be budgetary rhetoric rather than fiscal reality. Fiscal consolidation may have to begin after the elections.