Firstly I must confess that I am no fan of media colleague Daya Abeysekera’s long-running ‘Rupees and Sense’ programme on ITN because of its pro-government slant (no offence to you Daya!) though I have occasionally watched it. It may have changed under the Yahapalana regime However,  I would like to borrow the title  which struck [...]

The Sunday Times Sri Lanka

Rupees and Sense


Firstly I must confess that I am no fan of media colleague Daya Abeysekera’s long-running ‘Rupees and Sense’ programme on ITN because of its pro-government slant (no offence to you Daya!) though I have occasionally watched it. It may have changed under the Yahapalana regime

However,  I would like to borrow the title  which struck me as appropriate for today’s conversation on a simple lesson: Making people understand economics. Or to put it more bluntly, economics lessons where Peter robs Paul to (literally) pay him back. Sounds unfamiliar or too complicated? Read on.

The traditional mantra of economics in running governments is to tax the rich (rob Peter) to subsidise the poor (pay Paul). But today’s subsidy-laden economy is not doing that: In fact, the taxpayer and the farmer are both paying for the subsidy that the farmer eventually gets, for example, on fertiliser.   The Government subsidises fertiliser provided to the farmer; a laudable benefit he would think. But wait, what about other indirect taxes that he pays on goods and services that he and his family consume, every day, every month, every year? If a proper calculation is made, farmer Punchi Singho is either paying just a little less or equal amount in taxes for the benefit he gets from subsidies.

So where’s the benefit? Wouldn’t it have been more beneficial to the country to remove subsidies and reduce indirect taxes or are subsidies a way of keeping politicians in office as these bring votes? Your answer is as good as mine.

Consider this. Someone pays to subsidise services to the people. For example, free health care — somebody pays. Fertiliser subsidy – somebody pays. Free education – somebody pays. Road maintenance – somebody pays. Maintaining ministers and their often, arrogant staff – somebody pays.

Who is not paying taxes in society? Everyone pays, including those who benefit from subsidies. So what’s the big deal in subsidies which cost billions to the economy and an uneven playing field?

One of the biggest subsidy programmes was the poverty alleviation schemes started in the 1980s. In subsequent years it was trapped in poor targeting, with many not living below the poverty line (the required criteria) enjoying the benefits. The World Bank last month announced a proper targeting strategy with the Sri Lanka Government to ensure the recipients are the ‘real’ ones. This will make the identification process fairer and more transparent and ensure that the benefits reach the intended households, the bank said.

For decades the Government, politicians and mostly economists have failed to offer a simpler understanding of how economics work; how an administration raises revenue (through taxes) and spends on essential services and other compulsory needs.

What is dished out to the people (through the media and other public means) is on the country’s gross domestic product; inflation; gross national product; cost of living — described by figure-tossing economists who mouth statistics that no one understands.

The latest fad, popular among ministers, is to use the country’s debt and break it down to what each citizen in the country (they say) owes. Forget about not believing this statistic; no one understands this jargon, least of all the rural countryside.

That’s why when politicians and economists stand up and assert that “the cost of living has come down”, no one believes because the most believed notion is that every time you go to the market, prices have gone up. Housewives (and in today’s modern world, house-husbands) will take down ministers and economists if confronted in a marketplace with a simple lesson in economics: That people are paying more for goods than in the same period last year, whatever figures are trotted out.

Like everything else, governments have missed the bus in explaining in simple, understandable language the cost of running the country; from where the money comes and how the money is spent. What is dished out on our ‘arthika’ is economic jibber-jabber – budgets being a good example — which make no sense whatsoever, to the average consumer. This may be one of the reasons why articulate economic arguments in articles in the English-language press don’t often get into the Sinhala language media which not only have a wider audience but also need a simpler lesson on the economy of a country.  Often economists presenting facts and arguments on a touchy debt issue or revenue shortfall through an English language write-up ask editors whether it could also be published in the Sinhala language newspapers of the same group. “They need to understand more about the economy and the crisis,” an economist once argued. However, what would seem as a strong compelling argument to an economist or ‘qualified’ politician would appear as meaningless data that goes over the head of an ordinary person. You catch my drift!

Here is some useful data to present a simple economics argument within reach of the common man; a common man’s guide to economics or for that matter, a guide to how a national budget operates.

According to government data, an average income earner pays 10 per cent of his income roughly as indirect taxes. Thus, if a household income is Rs. 60,000 per month x 12 = Rs. 720,000 (per annum), 10 per cent (Rs.72,000) goes out as taxes.   These taxes are used for, among other spends, to provide free education (to everyone, rich or poor, attending a government school), free health (again no discrimination), to maintain the public sector; the President, the Prime Minister, ministers; essential services etc, and subsidises fertiliser and fuel (diesel is subsidised for both the rich and the poor).

Currently, the Government spends Rs. 50 billion on the fertiliser subsidy to 1.8 million farmer families. Who pays? All of us, including the farmer through the tax pool!

For example, the farmer purchases goods and services like basic needs – dhal, flour, vegetables, toothpaste, soap, etc, etc on which he pays indirect taxes. Eighty per cent of total tax revenue is collected through indirect taxes; a fact that is not easily understood by a large percentage of the people.

In the most, simplest of explanations, everyone – including those who benefit – pays taxes to subsidise what people get free.

The annual allocation for education is around Rs. 77 billion to maintain 9,829 government schools, 3.8 million students and 212,441 teachers; while the cost of public health is Rs. 216 billion.

Economists are able to convince policymakers and politicians but since these presentations are packaged in technical jargon, few people in the circle of a common-sense approach to economics will understand.

But are politicians interested in packaging hard-to-understand economic data and conveying it in simpler and easy-to-understand language? Not really, since subsidies are good election gimmicks and vote-catching programmes.

Here is one simple way of catching attention: The farmer or housewife pays taxes on the consumption of goods purchased from the village shop. For every tax rupee paid, the individual must be receiving 2-3 rupees in return from a subsidy that they enjoy (fertiliser, education or health). There is nothing called a free lunch!   Is this kind of grassroots economics discussion taking place in the village? Are people told how they get subsidies and who pays for them? The farmer gets a fertiliser subsidy but pays taxes. More bluntly, he gets a subsidy but is actually paying for it  at least some part (through indirect taxes on what he consumes).

A simple case of economics made difficult for a large segment of  the population.

Here’s a footnote: The fertiliser subsidy was removed last year and in its place came a Rs.25,000 cash subsidy in lieu of the subsidy. The farmer now pays Rs. 5,000 (compared to Rs.3,500 earlier) for his annual fertiliser needs at the rate of Rs.3,000 per bag of fertiliser per year. Opps … missed out on one salient point; cost of corruption and commissions which everyone bears including the farmer as they are all funded through indirect taxes.

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