the budget control expenditure?
Will the Budget for 2003 to be presented
next week address the central fiscal concerns? Most unlikely. The
political situation is such that once again the government would not
be ready and willing to take the political risks associated with the
required decisions to correct the fundamental weaknesses of government
finances. The fundamental weakness of the country's fiscal situation
is the large budget deficit. Current expenditure exceeds revenue.
Unproductive and committed expenditures on defence, debt servicing,
welfare salaries and pensions absorb the entirety of revenues. The
consequent large overall budget deficit requires the government to
The simple fact
is that successive governments have been spending far more than
the revenues they could muster. Consequently the public debt has
reached huge proportions and in turn the servicing of the public
debt has become a huge cost and the largest component of expenditure.
In such a situation bold decisions are needed to cut expenditure
on the one hand and increase revenue on the other.
However a government
that requires retaining popularity cannot take the unpalatable decisions
that would correct the fundamental problems especially when the
government's political horizon is short.
the restructuring of the public finances is a difficult task. The
difficulties arise out of the magnitude of the problem, on the one
hand, and the political repercussions, on the other. The large deficit
both overall and on the current account requires to be reduced.
Budgets have stated that they were cutting down the deficit but
the final out turn has been a large deficit. In booth 2000 and 2001
the government ran budget deficits of about 10 per cent or more.
The Budget of 2002 once again announced that it would bring down
the deficit to 8.5 per cent of GDP.
out, even at the time of the presentation of the budget, that it
was most unlikely that the government could contain the budget deficit.
This was because current account expenditures were unrealistically
low and the revenue expectations were too high. Now it is rather
clear that the deficit for this year too would be about 10 per cent
of GDP. Will this happen again to the Budget of 2003?
One of the
fiscal difficulties is the large debt servicing costs that has been
accumulated over the years. Today the public debt is larger than
the current GDP. This large chunk of the revenue each year going
for servicing the debt is one of the severest constraints to an
improvement in the public finances. Both the amounts of the debt
and the interest costs have been increasing.
for 2003 expends Rs. 130 billion on interest payments alone. The
amortization payments for 2003 are a massive Rs.197 billion. These
two amount to nearly the expected revenue for 2003 of Rs.339 billion.
In fact this year interest and amortization costs are expected to
exceed government revenue. The more the government has to borrow
the higher the rates of interest it would have to pay.
The large government
borrowing implies rather unsatisfactory consequences to the private
sector, which too has to pay the higher interest costs of the market.
The government borrowing also means a lesser amount of finances
available to private enterprise.
amount of finances available to the private sector and the higher
cost of credit dampen economic investment. This effect known as
the "crowding out" effect is an important factor for lower
economic growth. The first manner to reduce the budget deficit is
to reduce expenditure.
There are three
key areas of public expenditure that the government has shown an
intention to control expenditure.
These are the
curtailment of defence expenditures, the costs of the public service
and welfare expenditure. The on going peace process has enabled
the government to restrain the annual escalation of defence expenditure.
Although the defence expenditure is high it has been maintained
at just Rs. 1 billion more than this year's expenditure. The government
has also attempted to reduce expenditure on the public service.
The bill on salaries and wages has been reduced next year.
in many departments is very large in relation to the functions they
perform. Given modern techniques and management practices, it would
be possible to operate more efficiently with a lesser staff.
the public services have been considered a means of providing employment
without consideration of the productivity of the employees or the
cost to the Treasury. A significant reduction in the wage costs
of the public services can give relief. Otherwise these costs are
likely to escalate and make the fiscal problem more acute.
budget cut could be achieved is questionable. The other area of
concern has been the Samurdhi programme. Studies have revealed that
much of this expenditure does not reach the intended beneficiaries
although the expenditure has been large.
This is very
clear from the fact that over 50 per cent of households obtain Samurdhi
benefits-an extraordinarily large proportion for any country in
the world. Studies have also shown that as much as 44 per cent of
the beneficiaries are in the top 30 per cent of income households.
The government expects to cut these expenditures too. The Budget
for 2003 is lined with these good intentions.
It hopes to
reduce the deficit to 7.6 per cent of GDP. The unstable political
situation and the possibility of an election are likely to increase
expenditure and reduce revenue from those projected in the Budget.
If so we may
be back in the same situation as in years past. If these expenditures
were allowed to continue their up-trend, then the fundamental weaknesses
of fiscal policy would grow rather than diminish. Future budgets
would have even a lesser capacity to be a device for stimulating
economic growth. Fiscal reform on the lines of this budget is imperative.
Is it politically practical?