The Sunday Times Economic Analysis

The Sunday Times Economic Analysis By the Economist

Are the bold and beautiful budget proposals realisable?
The rhetoric of and proposals in the Budget were essentially in the right direction. As indicated by the Minister of Finance before the Budget, it was oriented towards the development of the rural sector and was to be a pro-poor budget. Budget 2005 also articulated a fresh effort at fiscal consolidation.

The main thrust of this consolidation was not by a decrease in expenditure but by an increase in revenue collection. This too is a correct approach to the country's fiscal situation in a context when the country is in dire need for developmental expenditure, the resuscitation of social sectors and the development of disadvantaged regions of the country.

The positive aspects of the Budget include enhanced expenditure on health and education, allocation of funds for the welfare of children, targeted budgetary expenditure on the most deprived regions of Uva and Moneragala and allocations for the development of science and technology in regional centres. All these are much needed development efforts. The quintessential issue is not the desirability of the Budget proposals but whether they are implementable.

There are several sides to this issue. First will the financial resource be actually available and on time? Second, are the finances allocated adequate to achieve the goals? For instance the underdevelopment of the Uva and Moneragala Provinces are of such a magnitude that considerably more resources are needed. Third, is there a capacity to implement these programmes?

The allocation of financial resources and their availability are no doubt indispensable. Yet the effective implementation of the numerous policies would require efficient administration. The experience of under utilisation of foreign aid is illustrative of this. These considerations leave one with scepticism that the good intentions of the Budget are unlikely to be achieved in large measure. What is worse is that if these funds are misappropriated and wasted then it would be a further drain on the public purse.

The increase in expenditure on Samurdhi remains controversial. The substantial increase in wages of public servants was overdue but burdensome. The employment of graduates is also a further burden on the economy. These expenditures are arguably burdensome and wasteful. The increase in Samurdhi expenditure is not likely to go to the deserving poor as in the past. Despite attempts to improve the targeting that the Minister himself spoke of, it has been revealed that a considerable proportion of funds go to undeserving persons, while most of those in acute poverty do not receive assistance. To pour in further funds to the programmes is wasteful of public funds. Nevertheless let us hope that the Minister's efforts to revamp the programme with development programmes using unemployed recipients of Samurdhi benefits would have a reasonable measure of success.

The employment of graduates by the government is yet another expenditure that could be wasteful. The Minister failed to mention that Sri Lanka had the largest number of public servants for the size of its population.

What was needed was to prune down the size of the public service, improve its quality and pay the slimmer service much higher wages. This has not been the approach. Instead the Budget increased the number of public servants and increased wages. No doubt political imperatives dominated this decision.

Quite rightly the Minister stressed the need to increase tax collection. As he pointed out the proportion of revenue to GDP has been declining and is as low as 15.7 per cent of GDP. He also pointed out that it was the lowest in the region. The approach to increasing revenue is also basically correct. As he said the intention was not to harass those who are already taxpayers but to enlarge the tax net by bringing into it errant tax dodgers. This is indeed crucial for a proper fiscal system and good governance.

Finance Minister Amunugama proposed a number of ways by which tax dodgers would be tracked down. These include those who incur high bills for telephones and electricity, those going on foreign travel, purchasing new cars etc. The point is that these techniques were available prior to the Budget proposals and yet hardly adopted by the revenue authorities. That is precisely why the country has only around 200,000 taxpayers. What is there to suggest that the Inland Revenue authorities would now be able to bring in these errant cases into the tax net? The chances are that the Minister's expectations would not be fully realised and that there would be a shortfall in the expected revenue collection.

The meandering Budget Speech of the new Minister of Finance touched on all conceivable subjects. He used his fluency in the two languages to address the people through parliament via television. He must surely be a more popular person in the country after the Budget than before.

He knew very well on which side his bread had to be buttered. It was to the poor, the disadvantaged and the rural community that he addressed the Budget; much more than perhaps any other Finance Minister had done. The JVP must surely be a bit equivocal about the Minister's performance: happy that he articulated what they wanted in large measure and on the other hand, perhaps concerned about the adroit manner in which he may have stolen some of their popularity in the villages.

As in the past the big question is to what extent will the Budget achieve its goals. Will the disadvantaged regions benefit significantly? Will the pro-poor budget proposals benefit the poor? Would the government be able to expand the tax net and increase tax revenue? Will the budget deficit be contained? The Budget rhetoric was sweet music to the multitude but will the results be of substantial benefit to them?

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