Taking from efficient sector and giving it to the inefficient
The State intervention in an economy is a very decisive factor, as it is up to the state to manage the economy by preparing the best possible business environment for private sector players, and getting involved in some economic matters for ensuring well-being of the public.
The government intervenes in economic matters by way of its fiscal policy; public expenditure and tax policy which can be considered very sensitive for the entire economy in perspectives of entrepreneurs as well as consumers. What can also be seen in developing countries like ours is that State intervention in the economy is highly sought by the public who firmly believe that state intervention ensures safety and welfare.
Sumal Perera, Chairman of Access Engineering PLC, at a recently held business forum, severely criticized government’s tax policy, emphasizing that current tax regime is drafted for the objective of taking from the efficient sector and giving it to the inefficient sector. It can be further noted that his remarks have clearly reflected the unfavorable business environment prevailing in the country. Dhammika Perera, Chairman of Vallibel One PLC, taking part in the discussion, made his remarks on the matter, stressing that the government also needs to raise its income for inherited duties like welfare. However, Sumal Perera criticized the action taken to increase public sector salaries by ten thousand rupees. In my view, ideas presented under the perspectives of both Pereras have to be taken into account, because it showcases two sides of the same coin.
Neoliberalism
Neoliberalism is an ideology that was first practiced by Augusto Pinochet in Chile and thereafter by Margret Thatcher in Britain and by Ronald Reagan in USA. It clearly articulates the way in which an economy should be managed so as to achieve faster growth. Minimum government intervention in the economic activities is highly emphasized, while promoting low tax regime, weak trade union, cutting public expenditure on welfare programmes, privatizing public enterprises and finally deregulating the market. If all these things can be put into action in a proper way, it is needless to say that economic growth can be made faster. Because this ideology paves the way for the private sector to play freely, maximizing their profit, this is popular among the business community.
It seems that what Sumal Perera advocated for is neoliberal policies which will in fact accelerate the production in the economy, by stating that the private sector had become a victim of government’s overnight policy shocks, particularly in the construction industry.
Reality
Even if previous governments, especially Unp-led governments that ruled the country have tried to implement some neoliberal policies, it came under severe public criticisms, having been further motivated by patriotic movements in the country.
The fact that has to be understood well has been that Sri Lanka is a welfareoriented country, even before the independence. Hence, if the governments change welfare programmes by cutting expenditure on them, people don’t hesitate to change that government at the election. This is what could be seen throughout the history.
This fear has led governments to introduce welfare programmes at any cost. In addition to that, as Dhammika Perera stated, a government needs money to run the country. In my opinion, what he explains is that the government needs money to spend on the sectors including welfare in which the private sector is not interested, due to the fact that they don’t generate profits. An economy cannot run without well-established infrastructure facilities that need to be built up by the government. Furthermore, economic development is more important than economic growth only which the private sector takes into account.
Alternatives
By all accounts, politics come before economics in the Sri Lankan economy, even though the economy should be managed, according to economics. Hence, the government must look for other possible alternatives for raising their income without touching sensitive areas of the economy like tax regime. Taking from the efficient sector and giving it to the inefficient sector should not be the theory of taxing, as that kind of policy will destroy the both sectors; public and private sectors.
It can be noted that the business community is disappointed with government’s economic policy, as it doesn’t seem to provide the private sector with a conducive business environment. Many blue-chip companies listed at the bourse have recorded a decrease in their profits, mainly having been hit by higher taxes and unfavorable business atmosphere. In my opinion, the economy is contracting under the higher taxes, higher interest rate, significant cash outflows for debt settlement and many more in the list.
Listing public enterprises in the Colombo Stock Exchange (CSE) can be identified as an alternative for raising revenue for the government. While the ownership can be kept under control of the government, revenue can be generated by energizing the bourse as well.
Another alternative is increasing efficiency and productivity in the public sector. It is reported that the public sector is overcrowded. Furthermore, the government should take steps to curb malpractices like bond scam in public institutions by ensuring great transparency in the economy. Short-sighted welfare programmes must be stopped, as they waste public finance. These are, in my opinion, some of the alternatives whereby the government can regenerate revenue other than taxing.