En­vi­ron­men­tal-friendly bud­get must achieve fis­cal deficit tar­get for eco­nomic sta­bil­ity and growth

Sunday Times (Sri Lanka) - - COMMENT -

The 2018 Bud­get speech of Fi­nance Min­is­ter Man­gala Sa­ma­raweera on Thurs­day was a long recita­tion of pro­grammes to usher in “En­ter­prise Sri Lanka” and pro­mote an en­vi­ron­men­tal-friendly coun­try. The Min­is­ter promised as­sis­tance for the de­vel­op­ment of small and medium en­ter­prises (SMEs), in­for­ma­tion tech­nol­ogy and tech­ni­cal skills, the ex­pan­sion of medical ed­u­ca­tion and the re­duc­tion of para tar­iffs to spur ex­ports.

Although a large num­ber of gov­ern­ment pro­grammes in­cur ad­di­tional gov­ern­ment ex­pen­di­ture, the fis­cal deficit was ex­pected to be re­duced to 4.8 per­cent of GDP next year. Achiev­ing this tar­get is es­sen­tial for eco­nomic sta­bil­ity and eco­nomic growth.

Re­cent bud­gets

Bud­gets of re­cent years have been a long list of what the gov­ern­ment ex­pects to do in the com­ing fis­cal year and beyond. It is no longer a clear state­ment of gov­ern­ment ex­pen­di­ture and gov­ern­ment rev­enue and the mea­sures by which it hopes to fi­nance its ex­pen­di­ture. New tax­a­tion mea­sures that are an in­te­gral part of a bud­get were men­tioned, but there was no de­tailed and sys­tem­atic pre­sen­ta­tion of the spe­cific rev­enue de­rived from tax­a­tion mea­sures.

The two hour forty five minute speech hardly pre­sented a con­ven­tional bud­get. That was left to the ac­com­pa­ny­ing book ti­tled Bud­get 2018 that gave the bud­get de­tails. The Ap­pro­pri­a­tion Bill, pre­sented by Fi­nance States Min­is­ter Eran Wick­re­maratne on Oc­to­ber 9, in­di­cated the Gov­ern­ment’s ex­pen­di­ture and the ex­pected col­lec­tion of rev­enue.

Bud­get deficit

The Fi­nance Min­is­ter in­di­cated that he would bring down the fis­cal deficit to 4.8 per­cent of GDP in 2018 and to 3.5 per­cent in 2020. This ob­jec­tive of achiev­ing a lower fis­cal deficit is vi­tal for macroe­co­nomic sta­bil­ity and eco­nomic growth.

Con­tin­ued vig­i­lance to not in­crease gov­ern­ment ex­pen­di­ture is es­sen­tial to en­sure that there are no over­runs in gov­ern­ment ex­pen­di­ture. Far too of­ten there have been rev­enue short­falls and ex­pen­di­ture over­runs. This must be averted to en­sure that the fis­cal deficit is con­tained at the tar­geted 4.8 per­cent of GDP.

The next few months be­ing an elec­tion­eer­ing pe­riod does not au­gur well for fis­cal dis­ci­pline; that would be more dif­fi­cult due to po­lit­i­cal com­pul­sions. In the event there are ex­pen­di­ture over­runs ow­ing to pop­ulist mea­sures, the Gov­ern­ment must take coun­ter­vail­ing ac­tions to re­duce other ex­pen­di­ture or in­tro­duce new taxes.

Rev­enue

The bud­get ex­pects to raise rev­enue to 16.3 per­cent of GDP next year, mainly through the tax re­forms of the new In­land Rev­enue Act that ex­pects to elim­i­nate most tax ex­emp­tions, in­creased taxes of higher in­come and cor­po­rate taxes, in­creased taxes and ex­pand­ing the tax base. How­ever much of the suc­cess in this bid to in­crease rev­enue de­pends on an ef­fec­tive tax ad­min­is­tra­tion. One pos­i­tive de­vel­op­ment has been in­creased rev­enue col­lec­tion this year.

Ex­pen­di­ture

Gov­ern­ment ex­pen­di­ture is ex­pected to in­crease to Rs 3 tril­lion. The nu­mer­ous schemes to pro­mote ex­ports, de­velop in­for­ma­tion tech­nol­ogy and as­sist Small and Medium En­ter­prises (SMEs), among other projects stated in the Bud­get, may ex­ceed the bud­geted fig­ure.

SMEs

The in­tent to as­sist SMEs is an im­por­tant move. Yet as sev­eral stud­ies have shown the con­straints faced by these small and medium en­ter­prises do not re­late to credit alone. SMEs of­ten lack tech­ni­cal knowhow, man­age­ment skills and fi­nan­cial knowl­edge. They have dif­fi­cul­ties in ac­cess­ing raw ma­te­ri­als and their ac­cess to mar­kets is lim­ited. An ef­fec­tive mul­ti­di­men­sional pro­gramme is needed to make SMEs a vi­brant sec­tor. The bud­get has enu­mer­ated the whole gamut of needed pre­req­ui­sites, but their im­ple­men­ta­tion is no easy task.

En­vi­ron­ment

The bud­get’s em­pha­sis on im­prov­ing the en­vi­ron­ment is com­mend­able and timely. Sev­eral mea­sures an­nounced in the bud­get are aimed at re­duc­ing pol­lu­tion and im­prov­ing the en­vi­ron­ment. These in­clude the re­duc­tion of im­port taxes for elec­tri­cal ve­hi­cles, a Rs. 50,000 in­crease in im­port taxes on diesel three-wheel­ers to en­cour­age the pur­chase of elec­tric three-wheel­ers, all gov­ern­ment ve­hi­cles to be hy­brid or elec­tric by 2025, con­ver­sion of all ve­hi­cles into green ve­hi­cles by 2040.

Tech­ni­cal and medical ed­u­ca­tion

The bud­get had a num­ber of pro­pos­als to im­prove in­for­ma­tion tech­nol­ogy skills, medical ed­u­ca­tion and vo­ca­tional train­ing. These in­cluded the es­tab­lish­ment of fac­ul­ties of Medicine at the Wayamba, Mo­ratuwa and Sabaraga­muwa uni­ver­si­ties at a cost of Rs 1,200 mil­lion. Ex­pan­sion of medical ed­u­ca­tion in the coun­try would not be easy, not only due to its higher costs, but also the re­quire­ment of qual­i­fied medical teach­ing staff. There are also re­stric­tive prac­tic- es among some sec­tion of the medical fra­ter­nity as wit­nessed re­cently.

Trade lib­er­al­i­sa­tion

The lib­er­al­i­sa­tion of trade is vi­tal to en­hance ex­ports. The need to re­form the highly pro­tec­tion­ist trade regime by elim­i­nat­ing para tar­iffs (non-tax charges, levies, spe­cial taxes and fees on im­ports) has been recog­nised in the bud­get. The Gov­ern­ment in­tends to re­move para tar­iffs on 1,800 items in the next year. These para tar­iffs in­crease the costs of im­ports and thereby the in­put costs of man­u­fac­tures, ren­der­ing our ex­ports un­com­pet­i­tive. There­fore, the bud­get pro­posal to elim­i­nate them would make ex­ports more com­pet­i­tive. This is an im­por­tant mea­sure to make the coun­try’s ex­ports more com­pet­i­tive. It may also en­cour­age for­eign in­vestors to set up man­u­fac­tur­ing plants for ex­ports.

Tax on food

On the eve of the bud­get, the Fi­nance Min­is­ter an­nounced the re­duc­tion of im­port du­ties on a num­ber of ba­sic food items. The re­duc­tion of these re­gres­sive taxes would re­duce the cost of liv­ing of the poorer sec­tions of the pop­u­la­tion.

Bot­tom line

Many of the de­vel­op­ment pro­grammes men­tioned in the bud­get have been also fig­ured in pre­vi­ous bud­gets. For ex­am­ple, the set­ting up of stor­age and freezer fa­cil­i­ties had been men­tioned years ago. The ground sit­u­a­tion is that there have hardly been any sig­nif­i­cant steps to­wards re­al­iz­ing these goals. Will there be a dif­fer­ence in the next few years?

This bud­get is chart­ing the right course to­wards fis­cal con­sol­i­da­tion and pub­lic spend­ing. It also has the cor­rect strate­gies. It is a man­i­fes­ta­tion of the vi­sion en­vis­aged in the Gov­ern­ment’s Vi­sion 2025 and the poli­cies enun­ci­ated by the Prime Min­is­ter’s state­ment on the econ­omy in Oc­to­ber. On the other hand, there are sev­eral fis­cal im­per­a­tives such as the pri­vati­sa­tion of the large num­ber of loss mak­ing en­ter­prises and waste­ful ex­pen­di­ture that have not been touched ow­ing to po­lit­i­cal im­prac­ti­cal­i­ties. It is when these two is­sues are re­solved that the coun­try’s pub­lic fi­nances could be strength­ened.

The proof of the bud­get pro­pos­als and pro­grams lies in their re­al­i­sa­tion. The po­lit­i­cal rhetoric of the bud­get speech must be trans­formed into in­sti­tu­tional re­al­i­ties and re­alised tar­gets. Too of­ten in the past the prom­ises in the bud­get, like prom­ises in party man­i­festos, are hardly im­ple­mented.

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