Govt. must prioritise what fiscal policy can and ought to do: IPS
Essential for Budget 2016 to focus on revenue, not ad-hoc one off tax measure Must rationalise expenditures and address weak revenue generation Policy makers to be cautions of demand side inflationary pressures
Fiscal policy has been acknowledged to be the key towards much needed economic reforms, but the new government must prioritise what the policy can, and ought to do when putting together the upcoming budget, asserted influential think tank, the Institute of Policy Studies (IPS) this week.
“We would be happy if next month’s budget focuses on the revenue side. Not an ad-hoc one off tax measure, but signalling serious intentions to bring in systemic revenue reform agenda. The rationalisation on the spending side can come later,” pointed out IPS Deputy Director Dr. Dushni Weerakoon when presenting the economic outlook and reform options at the State of the Economy 2015 report launch.
While the new government promises to take effective measures to address the prevailing issues in the economy, she stressed it is imperative to look into Sri Lanka’s weak revenue generation, and rationalise expenditures such as public sector wages, pensions, state enterprises, subsidies, transfers and debt management.
In the first six months of the year, the overall fiscal conditions have weakened as a result of the conditions of the current expenditure commitment made without matching increases in revenue.
Furthermore, Weerakoon noted it remains to be seen if there will be an increase in foreign capital inflows over the next couple of month, or if the IMF will have to be approached again for a standby agreement as a prudential and precautionary measure for external sector stability.
Policy makers would also have to be cautious on the demand side inflationary pressures that is likely to build if private sector credit growth and fiscal policy continues to expand, while the rupee move towards further depreciation.
As of now, the nation’s economic outlook remains moderate, but year-on-year (YOY) core inflation is observed to be picking up. Adding to this is poor export sector performance, largely attributed to the currency overhaul, and a surge in consumer import growth.
Weerakoon warned that with a misaligned exchange rate, attempting to use easing monetary policy to stimulate growth would only result in moving towards a vicious cycle in the context of consumption-led growth process.
“Monetary easing to stimulate growth works when money supply is a constraint to growth, which is if it is not following economic efficiencies and value-addition. But where economic growth is being led by monetary consumption, monetary easing simple fuels that cycle further,” she professed.