Fiscal outcome of 2019 Budget important for economic stability and growth

The final financial out- turn of the 2019 Budget will have a significant bearing on economic stability and growth. It is not the budgetary figures that will be presented in parliament on Tuesday, March 5 that matters but the final fiscal outcome. Far too often the budgetary out-turn is significantly different from the budget presented in parliament.

Challenging task

Achieving the planned fiscal targets for this year is challenging but crucial for economic stability and growth. The economic consequences of deviating from the fiscal consolidation process would be a severe setback to e economic development.

Far too often the budgetary out- turn is significantly different from the budget presented in parliament. It is the final financial outcome of Budget 2019 rather than the figures presented, and pronouncements made, in parliament and debated on that will determine the country’s economic future.

The imminent danger of this year’s public finances is that the fiscal deficit will be higher than the planned target. The economic consequences of deviating from the fiscal consolidation process would be a severe setback to economic stability and growth. There are signs of fiscal slippage that would impede economic stability.

Difficult task

A recent Reuters report said the government had requested the International Monetary Fund (IMF) to push back the fiscal deficit target of 3.5 percent of GDP agreed under the loan programme from 2020 to 2021 and to relax its tight spending targets ahead of key elections.

While Finance Ministry officials said the government would not deviate from the fiscal consolidation path, expenditure cannot be drastically curtailed this year owing to it being an election year. This demonstrates the enormous political pressures that are likely to result in expenditure overruns.

IMF

It is left to be seen whether the IMF would relax the fiscal deficit targets. What is known is that without IMF support, the debt repay- ment of over US$ 5 billion during the year would be more costly and onerous.

The extension of the IMF facility of US$ 1.5 billion loan by another year and fresh IMF loan is crucial as the government plans to issue US$ 3 billion of bonds and needs the IMF programme to continue to ensure more attractive borrowing terms.

It is not so much the amount of IMF funds that matter but the international confidence the programme instills that is crucial for the economy. Therefore, the Government must find ways and means to achieve the agreed fiscal targets, especially by curtailing wasteful government expenditure and fiscal and monetary measures that would contain aggregate demand and improve the trade deficit as well.

Fiscal experience

It is pertinent to stress that the final financial outcome of Budget 2019 rather than the figures presented in Parliament and debated on that will determine the country’s economic future as the country’s fiscal history is replete with budgetary out- turns that diverge much from the figures presented in the budget.

The distortion of the budget occurs primarily due to expenditure overruns. During the year, political compulsions require unbudgeted expenditure. This has been especially so in election years. And this is a momentous election year.

Populist budget

Consequently, this year’s budget would in any event have a number of expenditures that are designed to gain popularity. Therefore, the budget is expected to be a populist budget.

The increased expenditure on Samurdhi, the Gamperaliya and Enterprise Sri Lanka that have been dubbed developmental programmes, are basically giveaways to gain popularity. They will raise income of the receivers, but their impact on economic development is doubtful. They could also have an inflationary impact.

Unbudgeted expenditure

Furthermore there is a likelihood of unbudgeted further expenditures. Demands for salary increases would be difficult to resist. An already bloated public service may have to accommodate the unemployable educated. Demands for various services may be funded by supplementary estimates. Therefore expenditure overruns are very much to be expected.

Revenue shortfalls

There have been significant gains in revenue collection in the last two years. The revenue to GDP ratio that had fallen to about 11 percent has risen to about 14 percent in 2018 and is expected to increase to 17 percent of GDP in 2019.

In as much as the efficiency of the tax administering authorities is vital to achieve this increase in revenue, it is also important for there to be no tax exemptions and reduction of taxes. The Government must be firm in implementing the tax measures and on ensuring that there are no new tax exemptions.

These are difficult in an election year when the foremost objective of the Government is to win the elections. For these reasons there could be a shortfall in revenue as well.

Fiscal consolidation

It is of critical importance for the revenue enhancing fiscal consolidation that has been put in place is continued and that the targeted fiscal deficit of 4.5 percent of GDP is achieved in 2019. Any deviation from this target would erode international confidence, flout conditions for the expected new Extended Credit Facility and destabilise the economy. This is the most important fiscal objective for the economy that the Government must achieve.

The fiscal deficit is targeted to be reduced to 3.5 percent of GDP by 2020. Attaining this would be significant for economic stability and development, but the Government realises the difficulty of achieving it in 2020 and wants it to be postponed for 2021.

Concluding reflections

Ensuring that the fiscal deficit is contained is vital for economic stability and growth. While the political environment is not conducive for fiscal discipline, there are some hopeful signs. There has been a progressive increase in tax revenue in the last two years with revenue increasing from about 11 percent of GDP to 14 percent of GDP. Consequently there has been a reduction of the fiscal deficit. It is important to ensure the planned revenue collection.

Political compulsions should not compromise this vital objective. If there are expenditure overruns during the course of the year midcourse corrections must be put in place to ensure that the fiscal deficit is contained at least 4.5 percent of GDP by either revenue enhancing measures or curtailment of other wasteful and unproductive expenditure.

The paramount issue is whether government expenditure could be contained to reduce the fiscal deficit this year. One can only hope that political compulsions would not result in much fiscal slippage and that the government would be concerned about economic stabilisation and long run economic growth. Could government expenditure be contained to achieve the targeted fiscal deficit this year?