|Friday, 30 January 2004|
Probable impact of budget 2004 on the economy
by D.L. Ubeywarna
The budget of a country should not remain within the confines of mere collection of revenue and apportionment of expenditure for various purposes. Instead, it should go beyond such perennial and constantly recurring pattern and should have a stabilizing influence in the economic life of the nation.
The best budget is that which aims at and brings about the overall development (on an equitable basis) in the short run as well as in the long run.
However, in a famous quote, John Maynard Keynes remarked that, "In the long run, we are all dead". Yet, he agreed with the classical economists (such as J.B. Say 1767-1832) that in the long run, the supply side would dominate the determination of real Gross National Product (GNP).
The aim of a good budget should be to promote production now and in the future as a continuing process and Keynes correctly theorised, contrary to the teachings of his day, that an increase in demand for goods and services would increase real GNP because idle or unemployed resources would be available for producing the new higher level of real GNP.
Budget 2004 does not seem to create sufficient avenues to promote Savings and Investment and to uplift the employment of factors of production (ie, land, labour, capital, entrepreneurship) and thereby enhance the supply of goods and services in the production frontier and to induce creation of adequate demand backed by purchasing power.
The budget in general has not given due consideration for issues such as:
1. To raise the quality of life and living standard of the non-salaried and the self-employed paying indirect taxes.
2. Rice being the staple food, to protect and preserve at least the existing cultivable paddy lands (disregarding comparative advantages, if any) from being used for other purposes and save the future generations from famine and starvation.
3. To accelerate development of the milk industry (as in India) so as to gradually restrict or even ban the importation of powdered milk in a few years, Agro Enterprise Development Fund established in 2003, funding dairy farming and drip irrigation should be augmented and fortified so as to adequately provide all necessary facilities for the dairy farming community.
The Government and civil social organizations must launch a strong islandwide campaign exalting breast-feeding on the theme "that the world exists because of mother's milk and the sunlight".
4. Restore the National Savings Bank's (NSB) rate of interest on savings of senior citizens at least to its year 2003 inaugural level of 9.7%.
5. Rectify pension anomalies and grant redress to those who draw a pauper pension not enough to meet their medical expenses even.
6. The rural indebtedness to the village money lender charging exorbitant rates of interest, very often as much as 240% per annum, does not [permit, especially the rural farming community, the fishing families etc. to keep their head above water.
Successive governments have failed to draw up and implement A successful programme of credit (speedily on time when they actually need credit) and to provide them with credit in abundance (so as to prevent access to the village money lender for the residue) probably through the banking sector and associated with a foolproof mechanism for recovering loans.
7. Steps may be taken to, excempt from the VAT, all extremely essential consumer items and services used by the poor.
Consequent revenue loss caused thereby, could be earned by adjusting the tax free allowance to its year 2003 level of Rs. 240,000 and by re-arranging the widened tax slabs of individuals to its year 2003 level and raising the tax on next Rs. 240,000 individual income to 2% or more instead of 1% announced by the (year 2004) budget.
In my mind, it is too early to have brought down the next slabs to 20 percent and 30 percent respectively by the budget this year, although so anticipated and announced by the previous two budgets.
Instead they should have been kept at 25% and 35% or more. By this means, the Government will be able to collect the Rs. 2,000 million in additional revenue anticipated by unifying the dual band system of 20 percent and 10 percent to a single unified VAT rate of 15 percent.
Thus, ultimately everybody will be happy. The poor will be happy since all what they want are excempted from the VAT. The rich would be happy to buy and even replace their old luxuries with new items since the 20% VAT has been reduced to 15%.
There are 3 systems of taxation. They are Proportional; Progressive; and Regressive. The system that a 'poor' country like Sri Lanka should tightly adopt seems to be Progressive Taxation.
Under Progressive Taxation, the larger a taxpayer's income, the larger the proportion which he pays; under Regressive Taxation, the larger a taxpayer's income, the smaller the proportion which he pays; under Proportional Taxation, all taxpayers contribute the same proportion of their incomes.
8. School education, educational facilities and resources are at a low ebb in districts such as Moneragala, Hambantota, Ampara, Badulla, Trincomalee and Matale. This pathetic situation has to be ameliorated without any further delay. (A workable and fruitful formula to solve the whole gamut of this vexed problem had been suggested in the writer's article titled in translation; "Kannangara vision and the struggle for admission to Grade 1".
Still further, according to past Central Bank Annual Reports, total expenditure on education was 2.5% in 2000, 2% in 2001 and 2.4% in 2002 as a percentage of Gross Domestic Product. (GDP). Increased budgetary allocation on education in the coming years is a sine qua non for faster human resources development.
On the other hand, the Finance Minister in his budget speech, says that; "overall, I could also state objectively and with conviction, that we now have in place an economy which is on the upward march".
An unbiased, independent, but critical examination or analysis devoid of political motives is necessary to assess the element of truth or otherwise, involved in the aforesaid statement of the Finance Minister that "...the economy is on the upward march.
The topic of this article, i.e., "Probable impact of budget 2004 on the economy" too demands and envisages the ascertainment of the true colour of the economy before forecasting the probable impact.
For this purpose, economists do rely on available data pertaining to factors such as the annual rate of growth as a percentage of GDP sectoral growth; impact of the downward or upward trend in inflation; gradual reduction or otherwise of the budget deficit; the mode of deficit financing in case of a budget deficit, (the position of the stock market - highly volatile in Sri Lanka) etc.
* Growth rate - The increase up to 4% in 2002 consequent to the unprecedented - 1.5% negative 'growth' recorded in the year 2001 seems to be a remarkable upward march which facilitated the ascending trend up to 5.6% in 2003 and the of growth of the economy is expected to reach its year 2000 level of 6% of GDP this year.
* Gradual reduction of the budget deficit which stood at 10.8% of GDP in 2001 to 8.9% in 2002 and 7.8% in 2003 eventually leading to curtailment of domestic financing through bank borrowing which would end up in monetary expansion, perhaps leading to inflationary situations, seems to be satisfactory.
* Inflation which stood at 14.2% in 2001 too has been brought down to 9.6% in 2002 and 7.2% by October, 2003. However, as in the case of the previous (2003) budget which I critically analysed budget 2004 too does not seem to have focused significant attention to scientifically meet the problem of unemployment.
When a country like ours has to make priority decisions about trade-offs between, perhaps, conflicting macro economic parameters such as inflation and employment, we cannot afford to sacrifice employment for the sake of (moderate) inflation instead of striking the correct balance counteracting inflationary tendencies if any, using a combination of Fiscal policy and monetary policy.
* The enactment of Fiscal Management Responsibility Law and its implementation during the year 2003 in terms of the Mid Year Report and the year end Fiscal Strategy Statement and Fiscal Position Report could be considered a major landmark in the budgetary history of Sri Lanka especially since the aims and objectives being reduction of the budget deficit to 5% of estimated GDP by the end of 2006.
Proper implementation of this legislation and its 'accessories' continuously, might eventually act as a weapon against the implementation lag commonly found in most countries (in varying degrees) including Sri Lanka either restricting or inhibiting progress and development.
* Rural Resuscitation Fund established under the auspices of budget 2002 for proper maintenance of village tanks etc., should gather momentum and speedily restore and maintain village tanks that are neglected by successive governments.
Produced by Lake House