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A budget is useful only if it is adhered to

By a special correspondent

The budget for 2011 provides for an expenditure of Rs1,419.9 billion, an increase over the current year’s budgeted expenditure of Rs1,275 billion revised down to Rs1,201 billion.
The increase over this year’s expenditure is 11%. Since average inflation is 5.4%, the real or inflation adjusted expenditure is an increase of 5.3%.
If this can be achieved in practice, it would be a step towards the prudential management of public finances, something which has gone by default for the last 50 years.
In the President’s first term, the increase was 281% or a 25% average annual increase. So keeping to an 11% increase would certainly be an achievement.

Revenue estimates more realistic
The total revenue is expected to increase to Rs986 billion from the current year’s estimate of Rs812.1 billion, an increase of 21%.
But the government will still run a Current or Revenue account deficit of Rs53 billion.
The golden rule in budgeting is that there should be no deficit in this account for it means borrowing to fund day-to-day operations much like an individual who spends more than he earns as income.
He lives beyond his means. An individual cannot do so for long but a government can.
The government has been running current account deficits since 1988 and such deficits have been increasing from Rs 4 billion in 1988 to 88 billion in 2008.
The projected current account deficit for the current year is Rs113 billion which the government seeks to bring down next year to Rs 53 billion or halve it. Hopefully, it can be achieved.

Capital expenditure
Borrowing should be only for capital expenditure which will increase future income.
Making good investments is a top economic priority, for individuals and for governments.
Borrowing for good investments is NOTHING TO FEAR - political rhetoric notwithstanding. But not borrowing for current consumption which includes paying higher salaries to public employees.
It is true that there is a lot of waste and unnecessary expenditure on ministers and that there is no economic justification to increase the number of ministers or to spend money on expensive displays to celebrate any occasion however important.

In the UK, the Queen plans to have a low-key wedding for royalty because the British government of David Cameron has introduced an austerity budget.
We have difficulties in following such a good example because the people have elected a bunch of opportunists as their Members of Parliament, who have entered politics only for increasing their wealth and incomes.
They have no ethical principles or scruples and the stability of the government depends on buying over their loyalty.

Capital expenditure projects should be evaluated to ascertain the cost versus benefits and only projects showing a surplus should be included in the capital budget.
The principles underlying capital expenditure stress the importance of full cost ascertainment when planning a project, its cost benefit analysis, financing, and risk management.
Capital assets are defined to include the construction of buildings, roads, irrigation dams, and purchase of machinery and equipment including information technology.
Future economic growth depends on such capital investment and the government has provided for Rs413 billion of which capital expenditure on Education and Health is Rs54 billion. The rest, which is Rs359 billion, is for infrastructure investment.

Financing the deficit
The total deficit to be funded is Rs 433.7 billion.
The government will borrow both from domestic and foreign sources.
Rs 94.5 billion of the deficit will be funded from foreign borrowings while the rest will be from domestic borrowings.
Bank borrowings, where the banks subscribe to government securities, is highly inflationary but it has been budgeted at Rs 39.6 billion which is about the same level as provided for this year.
Increasing domestic non-bank borrowings from the public also means higher interest rates and a reduction in national savings to the extent they go to meet the current or revenue account deficit.
But high interest rates act as a disincentive to investors and the government had to take several steps to bring down interest rates to the current low level.
It is necessary to keep interest rates low to promote investment.
But this has to be done not by borrowing from the banking system which is tantamount to creating new money which is inflationary.

Already the Central bank is forced to create a lot of new money when it buys dollars from the market to prevent an appreciation of the Rupee.
The Central Bank seeks to sterilise such new money creation by selling its securities to withdraw such money.
It sold them at higher rates of interest and the banks have preferred to buy them rather than the Treasury Bills in the primary market. So it has temporarily suspended open market operations to avoid undermining the low interest rate policy and give the Treasury the opportunity to borrow its requirements.

So, if the Central Bank is to keep interest rates low and keep the Rupee stable, the government must cut down its domestic borrowings, not expand them by 40% as provided in the budget.
The government borrowings are high enough already. Borrowings from the banks will increase by 20% to Rs 42 billion.

This is inflationary. Inflation is already creeping up and the oil and food commodities are likely to rise next year.
The burden of higher inflation falls on everybody but particularly severely on the poor.
The government has, in fact, gone for more foreign commercial borrowings since the interest rate abroad is lower than here.
The burden of interest and debt repayment falls on the future generations and will adversely affect future economic growth. So, excessive borrowings would be casting a huge burden on the poor and on their children and grandchildren.
High budget deficits in previous years caused a 69 percent share in the increase of the debt stock from Rs1,219 billion in 2000 to Rs. 4,161.4 billion in 2009.
The balance increase was due to the depreciation of the rupee which contributed to an 18 percent share in the increase of the debt stock.

Impact of public debt
The opinion among economists is that excessive budget deficits are a threat to economic growth.
Empirical studies by Kenneth Rogoff of the IMF and Harvard University have suggested that debt beyond 90% of the GDP constitutes a real danger. The budget for 2011 will take the debt to GDP ratio to 89%. So there is little leeway for the government to increase public expenditure any further.
For this year 2010, the country has to service debts amounting to Rs801.1 billion.
The interest component absorbs almost 50% of the Tax Revenue. So it is important for the government to bring down the budget deficit so that inflation and interest rates can be kept at low levels to spur growth and protect the cost of living of the less affluent. Persistently high budget deficits drives up inflation and the cost of living. More debts also result in higher repayment obligations leading to higher deficits, a vicious cycle.

Budgetary control
We tend to pass a budget amidst much hype. But, nobody monitors the budget to see whether it is being adhered to.
The half-yearly Fiscal Management Report receives scant attention in the media and in parliament. Budgetary control by the Treasury over the spending departments is not what it was in the past.
Departments blithely spend even exceeding the budgeted allocations and then come up with Supplementary Estimates for approval in parliament.
In short, there is little or no budgetary control. The budget then is reduced to a mere piece of paper.
In the past, the Public Accounts Committee under able chairmen drawn from members of parliament who had a professional Accounting background used to examine the departures from the estimates sanctioned by parliament and call upon the Secretaries of the ministries who are the chief accounting officers to explain the discrepancies.

We remember how Bernard Soysa conducted the proceedings of the Public Accounts Committee with the attendance of the Auditor General.
But no punitive action has been taken against the officers responsible for violating the Budget and the Financial Regulations.

We remember how a senior civil servant who later served as the Secretary of an important ministry was surcharged when he was the Government Agent of
Kegalle district. But the report of MP
Wijedasa Rajapakshe was largely ignored.
A budget will be useful for financial management only if it is implemented.
Our record of budgetary control is poor indeed and the realised figures of expenditure particularly Recurrent Expenditure has always exceeded the budgeted figures.
Invariably the government of the day then cuts Capital Expenditure to keep the budget deficit within the borrowing capacity of the government. But this defeats the rationale for a budget.
A budget is useful only if it is adhered to.
The Auditor General is required to report on this aspect. But, his reports are always late and lose relevance. Will this budget be adhered to?

Budget in a nutshell
– The Bottom Line