|A budget is
useful only if it is adhered to
By a special
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
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
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.
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
Capital expenditure projects should be evaluated
to ascertain the cost versus benefits and only
projects showing a surplus should be included in the
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
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
Rs 94.5 billion of the deficit will be funded from
foreign borrowings while the rest will be from
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
It is necessary to keep interest rates low to
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
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
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
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
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.
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
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