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Budget moving towards reduction of fiscal deficit

One of the difficulties in assessing the budget is due to the wide variance between the estimates presented in the budget and what might be the final outturn.
The expected fiscal deficit of 6.8 percent of GDP, if attained would be a significant move towards fiscal consolidation. The goal in a few years is a fiscal deficit of 5 percent of GDP.
This is not at all an unrealistic goal provided the government is resolved to reform the fiscal deficiencies of the recent years.
What is more is that this is essential for sustained economic growth.
The realisation of this should provide the resolve to achieve it.

Past performance of budgets
The records of past performances of budgets have not been ones where the final outturn was close to the targets.
Every budget has put forward the proposal that the budget deficit should be contained and declared it as an important fiscal strategy of the government. The result has been very different. This has been especially so in the last few years. It is in the nationís interest that the outturn of this budget conforms to the revenue and expenditure targets stated in it.

The importance of containing the fiscal deficit has been stressed for more than a decade.
The IMF has repeatedly stressed the need to contain the deficit to much lower levels.
In fact, the reduction of the fiscal deficit was a condition of its recent stand-by facility of about US$2.6 billion.
The Central Bank has emphasised the need to contain the fiscal deficit in nearly every Annual Report.
In December 2002, the Fiscal Management Responsibility Act (FMRA) was passed by Parliament and was effective from the next year. Despite it being mandatory for the government to ensure that the fiscal deficit is brought down to 5 percent of GDP in 2006, the fiscal deficit was 8 percent of GDP that year.
The Fiscal Management Responsibility Act required that after 2003 the fiscal deficit should be kept at the 5 percent level after 2003. In fact it averaged 8 percent of GDP during the next five years (2004-2008) with the fiscal deficits being 7.7 percent of GDP in 2007 and 2008. Despite the IMF requiring the government to contain the fiscal deficit at 7 percent of GDP in 2009, it ballooned to 8.9 percent.

The budget deficit is expected to be brought down to 7.5 percent this year.
The budget for 2011 expects it to be brought down to 6.8 percent of GDP. Can this be achieved? If these objectives are achieved, then the economy will be stabilised and it would be a good foundation for the high trajectory of growth it aspires to achieve in the next six years.
If the fiscal deficit continues to be high it would destabilise many of the economic fundamentals.
Revenue and expenditure
The containment of the fiscal deficit would require that both the revenue proposals and the expenditure estimates are achieved.

A significant expectation of this yearís budget for 2011 is that the new taxation measures would yield higher revenue and reverse the trend of the declining revenue to GDP ratio. The achievement of a revenue target of 16.2 percent of GDP is a reasonable one.
Much would depend on whether the new tax regime would in fact yield the expected higher revenues.
Tax administration and tax evasion
It is however not only the new tax reforms that would matter but the effectives of their implementation.
The tax administration is weak on the one hand, and on the other hand, the business community, high earning professionals and informal enterprises evade a great deal of taxes.
If these could be raked in, there would be a considerable increase in taxes. As it is indirect taxes provide the bulk of revenue and these taxes fall for most part on the poor. However indirect taxes could be designed so that the rich pay through taxes on those items they consume.

The ostentatious life styles that a small section of the population display by their conspicuous spending leads to the view that they could be taxed much higher.
Unfortunately, the tax authorities appear to chase after those already paying taxes rather than track down the rich evaders. The tax net has to be much wider than it is now.
Some tax evaders justify their behaviour on the basis that the money is wasted by the government.
This is not a good basis or justification for evading taxes.
Nevertheless the government should see that every rupee that is taxed is spent well for the development of the country and the welfare of its citizens.
Unfortunately, the conspicuous wasteful expenditure of the government is a serious erosion of public confidence in the governmentís accountability. The reduction of government expenditure is no doubt an important means of curtailing the deficit.

Cutting losses in public enterprises
Reforms are an essential ingredient of fiscal prudence.
The huge losses in government enterprises are a severe strain on the public finances.
This budget expects a reduction in some of the loss making enterprises.
A vigilant effort to cut losses in such public enterprises as the Ceylon Electricity Board, Sri Lankan Airlines and the Petroleum Corporation would be necessary to achieve a better fiscal balance.
Reforms envisaged include changes in the BoI incentive regime that would reduce excessive concessions.
The BoI would also concentrate on large investment projects with a substantial component of foreign funds.
The electricity tariff is expected to be rationalised in 2011 to make the Ceylon Electricity Board achieve a breakeven. The non-performing debt of state owned enterprises are expected to be restructured.
In the case of the Ceylon Electricity Board, its overdue obligations accumulated up to the end 2009 and the debt obligations of the Ceylon Petroleum Corporation up to end 2010 would be restructured.
The overall objective is to reduce losses and move these state enterprises to a breakeven point in 2011.
This, however, is a difficult task and looks unrealistic at present.

Social expenditure
Although it has not been possible to decrease expenditure on defence in 2011, this is an area where substantial decreases must be made in the near future.
On the other hand, there is a need to increase expenditure on health, education and scientific research.
A better targeted but enhanced welfare programmes are also needed.
Fiscal objectives
The government is committed to achieving a budget deficit of 6.8 percent of GDP in 2011 and 5 percent in 2012.
The government is hoping tax revenues would improve up to 16.5 percent of GDP by 2012 from 15.5 percent in 2011 while recurrent expenditure is expected to come down by half a percent in 2011.
These objectives are most desirable in the interests of the economy.
Their achievement would be difficult without a strong political will and commitment.

(More budget analysis in The Bottom Line)