moving towards reduction of fiscal deficit
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
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
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
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
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
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
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
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
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
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
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
The huge losses in government enterprises are a
severe strain on the public finances.
This budget expects a reduction in some of the loss
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
The BoI would also concentrate on large investment
projects with a substantial component of foreign
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
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
This, however, is a difficult task and looks
unrealistic at present.
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
On the other hand, there is a need to increase
expenditure on health, education and scientific
A better targeted but enhanced welfare programmes
are also needed.
The government is committed to achieving a budget
deficit of 6.8 percent of GDP in 2011 and 5 percent
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)