Interim Budget: A Necessary Corrective To Rajapaksa-Economics

By Tisaranee Gunasekara -

“Ultimately it is what happens in peoples lives that matters.” – Sri Lanka Human Development Report 2012 – UNDP

November 2006: The Fourth Eelam War was raging. The regime exhorts the populace to make sacrifices – and awards the executive, the legislature and the judiciary massive salary hikes. The steepest increase goes to President Rajapaksa[i].

November 2008: The Eelam War is in its final phase. President Rajapaksa gives himself and the entire legislature another massive salary hike[ii].

Most Lankan were probably unaware that their rulers were ladling their own plates with unmerited generosity even as they preached the virtues of patriotic self-denial. Few Sinhalese would have cared anyway; hopeful of a definitive victory, they were willing to give the Rajapaksas a blank cheque.

When the war ended, hope of imminent good times soared in the South. That hope enabled Mahinda Rajapaksa to win massively the 2010 Presidential election. But as taxes and prices continued their upward trajectory, the hope of a better future began to ebb. The razzle-dazzle of massive physical infrastructure projects succeeded in camouflaging the absence of the peace dividend for a while. But as the years rolled on, the growing gap between an economically cosseted ruling caste and an economically depressed populace became too abysmal to be concealed by propaganda tricks.

Profligacy for the ruling caste and austerity for ordinary people were neither accidental nor incidental. They stemmed from the very nature of Rajapaksa economics.

Rajapaksa economic strategy was an extractive one. Its aim was to ensure the financial sustainability of Rajapaksa politics. And Rajapaksa politics was an extremely expensive affair; the amount of money needed to sustain the ruling caste and their megalomanic-projects was enormous. In the absence of natural resources such as oil, a modern form of ‘tax-farming’ became essential to Rajapaksa economics.

80% of tax revenue came from indirect taxes imposed on essential goods and services. These taxes became a key source of inflation; they reduced the purchasing power of the ordinary people, had a knock-on effect on small and medium entrepreneurs and depressed the ‘main street’, that economy in which the absolute majority of ordinary people work and produce, buy and sell.

Rajapaksa economics therefore created two economies – one for the ruling caste and favoured businesses and one for ordinary Lankans. The privileged economy grew and throve by sucking the lifeblood of the non-privileged economy.

Pablo Iglesias, the founder-leader of the left-radical Podemos Party, claims that in Spain, “…the fundamental divide now is between an oligarchy and democracy, between a social majority and a privileged minority.” [iii] An analogous situation obtained at the tail-end of Rajapaksa rule. It was this reality which enabled the Common Opposition to surmount seemingly insurmountable odds and defeat the Rajapaksas.

Unpicking Rajapaksa Economics

The Rajapaksas derailed the Lankan economy. The necessary process of undoing Rajapaksa economics and returning the economy to some sort of capitalist normalcy commenced with the Interim Budget.

The shift from indirect taxation towards direct taxation is not a radical formula but a sober economic necessity. In 2012, the UNDP pointed out that Sri Lanka’s excessive dependence on indirect taxes “shifted the burden of taxation on to the poor” and suggested that the government should try to “spread the burden of taxation more evenly, to improve revenue collection, to achieve better governance and accountability and to ensure that revenue is in line with growth”[iv].

Rajapaksa brand of tax-and-spend (taxing the people and spending on themselves) was creating a socio-economic volcano, consisting of growing youth unemployment and increasing inequality. According to the ILO’s Asia Pacific Labour Market Update of April 2013, “…in Sri Lanka youth unemployment rate was more than four times the overall unemployment rate….”[v] Minister Sarath Amunugama told the parliament that the richest 20% of the country account for 54.1% of the national income while the bottom 20% receive just 4.5%[vi].

Rajapaksa economics was not business-friendly either. For instance, Sri Lanka is categorised as a ‘mostly unfree’ country in the Economic Freedom Index. Fitch Ratings revealed that post-war Sri Lanka has not been successful in attracting foreign direct investment; since 2009, the average net FDI has been just 1.2% of GDP. “This is low in comparison with most regional peers and has fuelled a reliance on debt-creating capital….. This has kept the external debt burden at 57% of GDP which is much higher than all other emerging Asian markets, except Mongolia”[vii].

Rajapaksa economics was business-friendly only in a very limited and parochial sense. A small coterie of businesses with links to the ruling caste did extremely well. Economic policy was used to enable these favourites to make super profits via tax concessions and monopoly formation. For instance, in the 2014 Budget, “….more industries were given protectionism, allowing favoured businessmen to avoid competition, further worsening a culture of rent seeking and exploitation of poorer consumers. Boats and gauze were added to the list while protectionism was increased for building materials and food. Already monopolises have developed in building materials under protective tariffs…”[viii]

Rajapaksa economics therefore worked to create an Acolyte Capitalism, a system in which business success depended to a disturbing extent on how loyal and obedient you were to the rulers.

And this system was rapidly becoming unsustainable.

In August 2014, a Cabinet Subcommittee in a confidential report warned that government revenue was declining and that revenue estimates for 2015 were unrealistically optimistic: “It is not prudent to continue our over reliance on indirect taxes and must rely instead on a direct tax effort. We must ease taxing of goods for consumption and services regardless of the people’s income levels and avoid placing burdens on the poorer households.” [ix]

The course correction effected by the Interim Budge therefore is a necessary one. It has reduced reliance on indirect taxes while taxing some of the favoured-businesses which enjoyed economically irrational privileges in the last several years. Super Gains Tax, the Special Levy on casinos, the doubling of Betting and Gaming Levy, and the taxes on satellite TV operators and Sports channels belong in this category.

The pay hikes to the government sector are a socio-political and an economic necessity (its beneficiaries include the armed forces and police). This measure is necessary to pull the popularity-rug from under the Rajapaksas even further; it will also help correct income-distribution anomalies, expand purchasing power at the middle and lower level and help local businesses, especially SMEs.

More work remains to be done to transform the Lankan economy into some sort of capitalist normal. Sri Lanka needs to further reduce her reliance on indirect taxes, broaden the tax base and rationalise the taxing system. She needs to come to grip with the massive debt burden and develop an economic strategy which generates both employment and income for ordinary Lankans.

But for now, Ravi Karunanayake has presented a budget which Greece’s Syriza would be proud of. Class divisions and class conflicts are far from dead. They will come to the surface when the Lankan economy returns to some sort of capitalist normal. But without the Rajapaksa factor and in democratic conditions (however flawed), the playing field will be far less skewed and defeat will not be the only permissible o

[i] http://archives.dailymirror.lk/2007/01/12/news/07.asp

[ii] http://www.lankanewspapers.com/news/2008/11/35037.html

[iii] http://www.thenation.com/article/195129/can-podemos-win-spain

[iv] Sri Lanka Human Development Report – 2012

[v] http://www.ilo.org/wcmsp5/groups/public/—asia/—ro-bangkok/documents/publication/wcms_212030.pdf

[vi] http://www.island.lk/index.php?page_cat=article-details&page=article-details&code_title=91542

[vii] http://www.fitchratings.com/gws/en/fitchwire/fitchwirearticle/Sri-Lanka’s-Resilience?pr_id=805953&cm_sp=homepage-_-FitchWire-_-%20Sri%20Lanka’s%20Resilience%20Masks%20Medium-Term%20Credit%20Risks

[viii] http://www.lankabusinessonline.com/news/sri-lanka-targets-lower-deficit-in-2014-budget,-ups-protectionism/1793196494

[ix] Red Light on revenue: Cabinet subcommittee says 2015 revenue targets unrealistic and unachievable
– Sandun Jayasekera – Daily Mirror – 23.8.2014