RW’s Budget Of Hopes & Politics

By Ameer Ali –

The President cum Finance Minister, Ranil Wickremesinghe’s 2023 budget is more than a statement of revenue and expenditure, which hopes to lay the foundation for an “open market economy of social protection”, whatever that implies. On a previous occasion he picked 2048, the centenary year, as the one which would celebrate Sri Lanka’s total transformation into a technologically driven First World Nation with an export-oriented economy motored by renewable energy. In other words, that transformation is going to be an environmentally friendly, greenish, bluish and digitalized marvel. Unlike his predecessor’s “vistas of prosperity and splendour”, RW’s economic Valhalla is going to be at least a little El-Dorado. In that sense, the 2023 budget should be considered as the first step in that direction.  

However, given the current political morass both inside and outside the parliament, that budget should also be viewed as a tactfully crafted document intended to win wider support not only from different sectors and segments of the local economy and society respectively, but also to win the confidence and admiration of international observers and aid agencies such as the IMF. Its promised $2.9 billion financial assistance is contingent upon (a) implementing aset of economic and financial measures that RW’s regime should undertake and (b) successful outcome from debt restructuring negotiations with creditors, in order to qualify for that assistance. (It appears that China is going to be a tough nut to crack in these negotiations). However, IMF assistance is crucial to achieve a level of economic stability and revival, which also and more importantly would enhance the president’s electoral popularity. When one considers the fact that by the time the budget year comes to a close, the country would be constitutionally ready for another Presidential Election illustrates the political dimension of the 2023 budget. 

But whether its expectations to achieve (a) a growth rate of 7 to 8%, (b) revenue to increase to 11.3% of GDP from 8.7% in 2022 while expenditure rising to 19.2% from 18.6% and (c) to bring down the deficit to 7.9% from 9.8% of GDP, would be realized, depend on a number of factors some of which are not strictly economic. For example, fears surrounding an escalating war in Europe, natural disasters resulting from climate change and WHO’s prediction of outbreak of another wave of Covid pandemic are outside the powers of the budget to control. Supply rigidities resulting from the war, droughts, earth tremors, wild fires and floods, all leading to fall in agricultural output and increase in food insecurity are facts that cannot be belittled or ignored in any budgeting. Given these constraints, RW’s target to increase international trade by more than 100% of GDP, an annual growth of $3 billion from new exports between 2023 and 2032, and foreign investment $3 billion over the same period appear to be based on exaggerated optimism. One can only wish his budget, Good Luck! 

Apart from those global issues there are also local issues that would eventually affect budget’s targets through contraction in aggregate demand. For example, on the revenue side, proposals to increase import duties, broadening the coverage of VAT, raising personal and corporate tax rates, introduction of surcharge tax on diesel, petrol and crude oil, and introduction of a social security contribution levy are all burdens that have to be borne ultimately by the final consumer through higher prices for his/her consumption basket. Their belt tightening would take its toll on aggregate demand. While the government itself is forced to economize its own expenditure, whether the fall in consumer demand would be more than adequately compensated by that from local and foreign investors and positive net exports is uncertain in light of gloomy predictions about an impending global recession destined to impact Sri Lanka’s trading partners, including the mighty China. The twin rise in inflation and interest rate in almost all partner countries is not a healthy sign for RW’s budget aspirations.      

Apart from that, and on the expenditure side, how would RW justify the allocation of 539 billion rupees to defence and security while health and education receive only 322 billion and 232 billion respectively? The tri-forces and police which ballooned in size, though justifiably during the war years, have turned into another white elephant after the war, and become an unjustifiable burden on tax payers. However, to all presidents and governments after 2009, defence and security had become an untouchable entity deserving continuous pampering. The size of these forces needs to be cut down to save the tax payer, and the decision to reduce the retirement age to 18 is not going far enough. There must be demobilization in stages so that only a critical minimum is maintained and kept trained and fit to meet peace time contingencies. No president since 2009 seems to have had the courage to tackle this white elephant. In short, it is political necessity more than parsimony that had kept these forces un-affordably large.    

The same problem faces the overgrown public service. Politics has a lot to answer for its expansion. It needs merciless pruning as IMF would expect, but politics stands on the way. While RW intends standing for election at the end of 2014 – unless he overrules the constitution and extends his term – that pruning is going to be very minimal.            

At the same time by reducing budget allocations to education and health, RW cannot expect to produce an “internationally competitive workforce with high skills in the next 10 years”. What is really needed is not simply an increase in the quantum of funds allocated to these sectors but the quality of that expenditure, which is more than a matter of rupees and cents.  

More than all this, any success of RW’s budget depends crucially on the administrative side of the economic equation. Improving the efficiency of tax administration, eradication of an inbuilt culture of corruption and nepotism that had distorted if not paralyzed development with economic justice, removal of artificial market rigidities, wanton profiteering and hoarding by mafia elements and local monopolists, are areas on which the budget has said little. There lies the politics of the budget. In short, RW’s 2013 budget is a document based on hopes and politics rather than a true reflection of reality outside.    

*Dr. Ameer Ali, Murdoch Business School, Murdoch University, Western Australia

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