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by Dr. B.S. Wijeweera

This story begins with the year 1988. It was in that year that government fiscal operations began to register a recurring deficit in the Current Account (CAD). Of course, there had been five occasions prior to this, notably the Insurgency years 1971 and 1972, on which CADs had been registered, but the negative trend had been reversed almost immediately.

Since 1988, the deficit has come to stay and become a characteristic of government budgetary operations. A CAD (as distinct from the overall Budget Deficit of which it is a part) in lay terms is the inability to earn sufficient revenue by way of taxes, excises and other levies to meet the annual expenditure on government activity consisting of wages, utility expenses, maintenance of building and machinery, and the provision of public services such as eduction, health, transport and social welfare.

In budgetary parlance it reflects the insufficiency of revenue to accommodate current expenditure. Additional capital expenditure would undoubtedly compound the problem leading to the overall Budget Deficit.

If a CAD were to occur at the level of an individual firm or household over a prolonged period, bankruptcy or insolvency would set in and wipe out the unit. This is not so in the case of national governments. National profligacy appears (and only appears) to be sustainable.

In a deficit situation the first recourse is to borrow, whether it is an individual firm or a national government. When a firm borrows stringent corrective measures are taken to remedy the imbalance and also safeguard the interests of the lender.

When national governments borrow there does not seem to be that level of stringency, perhaps, in the belief that governments are more resilient. In either case, the failure of the remedial measures taken leads to bankruptcy or in the case of national governments to the inability to pay back the debt, leading to a national debt crisis.

The second fallback option in a deficit situation is to sell off assets. This is generally considered to be a desperate remedy to be used only when lenders refuse to lend or when the assets are irredeemably unproductive. In government budgetary parlance the monies realized from such sales are termed divestiture proceeds. In practice, these proceeds are gobbled-up by the Treasury to offset the deficits and, as such, divestiture is a euphemism for selling the family silver.

Public debt

These preliminary comments provide the background to a scrutiny of the public debt of government as shown in Table I. It was in 1988 that for the first time, since Independence, the total borrowings (both local and foreign) exceeded the GDP of that year. It would be recalled that 1988 was also the beginning year of chronic Current Account deficits. The problem would have been simmering for sometime and surfaced in 1988 with a CAD and a landmark public debt.

The coincidence does not end there, for 1988 was also the beginning of the second Insurgency. Which caused what is not clear, though the sharp correlation between social upheavals and degeneracy of economic fundamentals is well recognized.

The public debt pattern thereafter is very revealing. It rose to a peak in 1989, no doubt due to the economic disruption of the Insurgency, which made it difficult for economic activity to function. Thereafter, the situation improved somewhat with the Government resorting increasingly to divestiture proceeds to retire the public debt.

Divestiture/Privatisation

Divestiture proceeds became a budgetary tool for the first time in 1990 (at that time the lexicon had it as privatisation proceeds) with the sale of Thulhiriya Textile Mills for Rs. 200 million. The use of divestiture proceeds to balance the budget is reflected in Table II.

It can be seen that divestiture proceeds proved to be an affective tool in containing the public debt, somewhat, at the initial stages. The high point was 1997, in which year a record sale of Rs. 22 billion was registered mainly through the selling-off of a 35% stake in Sri Lanka Telecom and the stock of convertible debentures of NDB. Correspondingly, the public debt declined to 85.8% of GDP reaching its lowest point for the decade.

This improvement was short-lived as the divestiture proceeds declined in value. In any event, this instrument has only a one-off utility value because there aren't unlimited capital resources that can be sold indefinitely. At some point, the capital will be exhausted.

The other side of the equation is the public debt. We have it on the authority of the Minister of Finance, who announced in the Budget Speech 2002, that public debt has once again gone above the GDP in value. Thus, we are back to square one in retiring the public debt using divestiture proceeds.

The total value of the divestiture proceeds of the full period up to the end of year 2001 was around Rs. 52 billion, which today is roughly the annual wage bill of the civilian and military personnel of government. Thus, the limitation of divestiture proceeds as an affective instrument of retiring the public debt or bridging the budget deficit is self-evident. This will be more so in the future as attractive capital assets are progressively sold-off.

End of the road

Thus far, we have used both instruments available to us to make-up for recurring budgetary deficits: borrowing and divestiture proceeds. However, a turn around has not been achieved. Additional borrowing will place a severe strain on government finances through increases in debt service obligations.

Further, heavy domestic borrowing from the banking sector, which has been the trend in recent years, will deprive the private sector of much needed funds. We seem to have reached the limits of both borrowing and divestiture. What then is the alternative?

There appears to be no other alternative but to take drastic measures to curtail government expenditure. This has been spoken of on many an occasion, but nothing serious has been undertaken simply because it is a daunting task.

Let us take some obvious examples. Why should certain categories of government servants (in the top brackets) be provided with official transport from residence to office and back, up to a limit of 40 km (PA Circular 22/99)? There was a time not long ago when even Permanent Secretaries (as they were then known) drove their private vehicles to office. And, they were not all rich.

At that time, a very respected and senior head of department travelled daily by bus from his home in Ratmalana to his office on Bristol Street!! When one takes up employment it is ones responsibility to report for work, without insisting on the employer providing transport. Some employers in the private sector can afford to provide this, but this employer, the Government has come to a stage when it can no longer sustain this.

Compounding this extravagance is the facility of providing government vehicles for private running on payment of a token amount. This is done in violation of classic Weberian principle that the private life of an office holder must be kept separate from his official status, in an ideal bureaucracy.

The same argument holds for paying 90% of home telephone bills of a large number of government employees. The savings that can be affected from these measures are minimal, certainly not enough to bridge the Current Account deficit. However, the point to be appreciated is that when the ordinary citizen is made to bear the brunt of budgetary imbalance through higher taxes, levies and prices there should not be a privileged class that seems to be blessed with substantial perquisites of office.

The very fact of holding on to a permanent job (with even some security in old age) is in itself a blessing.

The above observations apply equally forcefully on political office holders. Why should the Parliament canteen offer subsidized meals? Should not the prices be fixed on a cost recovery basis at least to cover the cost of food supplied? Additionally, has a Sitting Allowance to be paid for attendance in Parliament? After all, one is paid a salary to attend to official work and a parliamentarian's primary place of work is Parliament. The matter should end there.

Once again, the savings that can be affected is minimal, but the spirit of these measures is more important. The spirit of frugality must pervade the entire government sector and, if so, discipline must flow from Parliament itself.

The above measures, thought having a moral import, are really peripheral to the real issue of curtailing government expenditure. The magnitude of the desirable reduction is formidable, and a little saving here and there will not address the real issue. Drastic measures have to be taken and, once again, one has to begin at the top. a few oft-cited examples will bear repetition.

Reducing current expenditure

Fifty odd ministries cannot be justified by any standards whatsoever (and to be fair no justification has been seriously attempted except to beg the question using the plea of political imperatives). True, ministers and deputies may not draw an additional salary but this is poor consolation.

Every extra ministry will need a Secretary, at least one Additional Secretary, a couple of Senior Assistant Secretaries and Assistant Secretaries, an OA or CC, twenty to fifty clerks and stenographers, about ten peons and an equal number of drivers, at the minimum. This is a formidable package of extra expenditure on personnel alone. To this must be added cost of stationery, rentals, fuel expenses and utility expenses such as electricity, telephones etc. From this perspective, every additional ministry is a big drain on funds.

The other matter often referred to is burgeoning bureaucracy. To be sure, the number of government servants (including those in provincial councils and local authorities) has not increased substantially during the past decade and, with difficulty, has been contained to a little more than 600,000 throughout. This is commendable.

The sources of the problem of expanding bureaucracy lie elsewhere. Firstly, even with constant numbers periodic salary increases make the bureaucracy increasingly expensive. Secondly, the prudence of keeping the civilian numbers under tight control has been completely negated by the rapid increases in the numbers deployed on military activity.

The net outcome is that the wage bill (of both civil and military personnel) has increased from less than 5% of GDP in the early nineties to over 5.5% at current reckoning. This is a substantial increase in a climate of scarcity in the supply side of the Current Account.

Since the total current expenditure has to be kept within limits for budgetary purposes the increasing wage bill has a regressive impact on the quality of public services provided by Government. This is borne out in Table III.

Health and Education are key service areas, which have an impact on almost the entirety of the citizenry. However, current expenditure on Health has barely managed to survive in the last decade whereas that on Education has shown a sharp decline. Now, current expenditure on these two vital sectors also includes the wages of personnel engaged in the respective sectors, which expense we have seen above has been on the increase in relation to GDP.

The next result of these two tendencies is to erode the funds available for non - wage expenditure, virtually running down the quality of the services provided. Thus, the common complaints of shortages of drugs in hospitals, lack of funds to repair damaged furniture and leaking roofs in schools can trace their origin to the increasing liability of bureaucratic costs on the limited allocations that are earmarked for maintaining these services.

This example can be extrapolated across the board to apply to all public services, including Police functions. In a climate of scarcity, increasing wage expenses can only have a regressive effect on the quality of services made available to the public.

Eliminating excess bureaucratic structures

The case for eliminating a number of excess ministries has already been stated. An equally forceful case can be made for redundant government departments. For a long time the Marketing Department existed with recurring loses, today it is no more with market operations having taken over its functions. Similar investigations could be done in respect of departments such as Textile Industries and Cooperative Development, to name just two.

Right at the centre of the General Treasury there is a Department of Management Services. It was created recently, at the time of abolishing the Department of Public Enterprises, to take over some of the latter's functions, but its primary responsibility was management reform. Later, management reform became the responsibility of the high-sounding Public Service Management Development Authority. Today, both remain at public expense.

Hard questions have to be raised such as whether these institutions serve a useful purpose, whether there is duplication, whether a rational amalgamation can save costs. Of course, there will be stiff resistance and from very powerful sources, but the issue of public interests versus personal interests has to be resolved satisfactorily sooner rather than later. In fact, it is almost too late.

The other area for investigation is public authorities that are set-up outside the departmental structure. They are variously termed Boards, Institutes, Authorities, Corporations, etc. Many have important statutory functions to perform. However, some of them have substantial revenue earning potential which could be tapped for budgetary purposes.

The rationale is that if a private entrepreneur were to invest he would expect a reasonable return on his outlay. The same logic should apply to all revenue generating public enterprises, except those that are exempted on grounds of public policy.

To take an example, the NIBM is fully government owned and is self-financed without any contributions from the Treasury. It generates surpluses every year but the investor gets no return. Similarly, the NIBM can be made to market its courses on a cost plus basis and provide even a token return for the investment. There could be other enterprises whose potential has not been explored. There was a time when the Treasury was satisfied if no funds were solicited. Now, the time has come for the Treasury to reverse the process and ask for contributions to enhance government revenue. Those that cannot contribute are ideal candidates for divestiture.

One area that has never before been highlighted in this country is the propensity on the part of legislators (advised by top bureaucrats) to create additional bureaucracy.

Every new piece of legislation that creates a regulatory authority or mechanism, a new institution or even a committee of officials that did not exist earlier adds to bureaucracy and additional expenditure. This is never recognized nor openly discussed when enacting the legislation.

In fact, there appears to be an unfettered constitutional licence (invoked in the national interest) to create bureaucracy as a natural concomitant of legislative activity.

Ironically, the national interest would be better served if there were less bureaucracy. Would it be too much to expect a constitutional amendment that mandates new legislation to specify the sources of savings in current expenditure that would finance the additional bureaucracy that the legislation may create!!

Stony path ahead

Extricating ourselves from this mess, which we have collectively created is not going to be easy. Above all, it would require firm resolve, tenacity and sincerity of purpose - qualities that are not found in abundance at the levels that matter. A few guiding principles are enunciated below.

1. A demonstration at the top levels of the politico-bureaucratic hierarchy of a preparedness to sacrifice non-essential perks and privileges, and this should begin immediately with a substantial reduction in the number of ministries (Cabinet or otherwise).

2. Enforcing a strict separation between the Current Account and Capital Account.

3. A firm resolve to balance the Current Account in the year 2003 and the conviction that this can be done. After all this was the case for a major part of our post-Independence history. The rot set-in only as late as 1988.

4. Having balanced the Current Account, use only divestiture proceeds, grants and soft loans (with a minimum grace period of 10 years) to finance the Capital Account.

Both big donors and big spenders, who maintain a symbiotic relationship, will be unhappy, but this pressure will have to be resisted. This makes good economic sense because divestiture proceeds are monetised capital and should be reinvested rather than fritted away through consumption expenditure.

5. The operational technique is very simple. Instead of being guided by the clamour of big spenders (who demand funds) and big lenders (who promote and induce the spenders to ask for funds) focus on debt servicing with a view to reducing the public debt and debt servicing to manageable proportions within a period of say 5 years. Public debt is a death trap and no amount of rescheduling will help in the long run.

The above is only the broad outline; specifics will have to be worked out by those whose responsibility it is to prepare the National Budget.

The Law of Increasing Entropy

From budgetary techniques to thermodynamics is a quantum leap that requires also a mental metamorphosis, but such flights of imaginations are sometimes called for in order to better understand social activities. Newton's Third Law of the equality of action and reaction in the interaction between physical bodies is an illustrative example. Though a precise mathematical equality may not obtain it is well recognized that this Law imparts meaning to personal relations and group relations. The Karmic Law, which pre-dates Newton, contains the essence of Newton's mathematical formulation.

In thermodynamics, Entropy is associated with the degree of disorder in a closed interacting system often called the universe. A special formulation of the Second Law of Thermodynamics states that the Entropy of the universe always increases. In lay terms this means that disorder (or chaos) has to increase in a closed physical system.

When one looks around at social systems there appears to be an inexorable law, which propels some of them along a path of increasing social disorder. This is true of our country and our neighbours in the sub-continent. A few have escaped this rule, but whether this apparent orderliness in the social system is only superficial is a moot point.

Be that as it may, our record since Independence has been one of increasing entropy (disorder) be it in the sphere of education, transport, power-energy or electoral processes. It should come as no surprise then that the budgetary process too has fallen victim to the inexorable law of increasing entropy.

From this perspective, all what has been stated in the earlier sections of this paper are too rationalise and technocratic. They are premised on the conviction that problems are capable of being solved and that a careful analysis of the issues will show the way out.

They suffer from an excess of rationality - the compulsion to order things into a neat configuration. In real world situations things are not black or white, nor are actions right or wrong. There is a large tract of undefined extent, which has varying shades of grey.

Hence, purely technical solutions may not apply. The empirical observation that there appears to be invisible forces (political imperatives and the propensity of new legislation to add to bureaucracy are just two of them) that propel government budgetary operations towards a greater disorder militates against too optimistic a prognosis.

That said, the mere resignation to fatality goes against the grain of human spirit and endeavour, and as long as this spirit burns within ones self there is always the urge to rationalize and search for order and logical sequence.

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