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by Dr. Sirimal Abeyratne, Senior Lecturer in Economics, University of Colombo.

The maiden budget of the UNF government appears to have aimed at achieving growth momentum. Having experienced an economic downturn over the past few years, reviving the growth momentum is no doubt the most fundamental requirement both in the short-term an in the long-term.

The achievements of the budgetary targets in the short-run and that of the development goals in the long-run depend very much on economic growth. Given this fundamental requirement at the current juncture of Sri Lanka is economy, the budgetary proposals are too soft and the budgetary targets are too ambitious.

Within the current development strategy of the country, in which the private sector is expected to play the major role, the budget proposals are basically directed towards promoting economic growth through an expansion of the business sector. Many of us still in the traditional belief that the budget is a government document, which brings about 'relief measures' to the public in the form of delivering things either free or at subsidised price. This is a myth, as people themselves have to pay through taxes for what they get free or at subsidised prices.

In addition over 50 years of fiscal operations in Sri Lanka have proved that such a strategy did not solve much of the country's basic economic problems, but rather contributed to aggravating such problems. An increase in income and an expansion of employment opportunities depend basically on economic growth.

In this context, there is no question about the direction of the current budget proposals to enhance economic growth.

The main issue in question is, however, the current weak state of the economy and the fundamental weaknesses of the fiscal operations of the government are too hard to deal with in the short-run.

Economic reality

Economic growth of Sri Lanka has been slowing down since the mid-1990s, although the world economy recorded an economic boom during this period. With a lack of policy coherence and week governance over the past few years resulted in an economic downturn of the country.

These factors coupled with adverse political repercussions last year brought the economy to its critical state by recording 1.3% of negative rate of growth in 2001 for the first time in the post-independence history of the country.

In addition, the most fundamental weakness of Sri Lanka's fiscal operation has been that the government's total revenue is not sufficient even to cover the recurrent expenditure. Last year, the total revenue has been 16.5% of GDP as compared to the recurrent expenditure amounted to 21.4%.

In particular, the revenue has fallen far below the cost of public administration, social welfare, defence expenditure and debt repayment.

In fact, during the past few years the gap between revenue and recurrent expenditure has widened, as the revenue growth was slower than the growth of the recurrent expenditure. Therefore, attempts to reduce the budget deficit, which is necessary in order to maintain the macroeconomic stability, inevitably resulted in curtailment of development-related expenditure.

Budgetary targets

The reality of Sri Lanka's economy does not permit in achieving the macroeconomic stability in a less painful manner as envisaged by the budget this year. The reduction in budget deficit to -8.5% of GDP in 2002 from -10.8% in 2001 is therefore too ambitious. Realistically we need to accept the fact that the budget deficit would grow and consequently, the macroeconomic stability would come under pressure towards the end of the fiscal year.

Given the proposed reforms in the tax structure with large reductions, there is a potential decline in total tax revenue below the expected level of 15.0% of GDP. However, much of the achievements envisaged in the budget depend basically on two factors.

The first is that to what extent the government succeeds in achieving administrative efficiency to raise tax revenue. The simplification and rationalisation of the tax system might have a positive impact in this regard, but the administrative efficiency needs to be improved in order to capture all forms of economic activities of individuals. The second is the economic growth.

Given the proposed tax reforms and the difficulties to reduce expenditure, an increase in government revenue depends much on economic growth. A positive development in this respect is the establishment of peace by ending the war in the North, which would necessarily bring about an economic boom in the country. It is, however, unlikely that the impact of the above changes would be big enough to bring down the budget deficit to a manageable level in a less painful way in the short-run.

Soft start

If the realisation of the country's development goals depends much on fostering economic growth, the budget proposals indicate a soft move though in the right direction. A radical move on the economic front is necessary, particularly at the beginning of a new regime. There are many important areas that are either missing or less emphasized in the budget proposals.

To name some basic areas of importance, the lack of adequate infrastructure and the delay of public sector reforms have continuously hindered the economic development of Sri Lanka. In addition, the budget does not indicate the government's clear strategies to promote potential growth sectors and to deal with the major problem areas of the country. Even strategically the best time for a new government to take radical steps towards achieving long-term growth objectives is the first year of the government in office. Given the cyclical movement of the political stability and popularity through an electoral system in relation to the decision-making power of the leadership, a 'big push' at the beginning is essential.

This was one of the major mistakes that the previous government did too. If the benefits of such a 'big push' strategy are realised over the subsequent years, it would also help the government to maintain its stability and popularity in the long-run. In this context, it is vital to take major and radical steps at the implementation level of the budget proposals during this year.

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