Budget 2012:

Enhancing revenue ratio vital

D D M Waidyasekera

While Sri Lanka’s fundamental economic indicators continued to be favourable in the recent past with a growth rate of 8% in 2010, inflation at mid-single digit levels, overall deficit at 7.9% of GDP in 2010, unemployment rate at 4.9%, foreign reserves at US $ 6,610 million equivalent to 5.9 months of imports, and government debt reduced to 82% of GDP, still what Sri Lanka should do is to avoid being lulled into a sense of complacency.

For instance, a sectoral analysis of the GNP indicates that almost 60% of the growth is in the services sector, with 22% being in wholesale and retail trade and only 10% being in the vital agricultural sector; while the percentage debt ratio may have decreased in nominal terms, long and medium term debt has increased from US $ 15,564 in 2009 to US $ 18,823 in 2010; the foreign reserves should be looked at from the non-loan point of view to ensure stability; interest payments account for over 37% of annual current expenditure; and the trade balance shows an alarming trend with a negative balance of US $ 3,122 in 2009 to - US$ 5,205 in 2010 and further increasing in 2011.

In the background of these positive and negative features, this article attempts to focus on the need to enhance the government revenue ratio and arrest the long continuing declining trend which is also the government’s fiscal objective.

The 2012 Budget aims to keep a growth rate of 8%, inflation at 6-7%, the budget deficit at 6.2% and public debt further reduced to 75%.

The Appropriation Bill presented to Parliament estimates the total expenditure for 2012 to be Rs 2,220 billion necessitating an increase in recurrent expenditure from Rs 1,029 billion in 2011 to Rs 1,101.9 billion in 2012 and capital expenditure from Rs 938 billion to Rs 1,111 billion. The total revenue is estimated to be Rs. 1,115 billion and the budget deficit to be maintained at 6.2%.

To achieve these overall objectives without incurring economic imbalances by way of increasing debt or inflation, the overall policy has to be either reducing government expenditure or increasing revenue or both.

Let us consider whether the first approach is practically possible in the current context.

With post-conflict development taking place at a rapid and accelerated pace in all parts of the country including the North and East, and the rapid expansion of the economy in terms of infrastructure, it is not a practical proposition to cut down on government expenditure though theoretically, arguments can be adduced particularly on a neo-liberal economic framework to do so in many areas, apart from the necessity to cut down on wasteful expenditure, and reduce rampant corruption, which of course is necessary.

Expenditure structure

The expenditure structure in Sri Lanka is composed of broadly four elements - general public services, social services, economic services, and others. Can expenditure on any of these categories be reduced? Civil administration which was at a peak in 1977 at 77% has gradually declined to 36% in 2010 but in the context of providing employment to the expanding labour force particularly in the pre and post- university sectors, and current government policy, it is doubtful if any significant cuts are possible in this respect.

Defence including public order and safety increased from 26% in 1977 to 63% in 2010 and as per the 2012 Appropriation Bill, Rs 229.94 billion the highest amount has been allocated to the Defence Ministry and Urban Development, a 7% increase compared to the previous year.

In the area of Social services, education and health had incurred 1.86% and 1.32% of GDP respectively in 2010, and in 2012 has been allocated Rs. 33.25 billion (an increase of 8% from 2011) and Rs. 74 billion (an increase of 18.8% from 2011), respectively. Other social services include housing, welfare, community services etc.

Considering the importance of these services in the long-term development of the country and the predominant role of the government in the provision of these services, it is politically impracticable for the expenditure on these services to be reduced.

In respect of economic services such as agriculture and irrigation, fisheries, manufacturing and mining, energy and water supply, transport and communication, roads, highways and infrastructure, etc. far from reducing them, these have to be increased further.

In respect of other areas such as subsidies, and welfare facilities etc, there is little scope of reduction as such except improvement in administering these, monitoring. The fertiliser subsidy (Rs 30 billion in 2011) is considered more an investment rather than a mere subsidy as it has a vital impact on productivity.

Declining trend of tax and GDP ratio

In this context, the main focus of fiscal policy falls into the vital need to increase government revenue, both tax and non-tax. It is a well-known fact that there has been a declining trend of government revenue during the past decade in terms of GDP.

For a country to become developed economists estimate it should collect taxes at a ratio of 20 - 30% of GDP.

In higher income countries the ratio is around 42%, middle income countries 26% and developing countries 20%.

To be continued tomorrow