By Hema Senanayake –

Hema Senanayake

Ravi Karunanayake has allocated funds amounting to billions from the 2017 budget to provide “tablets” to all students who are in Advanced Level classes and for the teachers. I hope that cash vouchers would be issued to students to buy tablets of their choice. Instead of doing it, if the Ministry of Finance or the Ministry Education decides to provide tablets to students and teachers then I feel that there is an element of corruption inbuilt in the budget itself with this proposal because this is a government which provides cash vouchers instead of fertilizers to farmers. Also this is a government which issues cash vouchers to students to buy uniform clothes and so should be in providing tablets too.

However, in general the budget is good but not good enough. From this budget, the Minister of Finance has corrected a few mistakes done in his previous budget. That is good. For an example, in the budget for 2016, corporate tax was reduced to 15% and personal income tax was reduced to be one flat rate of 15%. Progressive tax structure was removed in the previous budget. Even when a forum organized by Earnest & Young hailed these proposals, I argued against it. I wrote as follows:

“However, there was a post Budget Forum in Colombo, organized by the Ernst & Young. In the forum it was mentioned that Sri Lanka’s 15% corporate tax rate is the third best or equaling with Germany and only behind Ireland’s 12.5%. In personal taxation of 15% flat rate, Sri Lanka remained lowest among selected countries compiled by E&Y. It was further pointed out that, “In a personal tax view point Sri Lanka is the most attractive for people to work in terms of tax. In the region we are paying the lowest tax rate.” Amazing! Isn’t it? Where is economics? What about the filling of “gap.” What about making businesses more viable? What about preventing unsustainable credit growth – private and public? Our closest neighbor, India’s corporate tax rate is 30% and targeting double digit GDP growth while Sri Lanka’s GDP for the year 2016 has been downgraded to 5.7% by the CBSL.” (Colombo Telegraph, November 27, 2015)

The above mistake has been rectified in the 2017 budget. Even though I am not happy with the tax structure and the way it has been reintroduced, I am happy that Ravi Karunanayake has reintroduced the progressive tax structure from the budget of 2017. The government has been telling that they need to increase direct taxes while reducing indirect taxes. Economically this is a good objective. But the government can’t basically achieve this objective without having progressive tax structure in corporate taxes and in personal taxation. Accordingly the mistake done in 2016 budget has been corrected in the 2017 budget.

But the most important correction has been done in regard to the macroeconomic stabilization of the economy. The macroeconomic stability is very important in order to ensure the economic growth and poverty alleviation. Bad fiscal policies could easily destabilize the macro economy of any country. Basically and more frequently for countries like ours, this destabilization of macro situation do happen as a result of the destabilization of the exchange rate. This means we must focus on a foreign exchange rate based macro-economic stability. From the budget of 2017, the Ministry of Finance has done its part towards achieving the said goal. If the budget is implemented and the monetary authorities namely the Central Bank does it part duly the country will see that there will be no balance of payment runs in the year 2017 and as a result there will be no sudden devaluations of rupee. This could be a bad news for the Joint Opposition.

However, I do not necessarily agree that the reduction of the budget deficit to 4.6% of GDP is an essential part or element in making the macroeconomic stability. In fact this budget deficit is less than 0.1% from what the IMF had recommended. It intimates that the government thinks that by lowering deficit spending (or budget deficit) is good for economic growth. This notion is wrong. I would advise that the government must increase the deficit spending financed from domestic borrowing to the maximum point where it could achieve the exchange rate stability. This is important, especially in a period of reconciliation after a long war. If the government thinks it would destabilize the exchange rate if deficit spending exceeds more than 4.6%, this level of budget deficit is okay. Yet, I prefer to accept the IMF figure of 4.7% in this regard and it could even be more.

Finally, I conclude that there is one important common rule that needs to be established in order to ensure economic growth in any economic model. That rule is that entrepreneurs in the real sector have to earn more than what they have spent or invested. Without doing it no enterprise can prevail. Macroeconomic system must be designed to achieve that goal. The appropriate distribution of the distributable output is an essential element in achieving this goal. This must be the bottom line in our tax reforms and such reforms should begin from the budget. We do not see such a vision from the budget of 2017. This is a budget fixed by trial and error method and nothing more. That is why I mentioned in the above that this budget is good but not good enough.