By Hema Senanayake – 

Hema Senanayake

Previously I wrote that the Budget 2014 would stabilize the rupee and facilitate private credit growth which will help the economy to grow. This stability will achieve through the proposed increase of foreign borrowing. I pointed out that any proposal to increase foreign borrowing must come with a promise to increase the inflow of dollars through non-credit sources in future because foreign borrowings come with an obligation to pay them back in dollars.

However, addressing the issue of the stability of currency, while ensuring private credit growth, is one important aspect of the budget. This objective will achieve from the Budget 2014 under the proposal made to increase foreign borrowing together with the proposal made to reduce domestic borrowing to fill the budget deficit which is at 5.2% of GDP. What is good is good and hence must be acknowledged so.

Another important aspect or area of the budget is to relieve the economic suffering of the people. People expected some relief from the budget. It seems they did not get what they expected from the budget. Many people and the political opposition expressed their disappointment about it. If this is true, which I think is true, then the simple conclusion I would make is that the distribution of distributable income is a disaster. Here I use a term call “the distribution of distributable income” instead of simply saying “the distribution of income.” You may think from the term I used above implies that there is a certain income that should not or cannot be distributed. That is right. The Budget 2014 did a poor job in regard to the “distribution of distributable income.” What is bad is bad and hence must be pointed out so.

When Sajith Premadasa says, that the budget deficit reduced to 5.2% of GDP at people’s expense, this means a different story but not something about an error made in the distribution of distributable income of the economy. But, when Ranil Wickramasinghe says, that “the government is sacrificing the welfare of 99% people for the benefit of a 1%” and also when he says that “the government has embarked on a range of indirect tax measures…” these statements mean that there is a fundamental error in the Budget in distributing the distributable income, only if Ranil was careful to understand the difference between ‘the distribution of income’ and ‘the distribution of distributable income.’

Yet, this does not mean that what Sajith is telling is wrong or insignificant. The question he raises is related to the ‘deficit spending’ (or the budget deficit) of the government but not related to the distribution of distributable income. As at now, we may ignore Sajith’s concerns because in this essay I am going to focus only on the question of distribution of distributable income, in other words we will focus on the question on which Ranil has been critical.

Any economy produces products (or goods and services) for the use of consumption. Also any economy produces products for the use of production of  products. Are there any other products that are produced in the economy? No. Perhaps you might now question as to the role played by banks and the stock market (or the so called financial sector). This question needs a lengthy explanation. But in brief I would say that the investments made in stock market are not treated as investments in calculating the GDP value which value represents the goods and services produced domestically. The same principle is applicable with regard to the production of money through banking network. But, when both those entities, employees and owners of those entities purchase tangible products either for consumption or for the use of “the production of their services”, such transactions are duly accounted in GDP. For example, what is not accounted in GDP is the changing of hands of a certain chunk of equity of a particular manufacturing company because the buyer’s investment does not make any change in the productive capacity of the manufacturing company.

Now getting back to our topic, people’s wellbeing is purely depended upon their consumption. If children are well fed their wellbeing is good. If their access to education is taken care of, then again their wellbeing is good. If the law and order is administered fairly our wellbeing is good. Therefore, there are a range of goods and services that fall into the category of “consumable output” of the economy, which directly relates to the wellbeing of citizens.

If the wellbeing of people is depended upon the portion of consumable output they consume, then fair distribution of “consumable output” is undeniably fair. According to Ranil, the distribution of “consumable output” in the economy is distributed unfairly. Opening the budget debate in the parliament he said, “The government is sacrificing the welfare of 99% people for the benefit of a 1%.”  In any given accounting period or let us say that in any given year, the amount of “consumable output” that can be produced is a constant which depends on the economic capacity of the country. Therefore, if 1% of population consumes more of the national consumable output, other 99% will have less amount of consumable output. If we want to increase the “consumable output” of 99% then the current consumption of 1% has to be reduced. The logic is simple, obvious and true. I am for a fair distribution of distributable output. Yet, I do not like the way that Ranil put it forward. It is confrontational and negative. It is like setting one segment of population against another. This is dangerous. I remember one such extreme case.

As I was told, he was an elected president of a country with a landslide. People wanted him to relive their economic suffering. In general the majority of population was poor. After a couple of years later, people felt that the leader was not delivering his promises. They organized a mass protest and marched towards the presidential palace. President was people friendly, at least that’s what he thought, and hence came out to address the people. People said that they were poor. The president said “if you are poor, do not ask me why you are poor. Instead go and ask the rich why you are poor.” People exactly did that, later on the same day, poor people went on rampage against the rich people, looting and killing rich businessmen and others. Sri Lanka might not see such an extreme eventuality but I personally do not like anybody setting a segment of population even they could make up 99% against another segment of the community.

But I agree that the question Ranil put forward is highly valid.  We all agree that the distribution of “consumable output” has to be done fairly and also we know that this cannot be achieved without asking the 1% or perhaps the top 10% to scarify. Will they do it willingly? I do not think so. But if we offer an economic incentive or promise, perhaps they might be willing to sacrifice. Such incentives could be the reduction of their perceived life risks. The objective here is to retain their entrepreneurial and professional spirits while making them to sacrifice willingly to uplift the wellbeing of 99%. This is a topic for another day. But let us investigate as to the mechanism of distributing the distributable output.

Consumable output consists of tangible goods and services. By consuming them we satisfy our needs and wants ensuring our wellbeing. So, how those tangible produce be distributed among the members of the society? Consumable output has a certain value in rupees. Since the consumable output is consumed by consumers, then consumers must have money amounting to the value of consumable output. This is the money they use for their consumption. Therefore, if we can change the amount of money each consumer is holding in order to spend for his or her consumption then we can change the consumable output he or she consumes. This means if we need to distribute the consumable output fairly then we can easily do it by distributing the money that is used for consumption. The money used for consumption consists of two sources; one is what is known as household income and the other is credit or loans. You can’t get loans if you have no income. Hence what is primarily important is the household income hence for the time being we may ignore the credit distribution. Household income is the income that needs to be distributed. When the “consumable output” is given or a constant, there is no mechanism that certain households are allocated a good chunk of consumable income and at the same to reduce their share of “consumable output.” Therefore, unless we distribute the consumable income fairly we cannot ensure the fair wellbeing of all citizens. That is a fact and economic truth. What is the mechanism we have to distribute the distributable income? The answer is short. It is direct taxes on high income households.

Can we distribute the distributable income fairly through indirect taxes? NO. Ranil was accurate on this point. In the parliament he said, “The government has embarked on a range of indirect tax measures…” Indirect taxes are useful to collect revenue for the government. But, as we know now clearly, if the question of distributable income persists in the country that question cannot be solved by imposing indirect taxes. That question can be solved only by increasing taxes on high income households.

Why I ignore the question of taxing of business entities? We are investigating the issue of the distribution of “consumable output.” Do the businesses consume? No. They produce. They use part of national income in order to produce. This is the part of the income that cannot and should not be distributed even in a socialist state. This is the income (or proceeds) that intend to use as capital in the production process. Should that capital be distributed by imposing taxes? No. The income (or proceeds) that intend to be capital must not be distributed and the income that intends to be used for consumption is what must be distributed. Now you may understand why I use the term call “the distribution of distributable income” instead of saying “the distribution of income.”

Even though the 2014 Budget did a poor job in distributing the distributable output, the difference of both terms mentioned above must be understood clearly in order to ensure the distribution of distributable income while ensuring the economic growth of the country. I think Ranil knows the difference of both terms.