The 2019 budget came up with an attractive proposal of “Home sweet Home”fornewly married couples at an interest rate of 7 percent. (50% of the loan is subsidized by the Government for 5 years while for the remaining 20 years the loan interest rate should be continued at 12%). This proposal seemed to have appealed to the majority of young people as intended by the Government, but some view it with skepticism.
Apparently, it is customary to offer children candy with the approach of the festive season. The New Year is close by, so is the election 2020. The Budget is the best means of winning a bulk of the votes. The Government has exploited the opportunity optimally. The few simple eye catching proposals have successfully enabled it to cover up the disastrous implications that have potential to dampen the future of the economy as well as citizens’ economic and social rights by the continued austerity mind set of the budget. A critical analysis on the components of taxation and government expenditure and especially the means of financing the deficit of the budget is timely in the context where only praise for the budget is heard and observed.
Re visiting my previous article on Citizens’ perspective to Budget 2019 published in Colombo Telegraph few weeks back; UN independent expert’s views and recommendations were brought to the attention of the government, which it seems to have neglected whereas it has committed to fulfill the conditionality given by the IMF and other global financial institutions.The major symptoms of phobia behind the increasing debt burden of the country while kneeling in front of those so called global financial institutions can be seen , through the primary surplus of 1.5 of GDP for 2019 and the projected budget deficit of 3.5 of GDP for 2020 in the budget 2019.
A government can convert its primary deficit which is the negative balance obtained by deducting the total expenditure excluding interest payment by the total revenue mainly by several means; by cutting down the expenditure while keeping the tax revenue constant, if not while keeping the government expenditure constant it can enhance the government revenue or it can increase the tax revenue in at higher rate than the increasing the government expenditure etc. The government has adopted the latter to show the primary surplus in budget 2019. i.e the total revenue has been increased by 21.7 percent which is greater than the 13.02 percent increment of the total government expenditure. It is obvious that having the presidential election close by the government cannot cut welfare and other essential government expenditure. Nevertheless the most crucial wage increases up to the required level for most of the sectors in the economy seems to be forgotten including the wage of plantation workers .Further, the substantial increase of interest payment as a proportion of government expenditure may also have contributed to this that has been accounted as 28.9 percent in 2019. As an aggregate the interest payment for 2019 was Rs. 913 billion whereas the figure was Rs. 852 billion in 2018.With higher interest payments, there will be less government expenditure and this will lead to a more favorable effect on the primary balance.
Myth of 60:40 ratio of Direct to Indirect tax by 2020
To discover the impacts of the budget 2019, the critical analysis of the structural components of the budget should essentially be done. The changes in the components such as taxation in terms of direct and indirect taxes, total expenditure in the direction of recurrent and capital expenditure, the borrowing to finance the total deficit in terms of domestic and foreign sources have significant different effects on the macro economy. Moreover, the budget mirrors the government’s commitment towards the progressive realization of Economic, Social and Cultural Rights of the citizens.
In 2019, the taxes on goods and services has increased by Rs. 231 billion which is a 21 percent increase compared to 2018 provisional figures. The country is already facing 2.9 percent of food inflation and 6.7 percent of Non-food inflation as per National Consumer Price Index on Year on Year basis (February 2019 – Department of Census and statistics website). The increase in indirect taxes would have the potential to accelerate cost-push inflation thereby lowering the living standard of the people. Especially the rise in VAT for domestic sale of certain garments by export oriented BOI companies is indirectly intended to encourage exports. However does it not have the potential to redirect the expenditure of domestic consumers for imported garments? Should not the government be concerned about providing the quality product for the domestic consumers in the first place and make the country self sufficient? Nevertheless, the imposition of a carbon tax and the raising of luxury taxes on cars are commendable measures in terms of protecting environment and curbing conspicuous consumption patterns respectively.However, the implementation and monetary mechanisms for charging these taxes were not clearly mentioned.Apart from taxes, right after re-gaining of power, the government has re-activated their rigorous price formula which has doubled, tripled the burden of the general public.
The government has paid less attention to increase income tax revenue under budget 2019, which is a worrisome fact. Granting more and more exemptions of taxes for income sources such as earnings through sovereign bonds, NRFC and RFC accounts royalty payments does not seems to be more favourable for the citizens in the lower rung as it minimize the income tax base thereby widening the income gap between the rich and the poor. Ironically, the government has found a new source of income to charge taxes from children’s deposit account which is an inhumane measure which is to be adopted. In this context, the government’s pledge to move the ratio of direct tax to indirect tax revenue as 60:40 percent by 2020 seems to be a clear myth with the prevailing ratio of 18:82 percent.
Ad-hoc development plans in form of Public investment
The total expenditure of the government in 2019 has been accounted as Rs. 3149 billion which is a 13.03 percent increase compared to previous year whereas this was fuelled by 10 percent increase in recurrent expenditure and 20 percent increase in public investment which can also be called as capital expenditure. This seems to be pretty impressive at first sight. However, an in-depth analysis of the development programs reveals the ad-hoc nature of the policies and absence of a properly planned long-run development policy to direct the country towards the right path. For, instance, the program of Enterprise Sri Lanka provides an interest subsidy loan scheme and other non-financial support to encourage the investment and improve the entrepreneurship in the economy. At a moment when country is overwhelmed by loan sharks in the form of Micro-credit institutions, 170 lives has been lost by suicides, it does not seem rational to provide more and more loans to the people and requesting them to start investments. On the other hand , providing loans at low interest rates does not solve problems as we clearly observed in the 2008 global financial crisis as these measures have the ability to recreate credit and real sector bubbles. Increases in Debt burden can be harmful to anyone according to David Harvey. He interprets debt as foreclosure of future consumption. For an extremely poor person, it can be a foreclosure of his consumption at the present as well. Rs. 250 billion allocated for Debt relief Scheme continue through the cooperative, rural banks and thrift and credit Societies is not sufficient at all for 2.8 million poor who has been caught in the debt traps, where 80 percent of 2.4 million women of them have been resorted to more than three borrowings. The program of “Gamperaliya” is reminiscent of ”Gama Naguma” of the previous Mahinda Rajapaksa regime, which seems to be designed under the concept of integrated rural development focusing on infrastructure development in rural areas. Through our past experiences, it was observed that implementation of such development program is more beneficial to contactors and politicians rather than the public, since some public resources have been squandered drastically. One major reason behind that could be the governments try to injectand accumulate more and more capital rather than concentrating on the productivity of such capital goods. Mass investments in infrastructure development will improve the country’s productivity only if they are properly designed and plan. Such a sophisticated and organized plan cannot be seen through the budget 2019.
Inflationary means of financing the deficit; further accumulation of public debt burden
Overall budget deficit was calculated at 4.4 percentof the GDP in 2019. The means how the government expected to finance this deficit of Rs. 685 billion along with their consequences is another aspect to draw attention. Looking at the numbers, it could be observed that there is a shift from foreign borrowing to domestic borrowing. Foreign borrowing have decline by 88.17 percent which is a significant decline form Rs. 465 billion to Rs.55 billion. Perhaps the government is not able to have foreign borrowing due to worsening economic instability and credit ratings. The Government has pledged to repay Rs.665 billion of foreign loans by placing the burden on the common people. The accumulated debt burden of the government peaked in 2018 with a debt to GDP ratio of 84 percent. In 2019, a significant change could not be observed since it decline only to 83 percent. Scrutinising the debt figure of the country over the past years, it is clear that the country is vulnerable to a debt crisis; in both micro-level and macro-level. Debt contagion is spreading at a faster rate which is hardly stoppable. However, in 2019 budget, the government’s focus is more on domestic borrowing and it has escalated by 112.83 percent. Among them though more attention was given to non-bank borrowing, pulling money from the banking sector has also increased significantly by 131.5 percent, which is generally considered as an inflationary measure by theory, and therefore expected to pile-up the burden of the households further.
The national debt burden increases gradually, Micro-credit swallows the lives of the poor like a financial contagion. Is the government asking to build a sweet home in an indebted land? Evidently, it is rather ironical, isn’t it?
*The writer is a researcher at Law and Society Trust, Colombo, These views are her own and do not necessarily reflect the views of the Law and Society Trust or its Board