By Ahilan Kadirgamar –

Ahilan Kadirgamar

The 2014 Budget unveiled by the President is a Budget for everyone. It addresses infrastructure, health, education, business, banking, agriculture, fisheries, housing, pensions and anything and everything everyone wants. It is for this reason that it is confusing and difficult to criticise. What is the economic policy vision and strategy and what are the priorities in the Budget?

This article analyses the 2014 Budget as a continuation of the open economic policies since 1977, and particularly, a reinforcement of the accelerating neoliberal policy trajectory after the war ended in 2009. It discusses policy priorities by revealing the scale of investments in urban construction and infrastructure. It critiques the lack of redistribution and increasing inequalities promoted by tax policy. It analyses the process of financialisation supported by this Budget in order to understand the dynamics that could create an economic crisis.

Bowing to Pressures

The Rajapaksa regime has mastered electoral politics. And more, the regime has been able to take the wind out of every mounting struggle. Political parties are broken and their members are bought over. Militant struggles are appeased with hand outs. Even as the regime becomes more and more authoritarian and arrogant, it has not lost sense of the pulse on the ground. It is the Budget most of all that reflects the populist grounding of this regime.

Even as it has stolen the UNP’s neoliberal vision – thereby disarming the opposition of an economic critique – it has also appeased many of the trade unions and sections of the rural masses through hand outs. Indeed, the regime boasts the full spectrum of political parties under its fold from the Sinhala Buddhist Nationalist Right to the bankrupt Old Left. The regime works with the confidence that if it can buy parliamentarians for a pittance, it can buy the masses for even less. It expanded the Cabinet and provided ministries with little powers for patronage, and similarly, it has expanded the Budget with subsidies and hand-outs for the population. Just as political power has been entrenched within the authoritarian regime, wealth creation for the financial elite and the dispossession of the lower classes accelerate with the neoliberal transformation.

So, what is in the Budget that is attractive to the larger population? Public servants and pensioners are getting a cost of living allowance. The pension scheme for farmers, which was abandoned a few years ago, has been reinitiated, albeit with the age of qualification now at 63. University lecturers, who were credited with putting together the second longest strike in the history of the country last year, will be given a raise next year. Hostels are being built for university students and labs for secondary schools. There is going to be greater investment in healthcare, vocational training, SLTB buses and rural roads. The questionable major fertilizer subsidy will continue and even a subsidy for government field officers to purchase motorcycles.

Contrary to most claims, Government spending as a percentage of GDP is only 20 %, and compared to other countries, quite low. State sector salaries and allowances are Rs. 390 billion, pensions amount to Rs. 125 billion, fertilizer subsidy, pharmaceutical drugs and welfare transfers are Rs. 100 billion. The point here is that the populist measures that include salary increases and subsidies are not determining the trajectory of our economy.

Infrastructure and Urban Construction

In this context, what economic changes are prioritised through public investment? Much of the capital expenditure is going to be on infrastructure, particularly roads, irrigation, ports, power plants, airplanes, hospitals and housing. In an impressive move, the Chinese have provided a grant of US$ 180 million to develop the Colombo, Kalubowila and Ragama hospitals. Next, the Government intends to build fifty thousand houses in Greater Colombo to resettle shanty dwellers even as hotel and property development in Colombo moves forward. There are also plans to build fifty thousand houses in the plantation sector. Both these massive housing schemes will be built through a US$ 750 million international bond for the Urban Development Authority and an additional US$ 750 million from government-led development projects.

The Government has mobilised a US$ 1.2 billion loan from the Asian Development Bank for road building and connectivity. Such plans for massive build-out comes after over US$ 3 billion has already been invested in tourism related infrastructure. This drive to build infrastructure with global finance has led to a construction boom:

“The contribution of the country’s construction industry now accounts for 10 percent of GDP. This sector is growing at around 17 percent due to expanded investments in infrastructure as well as higher private investments in urban property development, housing construction, tourism facilities, new factories and other logistics.”

Thus the main priority of public investment is infrastructure and urban development. The Budget states:

“Urban development initiatives of the Government have gathered a new momentum. These public investment initiatives which are funded with domestic finances along with foreign finances from the World Bank will be extended to cover greater townships of Kandy, Badulla, Kurunegalla, Galle, Ratnapura, Anuradhapura, Jaffna, and Trincomalee. The Southern Expressway and the proposed Northern, Kandy and Ratnapura Expressways that are due to commence construction next year will connect neighbouring semi-townships, to universities, teaching hospitals, tourist zones, investment zones, ports and airports, while also providing a wide range of services.”

In other words, the physical and economic geography of the country is going through a major transformation. The important question is whether such investments will provide the necessary returns to sustain this transformation.

Taxation and Financialisation

One major criticism of the Government’s economic policies is the lack of revenues to sustain its level of expenditure. As Table 1 illustrates, total tax revenue is even less than recurrent expenditure. So, where will the funds come from to pay for public investment and the accumulated debt? While the Government has some plans to expand the tax base, much of it continues to be indirect taxes, particularly, the VAT as opposed to progressive direct taxes targeting the income of the wealthier classes. Indeed, problematic tax policies that came with tax reforms in 2010 are continued even as inequality increases.

The tax logic in the Budget is not about redistribution but about incentives to investors and businesses. The question is whether such incentives in fact work and who do they serve? For example, there is a 50% tax holiday for three years for those companies that get listed in the Colombo Stock Exchange in 2014. This is a move to prop up the stock market and the interest of financiers.

Indeed, in recent years the central shift in the economic policy trajectory is financial liberalisation. The Government is proud of its achievements:

“Our country is now well integrated with the international financial markets. The Government and banks have mobilised funds with 5-10 year maturities through internationally traded bonds. This has improved availability of foreign funds required for the financing of both Government and private development expenditure.”

But are such funds used for investments with returns or consumption resulting in the accumulation of debt?

In any event, the Government is continuing to encourage such financialisation to boost international capital flows, the promotion of banks and finance companies and further loans down to the rural sector. For example, the Government is going to push for the merging of the development banks, particularly NDB and DFCC so that they can float larger euro dollar bonds. The model is the Bank of Ceylon bond floats totalling US$ 1 billion and the NSB bond float of US$ 750 million; both brought considerable foreign exchange at high interest rates and are exposing domestic banking to external risks. It is also pushing Banks that have finance companies as subsidiaries to merge their operations. These moves are a recipe for financial contagion and crisis, even as they garner greater inflows of global finances in the shorter term. Finally, as if indifferent to the massive indebtedness in the countryside, the Budget is encouraging rural loans, particularly micro credit loans for women.

The Government assumes that tax incentives and financialisation along with the expansion of the market will create employment. It is blind to how the market is in fact undermining rural economic life, particularly the lot of the farmers and fisher-folk, broadening inequalities. Job creation continues to be the priority, but beyond expanding the public service it does not have a vision for employment. Tourism is proving to be a fickle industry, the garment industry is a global race to the bottom in wages and revitalisation of earnings from tea has been reduced to blending and marketing. Larger sections of the population are forced to choose problematic migrant labour in the Middle East with atrocious working conditions and related social problems at home. Sadly, foreign employment continues to be the primary foreign exchange and income earner for the country with expected earnings of US$ 7 billion.

In the meantime, financialisation from the rural up to the national level may throw the country into an economic crisis.

CHOGM, Cameron and Austerity

Given the Commonwealth summit that preceded the Budget Speech by a week and the President’s proud reference to it in the Budget, it may be appropriate to end with it.

Indeed, CHOGM was as much about economic priorities as it was about political clout. It accelerated beautification of urban Colombo and completion of the Katunayake Expressway. And it was pitched as attracting foreign finances including for building casinos. However, there is one point about CHOGM that offers the Rajapaksa regime and its critics some learning.

David Cameron stole the CHOGM show and many felt it was a blow to President Rajapaksa. On the other hand, it is through London that a considerable share of the global finance capital propping up the Sri Lankan economy flows. While Cameron, the first official leader of a country to visit Jaffna, can claim to shine the media spotlight on Tamil concerns, he cannot offer aid for the reconstruction of the North beyond a pittance. Cameron cannot put money where his mouth is, because he is the austerity Prime Minister of a country pummelled by the economic crisis. Cameron is too busy clawing away at the social welfare of his own citizens and therefore lip service at best for the welfare of the war-torn Tamils.

With neoliberal globalisation, horrific images are there to be rapidly circulated and consumed, but in the interest of corporate media profits and Western establishment interests. They rarely contribute towards equitable reconstruction of post-war societies and much less social justice. Many of the regime’s most vocal critics have been pinning their hopes on international actors. Critique and oppose the authoritarian regime they must, but it would be prudent to understand the character and interests of their enemy’s enemy.

The lesson for the Rajapaksa regime is that when the financialised economy collapses, it may be hard to find even the populist hand outs. The very donors and financiers that have been pouring in capital will scream austerity and privatisation. When the crisis hits, the mask will have to come off, with only the neoliberal face of Cameron in the mirror minus of course colonial privilege. The people should be aware, will this be the Budget before a crisis or will there be more?