By Hema Senanayake –

Hema Senanayake

“Sirisena promises 10,000/= rupees salary increase but does not show how he obtains the money to pay this.” This comment was posted by a concerned reader of Colombo Telegraph in response to an article published under the caption of “Maithri’s Manifesto Launched; It Is For Provider Government With A Vision” (December 20th, 2014). The same concern was re-echoed by Minister Susil Premajayantha and said that most of the promises mentioned in Maithri’s Manifesto cannot be delivered. He must be primarily referring to the economic promises.

Hudson Samarasinghe, the Chairman of SLBC wanted to do it in a more credible way. So he called the best official expert in the subject of economics in order to be interviewed on “Rupavahini.” The expert was Dr. P. B. Jayasundera who is the Treasury Secretary. The interview went on for two hours. The intension was to seek his professional analysis on the promises mentioned in the Manifesto of Maithri.

Accordingly, it may be useful to submit my views on this matter; the matter on economic concessions promised by the common candidate of the opposition.

In general, all the economic concessions that any candidate promises would create an impact on national budget or public debt or both because the current budget must be financed either with tax revenue or loans, if money is not printed or do not use the technique known as “quantitative easing.” Since the loans obtained at present would be paid back from the future tax revenue the loans obtained now would create an impact on future taxes. Hence promises to make economic concessions would affect to the “taxes” at present or in the future. The “taxes” could be direct taxes or indirect taxes. No economist can deny it. This is the first point we need to keep in mind.

The second point is that there is a technical limit for economic concessions if taxes are left unchanged. Excessive concessions could create financial instability and as a result would cause economic chaos and would hamper economic growth. The most possible financial instability would be a sudden devaluation of rupee in the same way that happened in early part of 2011. Previously I wrote that any level of corruption would not make the economy collapse suddenly, but financial instability would.

Therefore, economists cannot ignore both above factors when any government proposes new economic concessions. This is equally true for Maithri’s new government if he is elected to be the new President on January 08th 2015.

Under the light of above two concerns, my analysis is that Maithri can deliver his promises even though I do not agree with some promises he made but those promises has minute impact on the national budget; moreover such promises were inherited from the legacy of the existing administration. Let me submit my analysis as follows.

The subject we are discussing about falls into a specific area in economics. It falls into the area of the “distribution.” But I prefer to call it the “distribution of distributable output” or the “distribution of consumable output.” From my definition it intimates that only a part of economic output is distributable and there is a part that cannot be distributed. This is true but our focus here is only about the distributable part of the output. Economic concessions constitute a part of the distributable output or the consumable output of the economy. Therefore economic concessions primarily do change the distribution of consumable output. Is this possible?

In a money based economic system, no economists would doubt the government’s ability to make policies to change the distribution of consumable output as the government wants to. If the government wants to do the distribution equally it can be do so. The question on the mechanisms of adjusting the distribution of distributable output has been resolved globally. Taxation and credit are quiet sufficient to do the distribution of distributable output equally or unequally. But what is not resolved globally is the suitable model for taxation that helps to promote economic growth.

Some economists strongly suggest that the way distribution is being done, has a direct impact on the economic growth. They say equitable distribution does not reward entrepreneurship and the risk taken by entrepreneurs. In the event the economy would not grow. So, they prefer to have a structure of taxation that ensures enough rewards for entrepreneurship. This cannot be ignored because if the economy does not produce or grow we will not increase the consumable output. In the first place we need to produce in order to distribute. The World Bank and IMF cater to this idea and hence Maithri like other global leaders might have to accept the existing economic wisdom.

Therefore imposing heavy taxes on the rich and businesses might not be on his plan. Instead increasing the efficiency of tax administration by preventing tax evasion would be appropriate for him and this is a cause that would be helped by IMF and World Bank. If there are no new direct taxes imposed on the rich and businesses, how Maithri is going to get money in order to finance the newly promised concessions? This was the question of CT’s reader mentioned at the very beginning of this article. The same question was raised at a formal business forum by leaders of businesses when Maithri and Ranil met them recently. The question is highly valid.

In response to the question of business leaders Ranil made an important statement. Ranil said that the objective of offering new concessions (may be except a few) is to increase the aggregate demand. This visionary statement is important. When the aggregate demand is increased there would be a new demand for goods and services produced by entrepreneurs. As a result business activities would increase and possibly the economy would grow. But the question is that you can’t change the aggregate demand just by adjusting the distribution of distributable output. Therefore, increasing of taxes cannot be on the table at least in the transitional government to finance the concessions. If this is the case there are only two options available.

One is that the new government can make adjustments to the common interests that the government is supposed to produce. What the government is produced is known as common interest services. Such services constitute part of the total demand or aggregate demand. Therefore, what the new government could do is to cut the expenditure of a certain ministry by a certain percentage and use that money to finance the concessions. Perhaps, since they are going to abolish the Executive Presidency, the cost involved with it could be reallocated to finance the concessions. Will these adjustments increase the aggregate demand? Perhaps it is not. Would these adjustments change the GDP? No. It is not. But these adjustments would possibly increase the credit growth on the part of consumers. If this happens it could increase the aggregate demand.

The second option is to use the technique known as “quantitative easing” temporarily. In simple terms what happens in quantitative easing is that the government gets new money from the Central Bank mostly in electronic form. This does not have the same effect as “printing money” even though some economists think so.

When the demand is slack and the banks do not create enough loans the Bank of Japan used this technique for the first time in the decade of 1990s. Then, after the Great Financial Crash of 2008, the United States used “quantitative easing” in order to increase the aggregate demand function. Ranil sees that demand is low and wants to increase the aggregate demand. It seems that Ranil envisions using quantitative easing in the new government. This technique can be used subjected to one important condition. That condition is that it should not create financial instability. Such situation can be easily prevented if the inflow of non-credit-based dollars (reserve currencies) is increased.

In short, since the economic concessions promised are targeted to increase the aggregate demand it is more likely that there won’t be increases of taxes. Instead the strategy could be to adjust the government expenditure with a view to promote consumer credit growth or to use quantitative easing temporarily or using both maneuvers in combination. If this is the case I see that Maithri can deliver his promises. In other words he can find money to deliver his promises.