By Kumar David –

Prof. Kumar David

The Budget is remarkable for three reasons; it is ambitious and looks into the future, it cannot function without public-private partnerships (PPP) in new industrial zones, and thirdly if the long-term objectives that embellish the Finance Minister’s vision are to bear fruit the government has to be an active agent and driver. The third consideration is in conflict with what the FM has pronounced at seminars with business organisations and I will deal with this at the end. All over the world budgets promise the moon and fail to light even a candle. Still, if these proposals are read as long-term (as with NM’s approach) to be spread over say five years, they are credible. So when I tease Mangala that he is on steroids, well why not; that’s what we need. 

I have to ration words – the Editor is not my godfather – and limit myself to a few topics. My choice today is environmental and sustainable development, the informal and SME sectors, the global nexus, public finance, the revenue gap and our colossal debt burden. I will sign off by voicing concern that the FM’s outlandish comments at business seminars amount to capitulation. Mangala your slip is showing! I have paid you the ultimate compliment for a Lankan finance minister, mention in the same breath as NM, but you despoil a balanced parliamentary presentation with a starkly contradictory stance when addressing captains of capital and dinosaur liberal think-tanks. I say old chap, what’s up; schizophrenia?

Welcome features

Paragraphs 14 to 65, prominent in the early part of the budget presentation, bear the imprint of President Sirisena. It is long section on ambitious environmental objectives and a promise of sustainable development, Sirisena’s pet themes. I believe this is the first time the environment, the surrounding oceans and pollution related concerns have featured prominently in a Sri Lankan budget. Specifics include electric vehicles (cars, buses and three-wheelers), solar-power, drip irrigation, a tax on polythene and carbon emission, waste management, and cleaning river basins which are becoming cesspools. Incentives to encourage solar power, electric car charging stations, agro processing, drip irrigation and the plantation industry have been included. A carbon tax, and a one-time luxury car tax instead of the present tax distributed over seven years, will be levied on petrol and diesel vehicles.

Wildlife conservation and reformatting the Dehiwala Zoo along the ‘Open Cage’ plan finds favourable mention. This is avant-garde thinking, I hope it gets done. Will it bring a smile to the face of Dr Sumith Pilapitiya, and will he, at last, buy me that long promised whisky?

I am happy that the small and medium enterprise sector (SME) has won much attention and promises of support in paras 74 to 84. I would have been happier (and so would my neighbour and friend S. R. de Silva who has much researched the topic) if the FM had paid attention to the informal (unlicensed, undocumented untaxed) sector of hawkers, craftsmen and skilled workers who, below the radar and unaccounted, contribute a goodly amount to the country’s undocumented GDP. Several expenditure proposals to assist SMEs have been introduced, including grants, lower interest rate loans and technical support.

A welcome feature of the budget is that, at last, this or any government has taken note of the need for a special effort to rebuild the war ravaged north and east and has made budgetary provisions in a section entitled Reconciliation. The Finance Minister will win the appreciation of the Tamil and Muslim minorities for taking note of their predicament. On the other hand, this is another reason why the Joint Opposition and its English literate apparatchik, snarl their hatred of the Budget. Mangala, personally, has kept faith with his standing as an advocate of pluralism and cultural modernism.

Hard facts

Paras 85 to 100 are addressed to the local capitalist class. The section promises many goodies such as support for export market activities (Rs 800 million earmarked) and quality, outreach support and intellectual property protection, together Rs 300 million. Incentives are offered for job creation, investments in fixed assets in designated zones, information technology and headquarters relocations. But there are threats! Restrictions on foreign ownership of condominiums below the fourth floor and on ownership of shipping and the freight forwarding businesses will be lifted.

“The para-tariffs applicable on the tariff lines which do not at present carry any Customs duties will be abolished within the next 3 years, in keeping with our policy of liberalizing and globalizing. (W)e will remove almost another 1,200 para tariff”. (Para 85)

“Restrictions on the foreign ownership on the shipping and the freight forwarding agencies will be lifted. This will enable major international shipping lines and logistics operators to base their operations in Sri Lanka”. (Para 97)

‘Cess’ has been removed on hundreds of items. The intention is to end blanket protection for the mudalali class and local capitalists, and expose their products to global competition. Shielding local capitalists has gone on for far too long; the consumer of shoddy, overpriced commodities has been the loser. Shielding nascent domestic industries from global competition is necessary for a period – say 5 to 10 years depending on investment and industry. After that it must be no-holds barred global competition. Why should consumers subsidise grotesque rewards to inefficient blood-sucking capitalists? The allied issue of employment protection can be addressed separately.

In several places the FM stresses the importance of foreign trade, development zones with foreign participation and interaction with the global economy. These initiatives and the aforesaid threats have evoked howls from the blood-suckers. Mouthpieces of the Joint Opposition and Mahinda Rajapaksa are blaring themselves hoarse. They now have one more arrow to add to their arsenal of race-baiting and Muslim-hating. Let’s see if the FM and government are forced to back off – the Achilles’ heel is Sirisena’s SLFP entourage.

The strategic objectives driving the Finance Minister’s vision, as well as numerous specific goals (e-commerce, logistics, robotics, multinational outreach, product design, mechatronics and dedicated industry zones), cannot be reached without the state taking a leading role and driving the process. Surely only a dotard can imagine that Lanka’s private sector, stunted and lacking vision, can blaze this trail unless led by the nose. Should we not learn from South Korea, Taiwan, Vietnam and Modi’s driving energy in India?

Shortfalls

There is no change in personal taxes which are already too generous to the rich and superrich. I used a website run by PwC to a make a rough computation of tax on gross personal income and came out with the following: Monthly income Rs 100,000, no tax; monthly income Rs 1,000,000, tax Rs 186, 000; monthly income Rs 10,000,000, tax Rs 2,346,000. This is far too low for a country with large income inequality. Of the expected gross government revenue of Rs 2,200 billion in 2018 only Rs 375 billion is derived from income tax; VAT and Excise Duties contribute Rs 550 billion and Rs 535 billion, respectively. This is grossly lopsided; the rich get away lightly. The proportions remain roughly unchanged till 2021, the point to which budget forecasts extend. If one adds import duties, nation building, CESS (all items passed on to consumers) in 2018 the populace will pay Rs 1,660 billion while the rich (the income tax payers) contribute a measly Rs 375 billion.

Because of feebleness in direct personal and corporate taxation, revenue will fall short of expectations in the next period. Nor is the much-hyped business class going to drive the economy upward and provide the state with enhanced revenue. The hope of reducing the fiscal deficit from 5.4% (2016), to 3.5% by 2020 will not materialise, in part for this reason, and in part because many new initiatives have been introduced on the expenditure side. The FM says that government revenue rose from 11.5% of GDP in 2011 to 14.2% in 2016 and will be held at 15% of GDP for the next three years. But that’s not enough.

My last substantive comment is about debt and debt servicing. This is a big topic and I touch just one crucial aspect. There is no undertaking given that the foreign debt mountain will be trimmed; all that is promised is that its rate of increase will “decelerate”. The incomprehensible gobbledygook is: “As net borrowing is expected to be less than interest payment, the build-up of outstanding debt would decelerate since a part of revenue goes to finance debt servicing, in spite of depending entirely on borrowing”; (figure caption on p.107). Translated into standard English this says: Revenue will be adequate to pay interest, but new debt will be incurred to service principal-repayment and perhaps more borrowing may be needed; so the quantum of foreign debt is likely to keep rising.

Is neoliberalism lurking in the corridors?

Which is the true Mangala? If his talk at an Ernst & Young forum reported in the Financial Times of 13 November and his comments in Economy Next on 15 November are taken literally, one would think the ghost of JR had risen again. “Mr Speaker, while we introduced an open economic policy regime in 1977, in the last decade we have lost momentum, with many of our laws remaining archaic and regressive”. (Budget, para 14). And he told the Ernst & Young forum: “Some Lankans still have a socialist mindset. It is time for Sri Lanka move forward and competes”. It is news to me that Mangala is hostile to socialists, though ironically, he is finance minister of a Democratic Republic which also calls itself Socialist (sic!)

Many people fear that if these remarks are taken at face value, it signals a swing to neoliberalism of Reagan-Thatcher vintage and the 1980s ideology of the IMF and Washington Accord; both now defeated, disgraced and discarded. Either the economic orientation implied in these remarks must be reversed by public intervention and internal forces within the government, or it is a war in which no segment of the left can stand still.

I am not exaggerating; here are a few comments from the Ernst & Young forum summarised in the Financial Times (SL) of 13 November. “Finance Minister justifies case for sweeping liberalisation; laments some still have socialist mindset; assures Govt. support in creating an environment for free enterprise; the thrust of the 2018 Budget is free enterprise, liberalisation and globalisation”.

These comments, within a balanced discourse and limited ambit, are not reprehensible, nor do I wish to make ideological heavy weather about isolated remarks. In the context of the Budget Speech and the written version before me, the FM deserves forgiveness if he was only feigning a split personality to please the assembled moneyed players and petty-bourgeois hoi-polloi. Let him clarify.

Dani Rodik writing in Class & Inequality, 6 November 2017 (Rescuing Economics from Neoliberalism) says the neoliberal experience has been a failure across the world. “Almost all of these countries joined the world economy by violating neoliberal strictures (meaning South Korea, Taiwan and Singapore). Chile’s neoliberal experiment produced the worst economic crisis in all of Latin America. Mexico provides a particularly sad example. The fatal flaw of neoliberalism is that it does not even get the economics right. It must be rejected on its own terms for the simple reason that it is bad economics”.

Mangala, does your government intend to lead from the front, or to abdicate the task to fickle, untrustworthy and unproven chattering classes?