3 December, 2020

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lamborghini-Badagini: The limits Of The Budget Debate

By Kath Noble

Kath Noble

Parliament has become a place where its members go for a free lunch when they have no better offer. And it would seem that MPs receive plenty of attractive invitations, since most of them are rarely to be seen in the chamber, even for a nap on the comfy recliners the Sri Lankan people have so thoughtfully funded, assuming that their representatives would be spending long hours debating the future of the nation.

The Speaker admitted as much last week. There is no point in holding the budget debate, he said, when the responsible ministers are not present.

In principle, he was quite right. Why bother to ask questions about the allocation for higher education when SB Dissanayake is not there to answer or at least to hear what is being said? Suggestions cannot be taken into account in formulating policy if the person taking the decisions is ignorant that they have even been made. And on the day Chamal Rajapaksa made his statement, only four out of the scheduled twenty-two ministries were represented!

However, practically speaking, we should probably breathe a sigh of relief when ministers stay away.

Consider the Parliamentary Select Committee that has been impeaching the Chief Justice. Ministers enthusiastically attended every one of its sittings. But what did they contribute? When they were not calling Shirani Bandaranayake names, they were justifying a very obviously unjustifiable process on the pathetically simplistic grounds that what Parliament says goes. There was no debate about the decision to require the Chief Justice to reply to more than 1,000 pages of ‘evidence’ literally overnight. It was simply declared by the ministers present. Likewise, once she had walked out of the proceedings in protest at her treatment, there was no debate about calling the ‘witnesses’ they had previously said would not be available for cross-examination. They arrived within minutes, once the coast was clear. And by the following day, the Parliamentary Select Committee had managed to finish its ‘deliberations’ and prepare a lengthy report (including references to cases from as long ago as 1852!) – more work than any of the ministers had done in the previous year.

But what Parliament says goes. And in this case it said that it didn’t care to give the Chief Justice a fair trial according to the principles that Sri Lanka applies to everybody else (including ministers!).

In any case, the budget debate is generally used by MPs not so much for commenting on the Government’s plan for the following year as for presenting what they hope will be a headline-catching soundbite, on whatever subject happens to take their fancy.

And this time was little different.

The Opposition quickly latched onto a catchy slogan. The budget was summed up with the phrase ‘lamborghinis for politicians, badagini for the people’, which no doubt resonates with the middle class in Colombo. However, it is not really accurate. If things were that simple, Mahinda Rajapaksa would be a lot less popular than he is with the masses.

Of course the war victory is important in explaining the support he enjoys among the majority Sinhalese, but it can no longer be the only factor.

We need to understand the secret of his success. For if the President were even somewhat more unpopular, his capacity to use the powers that he has won would be considerably restricted. He would not be able to control Parliament to the extent that he does today.

And then the Chief Justice might just stand a chance.

As the Government’s plan for the following year, no matter how many changes are bound to be made later, when nobody is paying attention, the budget gives us an idea of Mahinda Rajapaksa’s appeal.

The lamborghini-badagini slogan is not really accurate, but it is not completely inaccurate either. As the UNP’s chief economist MP Harsha de Silva pointed out, the budget maintains taxes on food such as milk powder and tins of salmon while exempting racing cars. He called it a budget for the 0.1%, no doubt consciously evoking parallels with the popular campaign of the Occupy Movement in the United States and elsewhere that talks about 1% of the population controlling an ever greater share of the country’s wealth. His point was that only the richest of the rich can afford racing cars, which are now going to be cheaper thanks to the Government’s proposals, while the price of basic food items is of most concern to the poor.

The Treasury issued a totally ridiculous statement in response to this criticism. It seems that it is not lamborghinis but go-karts that are being exempted from tax. Well, that’s a relief, isn’t it? People are constantly complaining about the cost of go-karts!

Of course tax exemptions for racing cars of whatever kind are completely misguided.

The proliferation of such random concessions is one of the many things that are wrong with the Government’s tax policy. The more complicated the system, the easier it is to avoid paying one’s dues. At the same time, exemptions mean less revenue for the Government.

Far too little attention is paid to the appallingly low level of tax revenue being collected in Sri Lanka. Taxes amounted to only 12% of GDP in 2011, far below the international benchmarks of 25% for a Middle Income Country and 18% for a Low Income Country, as noted by Anushka Wijesinha in a recent article on the Institute for Policy Studies ‘Talking Economics’ blog. And rather than improving with average incomes, the ratio is getting worse. This is a massive anomaly.

In the absence of sufficient tax revenue, the Government resorts to borrowing, which tends to push the country ever further into debt.

Another huge problem is the extraordinary dependence on indirect taxes, meaning taxes that fall not directly on incomes but indirectly through consumption.

There are two issues here. First, the two forms of taxation are not substitutes. Indirect taxes create inflation, since they add to costs – if a company has to pay taxes on its inputs, it will simply increase the price of its output to compensate. By contrast, direct taxes have no inflationary effect. And so long as the Government spends the money it collects, taxing corporate profits actually increases the level of profits in the economy and thus also the national income. This is counterintuitive, but non-economists should try to understand that this is often the case in economics. Something that is true at the level of an individual is often not true at the level of the economy as a whole. A company might believe that taxes reduce its profits, but it does not exist in a vacuum – the effect of spending by the Government increases economic activity and generates increased profits, albeit not necessarily for that particular company. (This idea should be more easily accepted now, since it was such a fallacy of composition that Keynes pointed out at the time of the Great Depression, saying that if individuals all saved more then aggregate demand would fall, which would mean a lower national income and thus less savings in the aggregate – the ‘paradox of thrift’. The Global Financial Crisis and its aftermath have repopularised his ideas regarding the need for what is now called a ‘fiscal stimulus’ to get out of an economic downturn.)

Secondly, the poor bear more of a burden than the rich when taxes are collected indirectly rather than directly, since consumption forms a larger share of their income. They may spend half of what they earn on food, but it would be physically impossible for Bill Gates to do likewise – even throwing so much food away would be a challenge!

In Sri Lanka, direct taxes constitute only 20% of the total, with the remaining 80% being indirect taxes. This compares extremely badly with other countries.

Totally ignored by just about everybody, the Government is busy making things worse. Last year, when it finally restored income tax liability to public servants, it managed to ensure that this resulted in no overall increase in tax collection by significantly reducing tax rates and doubling the tax-free allowance. And this year it has introduced a whole range of additional concessions, such as reducing the income tax rate for IT professionals to 16%, organic tea exporters to 12% and large scale poultry farmers to 10%. Meanwhile, companies that list on the stock exchange are to be given a three year half tax holiday. And these are just the new measures. Some time ago, the Institute of Policy Studies estimated that concessions offered by the Board of Investment to foreign companies cost Sri Lanka 1% of GDP, in the process of attracting investment that amounts to no more than 1.5% of GDP – and this money would likely have come anyway, since foreign companies openly state that they are not primarily interested in the level of taxation. Soon it will cost the Government more to administer the tax system than it actually collects!

Many of these issues were undoubtedly highlighted by the Presidential Commission on Taxation, which spent about a year working solidly on the issue, submitting its report in October 2010. But Mahinda Rajapaksa has declined to publish it.

When presenting the budget, he highlighted the fact that the Government has not resorted to privatisation, a recruitment freeze in the public sector, cuts in subsidies or neglect of infrastructure development, even though it is short of revenue. But what the President was hiding is that he has nevertheless cut expenditure. Or rather he has prevented expenditure on certain items – education and health in particular – from going up in line with the national income.

Why? Because he wants to meet the fiscal deficit target set by the IMF.

I would argue that there is absolutely no need to follow the advice of the IMF, but even doing so would not have been a problem if Mahinda Rajapaksa had got a grip of tax policy.

All that said, even if we limit ourselves to discussing tax policy, Harsha de Silva’s analysis of the budget is tellingly off the mark.

He wants to abolish taxes on milk powder and tins of salmon, but these are not just a matter of revenue. They are an integral part of Mahinda Rajapaksa’s programme for the development of agriculture in Sri Lanka. Backed up by a whole range of other interventions, including through the much criticised (including by me) Divi Neguma, they provide incentives to farmers and fishers to boost production, since they increase the price of imported goods. And they are working.

Sri Lanka has become self-sufficient in rice, maize and black gram, and will soon be in green gram, onion, sugar and milk.

This is a good thing, since the prices of food on the international market are now subject to speculation by financiers, who regard it as just another commodity. They are volatile and increasing at a faster rate than ever before.

It is also one of the reasons why Mahinda Rajapaksa is popular with the Sinhala masses. For he has put a lot of money into rural areas.

Rural areas have also benefited from what I would describe as his other major economic policy – maintaining a large army and putting them to work in all manner of ways. I have written at length against this on political grounds, but economically speaking it has been a key source of growth. And the budget shows that there will be no change in approach. It justifies a significant increase in spending on the police on the basis that they will take on some of the responsibilities that the army handled during the war, while making no proposal to reduce spending on the army.

An addition this year is the plan to establish twenty technical colleges catering to the requirements of jobs in other countries.

Of course there are many other things to be said about the budget, but they will have to be left for another opportunity. For the moment, let us simply realise that things are not as clear cut as Harsha de Silva made out.

The UNP’s problem is that it has no coherent alternative to present to the people. Its policies under Ranil Wickremasinghe were tremendously unpopular, and he does not appear to have changed his mind about them. What is worse, the UNP does not appear to have changed its mind about him. He has been given another six years to accomplish what he could not do in the last eighteen. And the country’s problem is how to keep Mahinda Rajapaksa in check when the Opposition seems so determined to remain ineffective.

Until that question is answered, any debate in Parliament is bound to be a waste of time.

*Kath Noble’s column may be accessed online at http://kathnoble.wordpress.com/. She may be contacted at kathnoble99@gmail.com.

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Latest comments

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    The budget itself was a waste of time. Nothing but a crude balancing act. Policies do not work when they are fundamentally flawed. Removing taxes on racing cars in order to please his own offspring is not what a responsible President of Finance Minister should do. It shows an absolute lack of honesty.

    He permitted the sale / transfer of duty free vehicles which would give a clear profit of Millions to politicians and public servants.
    On top of this to tax and increase prices of essential items used by the common man indicates he considers them to be the milch cow to support his extravagant policies and lifestyle.

    He is failing not only on the economic front but on the political front by victimising students and youth in the north. It is surprising to hear that everything is hunky dory when things are coming apart at the seams.

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    The writer knows the exact position of Sri Lankan politics more than the Sri Lankans. Bravo and it is very pleasant to read her articles as all are facts and nothing but the truth. Some of her findings may hurt us but those are facts and not biased at all.

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    Kath, Are you saying that Shiranie B is an ‘Angel’? What about the 14 charges against her. The PSC was appointed based on the constitution. Do you want her to go scot free after all the corruption by her and her husband. And previously three Chief Justices had been impeached. In 1968 Chief Justice Sansoni was impeached and he was the first.

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    Going through the attic- Balanced budget requirements seem more likely to produce accounting ingenuity than genuinely balanced budgets which in any case do not produce a stable price level. Deficits themselves do not produce inflation.

    If De Silva can make another 15% of the women vote then perhaps he will be able to implement the no taxes on milk and sardines I suppose so. Talking of rural areas- Does Sri Lanka plan to reinvent itself as an agricultural nation then in that case have a closer look at Zimbabwe today and when Ceylon became Sri Lanka in the 70’s getting rid of the sterling companies.

    Remembering live aid- What the African receiving this aid wanted was infrastructure, removal of agricultural policy and protection in the west so that they may not just provide for their own consumption but export to the west.

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    When the stocks of petrol imported by the government during the last month the price of a liter of petrol was Rs.89. A liter of petrol when unloaded at the port is Rs.89. However, it is Rs.159 in the petrol shed. When the petrol reaches the petrol shed its price goes up by Rs.70. This is the tax levied by the government. Levying tax from petrol has become the only source of income of the government.

    The port and aviation tax is 5%. Pot charges are 2.79%. Then the liter of petrol that cost Rs.89 at the port goes up to Rs.95.91. The government levies an extra tax of Rs.25. The Petroleum Corporation charges Rs.1.50 as service charges. The profit of the petrol shed owner is Rs.1.25. When profits and service charges are added a liter of petrol would cost only Rs.129. The Corporation adds another profit of Rs.30 to this amount. Which means Ceylon Petroleum Corporation steals Rs.60 from a liter of petrol. When you pump 2 liters of petrol to your vehicle you pay a tax of Rs.120 to the government. This is how the government levies taxes from day to day needs of the people and earns its income.

    Nearly 80 million liters of petrol are sold every month. If the money that the government cheats from a liter of petrol is Rs.60, it gets a profit of Rs.4,800 million for a month from petrol only. For a year this income is Rs.56,000 million. Petrol, instead of becoming a general consumer item of the masses has become the main source of income of the government. The number of families living in our country is about 5 million. Every family in our country has paid Rs.11,000 as tax for petrol. Nearly Rs.1000 is paid as tax for petrol by every family every month.

    In 2013 budget it is stated that special vehicles used for racing sports will be exempt from import tax. However, Carlton Motor Sports Club orders racing cars even before the budget is presented. ‘Carlton’ is the brand name of Mahinda Rajapaksa family. The whole country knows it. This sports club is the sports club of Rajapaksa’s offspring. They knew tax for racing cars would be reduced from the budget. The father, who is the Minister of finance, has revealed budget secrets to his sons. Is this the conscious of the President? He doesn’t work according to the Constitution or the law of the country but according to his conscious. Do these agree with his conscious?

    Carlton Motor Sports Club imports 19 racing cars – 2 Lamborghinis, 1Porsche racing car, 13 Etios Motor Racing Cars and one each of Aston Marti, Nissan Fairlady and Honda Civic. The cost of these cars is Rs.93.3 million. Nearly US$800,000 goes out of the country. As import tax has been removed the country loses Rs.200 million. The tax relief for his sons is Rs.200 million. What kind of a leader is he? The government does not have money to increase the salaries of state employees by Rs.2500. The government that does not listen to the woes of farmers and fishermen has given budget relief to their sons.

    When port and aviation tax and port charges are added to import tax the whole amount the country loses due to the import of vehicles for Rajapaksa offspring is about Rs.202.2 million. Not a single cent of this money has been paid. Carlton Motor Sports Club has paid only Rs.2500 to remove 4 containers. They have wriggled through the customs regulation called CARNE ATA, an international customs document and title guarantee both, used in trade in goods between the Community and third countries, regardless of transport used to facilitate crossing the border for customs and the temporary importation without paid taxes and customs charges. According to this regulation a foreigner could bring his vehicle to Sri Lanka after depositing an amount in a bank. The customs doesn’t make any charges. However, the vehicle should be taken out within 6 months. If the vehicle is not taken back customs duty is levied. Rajapaksa sons have wriggled through this regulation. The Director of Customs can extend the period when the Minister of Finance makes a request. The Minister of Finance is President Mahinda Rajapaksa. Recently the President had said law is equal to all and the law should be implemented without any favour. However, a few days after this statement he says the Chairman of NSB fell into trouble due to a fraudulent share transaction but they intervened and saved him. This is how the President saves his people. What wouldn’t such a President do for his sons?

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      Safa,

      Were these racing cars temporary imports? Will they be re-exported after the races? Were the races a ruse to import race cars? After the budget, there was a clarification that only go-carts were being exempted from duties. Was this a l2ie2@?

      Dr.Rajasingham Narendran

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        The races apparently were not successful and only 11 of 13 events were completed with a few accidents. Although organisers claimed that many cars and foreigners were to partcipate we dont hear of any big influx of world renowned drivers to partcipate. Press is dead silent about these races and the little we can learn is from the various gossip columns.

        Paying freight and importing a car and then keeping it in a garage for six months or driving in first gear in colombo traffic is a rather absurd proposition except for a few super rich and kids of politicians. It seems that the cars were imported are for this category of people. Most probably these can only be used at night by the political kids who frequent colombo night clubs, casinos etc. Also they can drive up and down on the super highway and 1500 km of roads said to have been constructed in Hambantota.

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      Safa: You have taken a lot of trouble but for what?
      Today’s Euro lottery is € 69million (£2) and tomorrow’s minimum is £2.2million (£1). A 2 bed house in west end of London cost £ 2 million. Therefore the amounts you mention are just a drop in the ocean. From the days of the Mahaveli luxury vehicles have been imported duty free in lieu of trucks for the project. They mainly imported Benz because it was common and could be driven around but there were collectors like a Buddhist monk who imported Maserati and these just changed hands because they were investments. There are thousands of them brought in duty free over there and I have driven quite a few of them. Every man who arranges the 5% in a contract and there are foreign elements involved he gets his vehicle down. Now for a couple of cars why all this noise? Do you know the price of petrol at the pump is Cheaper in China than the US even though US exports and imports oil?

  • 0
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    A silly article – badly written and repetitious, poorly constructed and argues, with over general statements that lack substance.
    Kath Nobel should find something else to do!

    • 0
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      You are absolutely right. Why don’t you take her to Temple Trees and teach her how to lick backsides! I am sure you will make an excellent tutor.

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    Ranil Wickramasinghe and his UNP supporters are an utterly useless and unprincipled bunch of politicians – unable to educate the people about the Kangaroo Courts that the Rajapassa regime ran which brought great disrepute to the judiciary and sovereign people of Sri Lanka. The UNP under Ranil is clearly unable to grab an opportunity to build mass opposition to the dictatorial regime on either the budget or the impeachment issue.
    Ranil and his elitist, legalistic, anti-media and anti-people politics, and silence on the illegal attempt to impeach the CJ, is exemplary of the root cause of the ROT in the UNP.
    Ranil has merely issued a legalistic statement and keeps harping about Latimer House rules, while silently collaborating with Rajapassa and showing him the way forward, instead of educating the people and organizing a massive people’s protest against the Kangaroo Court in the Diya-wenna Parliament that that has brought great disrepute to the judiciary, legislature and sovereign people of Sri Lanka.

  • 0
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    Eco-friendly hospitals are being proposed, while very ‘Eco-unfriendly’ motor car racing is being promoted! The duty on Eco-friendly small cars has been increased, while fuel guzzlers are brought in to race on our city roads! As Mary Antoinette, the queen of France once offered to the starving, are we being offered cake, when we are struggling for our daily bread! Have our politicians lost touch with the people and their needs?

    Are we nation with a split personality or do we have a propensity to elect politicians with split personalities? I have seen some logic even in the mad!

    Dr.Rajasingham Narendran

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      DRN: surrounding the attribution: Austrian Marie-Antoinette was just 9 years old when Jean-Jacques Rousseau’s Confessions,written in 1765, and published in 1782 (1789-la guerre des farines- flour wars).
      Its like Emperor Hui of Jin anecdote

      • 0
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        Wuliangguobinjiu,

        Thanks for the historical titbit.

        Dr.R.N

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    This budget very very good. Eggselent.

  • 0
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    Those Racing cars came here to stay. Racing event was the bait for public to get down the cars …..duty free.

    These Racing cars are not Taxies…..They are highly sophisticated, very delicate, highly complex and ARE MADE TO WIN….WIN….and WIN…

    Therefore after each race these machines go through a full overhaul….including dismentling the whole engine and replacing all the worn out parts….even thay are re-usable. They are including Pistons, piston rings,engine parts, gear box, exhaust systems,electrical, mechanical and computer systems, wheels incluging the tires etc..etc… A pair of Lamborgini tires could cost between US $ 2,500 to $10,000 depend on the model.

    The point I want to bring is….after the race…. to replace the parts and labor cost on these highly sophisticated racing cars are costing almost equal to BUYING A NEW CAR….They are built and race to win….and not for old crocks rally.

    Therefore I guarantee the company or the guys who leased these toys will charge almost the cost of buying one….for leasing these highly sophisticated racing cars….

    Do you know that Michale Jordan who is a Racing motor bike fan…has employed a hugh full time employes to upgrade his racing motor bikes (Michael Jorden Motor Sports -initiated 2004) Invested Billions of Dollars and yet to win a race.

    My Final conclusion is TO LEASE THESE MOTOR CARS THE LESSOR CHARGES ALMOST THE AMOUNT AS TO BUY A NEW CAR…..leave alone Comprehensive full insurance and liability coverage and cost of shipping back to Lessor.

    So these cars are here to stay…….duty free.

    Yes Pretty soon these toys will be driven by Namal, Rohitha,Yoshitha, Mervin, Malaka and other Govt. A.s Lick..’s Sons.

    Await for the next Race car Muppet show.

    Good luck Sri Lanka.

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    A few observations:

    The path to reducing high taxes is the reduction of expenditure. As per the budget 2013, the GoSL (optimistically)earns 1.13 trillion rupees in taxes but proposes to spend 2.52 trillion, leaving a deficit of a 1.39 trillion.

    The deficit is financed by borrowing.

    What does the GoSL spend on?

    Defence : 289bn
    Interest on debt: approx 360-370bn
    Salaries and pensions : approx 450bn.

    Bsically, all tax revenues are swallowed up here. And the rest? This is funded by borrowings. This increases the stock of debt, which means the interest bill keeps multiplying. (We borrow to pay the interest on existing loans).

    Does this sound familiar? It should. This is the Greek model of financing that is causing the crisis in Europe, so the IMF’ advice to balance the budget is sound.

    The way to do this is by cutting unnecessary luxuries (Mihin Air etc etc etc) of which there is plenty, but instead the GoSL simply pushes the burden on to the public by increasiing taxes. The fault lies with the GoSL, not with the IMF.

    Debt SERVICE (including capital repayments) is about 1.2 trillion.

    (There is an element of double counting in this above because a good chunck of the defence bill is salaries/pensions but it serves to illustrate the point of how unsustainable this pyramid is)

    On “protecting local agriculture”, self sufficiency etc the right question to post is “Does one want to help 300,000-400,000 farming families or 4 million consumers?”

    Local maize (of inferior quality) is double the price of imported maize. Imported sugar, onions, potatoes are all cheaper than the local variety. Why should consumers subsidise farmers?

    A lot of the agricultural trade is controlled by politicians, who make big bucks, so a part of the higher price goes into their pockets. After the nationalisation of the sugar companies the GoSL has imposed a Rs.20 cess on sugar in addition to passing about Rs.900m in supplementary estimates to pay costs of the companies. Cronies within are siphoning off stocks and cash and the public must pay.

    The same pattern is repeated in all the agricultural trades, the trite appeal to nationalistic sentiments “proptect our farmers”, “grow our own food” is only to disguise the fraud being perpetrated on consumers.

    See also

    http://www.wsws.org/en/articles/2012/10/slec-o19.html

    http://www.lbo.lk/fullstory.php?nid=82062403

    http://www.lbo.lk/fullstory.php?nid=1277234993

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