Finance of the Budget
Prof. A D V de S Indraratna
The second reading of
the budget is over. The government has won it by a majority of 100 votes. The
final reading is expected in about 3 weeks’ time. There had been a mushrooming
of seminars and discussions on the
budget during the whole of last week of October. Many of them examined
the budget from the view point of how it affected their organizers. Workers’ unions and the public looked at it from how it affected their livelihoods. Hardly a few looked at it from an overall
macro point of view. I do not wish to look at the individual proposals and pass
judgement. I will rather look at the
budget ( or the entire budget arithmetic ), as a whole, examine it as a fiscal
instrument in the mid-term development framework. and indicate any policy
implications, as I see them, for consideration of the policy makers and the
relevant public officials. For this
purpose, I shall first rearrange the 2015
budget in accounting format, as follows (see Table 1)
In the backdrop of the preceding three
budgets, I see in the 2015 budget several
healthy trends : From 2009 until 2013,
revenue as per cent of GDP has been declining; this trend was reversed this
year 2014, with its revenue increasing by 17 per cent to 14.4 of GDP from 13.9 % of
GDP in the preceding year. This rising trend was maintained in the 2015 budget, with even a further
increased revenue estimate of 14.9 per cent of GDP.
On the other side, the recurrent expenditure apparently could not be cut due to increasing salaries and
wages and subsidies and transfer incomes of Rs. 146 billion, some of which, if
I may, might have been prompted due to trade union pressure and electoral and
political compulsions. Nevertheless,
the budgeted increase in recurrent expenditure has been kept less than the
increase in revenue, thereby working out for a current account /revenue surplus
of 1.1 per cent of GDP, for the first time in the last few years, (barring 2014
in whose revised estimates a very marginal surplus of Rs. 8 billion is
expected) This is certainly an healthy trend, and should not be allowed to be interrupted
by going in for too many supplementary
estimates of current expenditure.
Table 1 – 2015 Budget in Accounting Format
( Rs. Billion)
Amo
unt
|
% of GDP
|
Amount
|
% of GDP
| ||||
I
|
Total Current Revenue
|
1,654
|
14.6
|
Total Current Expenditure
|
1,525
|
13.5
| |
Current Surplus c/d
|
129
|
1.1
| |||||
1,654
|
14.6
|
1,654
|
14.6
| ||||
II
|
Current Surplus b/d
|
129
|
1.1
|
Public Investment
|
696
|
6.2
| |
* Grants
|
35
|
0.3
| |||||
Unspecified
|
11
|
0.1
| |||||
Overall Deficit c/d
|
521
|
4.6
| |||||
696
|
6.2
|
696
|
6.2
| ||||
III
|
Financing of Deficit
| ||||||
Foreign Borrowings 86.9)
|
453
|
Overall Deficit b/d
|
521
|
4.6
| |||
Less Repayment (38.8)
|
202
|
251
|
(48.1)
| ||||
Foreign Investment on TBs & T Bonds
|
40
|
(7.7)
| |||||
Domestic Borrowings
| |||||||
Bank (13.9)
|
70
| ||||||
Non- Bank (30.7)
|
160
|
230
|
(44.1)
| ||||
521
|
(100.
|
521
|
4.6
|
Note:- figures within brackets are percentages(%) of the overall deficit
*I have entered the grants in the capital part of the account since it is not revenue but usually given for project/capital expenditure.
Be that as it may, I may add a caveat
here: Given the above
circumstances, Current
expenditure could be cut, if firm positive action were taken to reduce
corruption, waste and ostentation, in the public sector, thereby increasing the
current surplus further. The Prime Minister himself has suggested one way :
cutting down the number of parliamentary sittings. This would no doubt reduce
the cost of sitting fees and subsidized meals and refreshments etc and parliamentary
overhead costs. There would be other bigger
cost cutting items, which a Parliamentary
Committee itself is best allowed
to sort out. Positive action in this direction would further enhance the
current account surplus and correspondingly ease the burden of financing the
capital budget.
Another healthy feature of this budget is that
the trend started in 2010, of bringing
down the budget deficit yearly, has been
maintained by budgeting for an
overall deficit of 4.6 per cent of GDP. I have advocated as far back as 2011 ( see my latest book, Policy Issues for Sustained Development for
Sri Lanka ) that to make Sri Lanka Wonder of Asia, one of the several targets
should be a budget deficit of 3 % in
2016 or failing which, 2017). The Government should be able to reach this
target in 2017, if it continues with
this trend.
Coming to the capital budget, it is gratifying to note
that despite Government’s effort to maintain the declining trend in the overall deficit, the
planned infrastructure investment has not been reduced; on the contrary it has
been increased by more than 20 per cent to more than 5 per cent of GDP and
along with the increase in education and health of 54 per cent, the total
public investment has been planned to increase to 6.2 per cent of GDP from 5.6
% of GDP in the preceding year. In my view, even this is not enough if Sri Lanka
wishes to be the wonder of Asia, especially in the education sector. It would
be healthier, of course, if any increase in public investment were to be
financed with increase in public savings ( see below)
I have advocated that public
investment should be around 7 % by 2017 so that with the recommended private sector’s increased contribution of
around 28 % of GDP, Sri Lanka will
achieve a target of around 35. 0 % of GDP in total gross investment of the
country. However, Sri Lanka cannot afford this increased investment
by increasing foreign debt further
as I have argued elsewhere(op.cit) . It
must come from greater mobilization
of domestic resources, and
increased FDI.
Already we are heavily indebted. In
2013, as I have shown elsewhere ( see
op.cit), our debt burden, as measured by the debt service ratio, was around one
fourth of the total export receipts of goods and services. The estimated interest payment on debt for
2015 is as high as 425 billion, only
second to salaries and wages, and is likely to increase the debt burden further.
If on the other hand, had it been possible
to keep it at half of this sum, for instance, it would be possible to bring
down Sri Lanka’s overall deficit to less than 3 per cent of GDP, a target
expected to be achieved under the
present scenario by around only 2017 or 2018.
In fact, the debt, in particular the
heavy foreign debt is the villain of the piece. It is quite evident when we
examine the provision made for financing
the overall deficit, as shown in Section III of the above Budget Account. Other than the Rs. 202 billion
to be set apart for repayment of the existing foreign debt, the total foreign debt
including the foreign investment in Treasury Bills and Bonds account for 56 per
cent of the total overall deficit in 2015.. And
with the Rs. 230 billion domestic borrowing, three fourths (3/4) of the
total public investment is to be met by debt, only the other one fourth (1/4)
being met by domestic resources. As I have argued else where (op.cit), this sort
of scenario would not be sustainable and must cease . Increased public investment
must be financed by increased domestic resources, not by increasing foreign
debt. By the time of the 2017 budget, if
not able to swap the above position, at
least half the public investment will have to be met with
increased domestic resources, ie., with the budget deficit around 3.0 per cent
of GDP, by increasing public savings/
increasing the revenue surplus. That will enable the Government to refrain from
increasing the borrowing limit as has happened now. This is indeed necessary
for sustained growth and development of the country.
04.11.2014.