Exploring Directions on Fiscal Policy

By Priyanga Dunusinghe

Published in Ceylon Today

What is fiscal policy?

One of the tools that helps determine the country's economic future is fiscal policy. Governments around the globe use fiscal policy to influence the economy by altering revenue and spending levels. Fiscal policy is based on the theories of British economist John Maynard Keynes, which state that increasing or decreasing revenue (taxes) and expenditures (spending) levels influences full employment level of output and prices. Fiscal policy is often employed in combination with monetary policy that determines the opportunity cost of money and the liquidity level in an economy, to influence the direction of the economy and meet economic goals.The two main tools of fiscal policy are taxes and spending. Taxes influence the economy by determining how much money the government has to spend in certain areas and how much money individuals have to spend. Spending is used as a tool for fiscal policy to drive government money to certain sectors that need an economic boost. It is found that, to a greater extent, expenditure allocations across sectors as well as revenue generation through taxes & other means are largely determined by political economy considerations in developing countries. Sri Lanka is not an exception. The political party in power takes into account the impact of expenditure allocations and imposition of taxes & other revenue generating means on their vote base and attempts to maximize national economic wellbeing while making sure its vote base is not affected adversely. Hence, it is imperative that analysts take into account these political economy considerations when discussing the pros and cons of the budget presented annually.

 During 1950-70s, the budget speech had a great value because it made an impact that was felt across the society. However, aftermath of the opening up of the economy in the latter part of the 1970s and more widespread privatization programmes carried out in the 1990s, people lost interest in knowing the contents in annual budget due to a number of reasons; namely (1) waning role of the public sector in the economy as well as the share of public sector employment and (2) many things related to government expenditure and taxes are determined outside the budget. Yet, public sector workers, entrepreneurs engage in small & medium scale businesses, and various underprivileged people in the society still eagerly wait for the budget assuming there is something for them in the budget.  

Fiscal policy directions during 2006-2014

It is quite clear that fiscal policy directions are quite different between 2006-2009 and 2010-2014 periods. During the former period the government mostly focused on rural development and assisted underprivileged groups through increasing expenditure for farming, small manufacturing activities, developing rural road network, launching rural development programmes, addressing issues of health and nutrition. Other areas are mostly encouraged through tax incentives. In contrast, during 2010-2014, the budget focused more on infrastructure development while compromising, to a certain extent, social services. More funds were allocated to carry out mega projects while giving less priority to education and health. However, in contrast to budgets presented during 2010-2014, according to the appropriation bill presented recently, the government has put more resources on education and health this time, while maintaining sufficient amount of resources for infrastructure development. It seems that 2015 budget will significantly increase resources for education and health through line ministries as well as through the relevant ministries in the provincial councils. This increase is certainly a positive development because both education and health sectors have witnessed certain level of weakening due to lack of funds allocated during 2006-2014 period. Many groups highlighted the need for more funding for human capital formation if the country is to transform into a knowledge economy and to avoid the middle income trap. At the same time, as usual, the appropriation bill shows that a significant increase in recurrent expenditure hinting that many groups will be targeted with some handouts owing to political economy considerations.

Under utilization of provisions

It is important to note that the effectiveness of the fiscal policy mainly depend on its implementation. What we have seen in past is that the budget looks good in papers and become very weak when it is implemented. One of the serious issues is the under-utilization of allocated funds for capital expenditure. This is what the Committee on Public Accounts (2013), headed by Hon. Minister Dr. SarathAmunugama, has to say about the under-utilization of funds;

“In many institutions there had been high amount of under utilization of budgetary provisions especially under Capital expenditure. In few cases this was due to delay in releasingimprest from the Treasury. Another reason for this was due to unrealistic projections when preparing Annual Estimates. This situation should be considered seriously because, if there had been a realistic estimate the Treasury could have been able to make use of this money for a better purpose”.

Table 1: Capital Investment on Development Projects
Year	Total Provision  (Rs. Bn)	Actual Expenditure (Rs. Bn)	Un-utilized Funds
			Amount (Rs. Bn)	as % of total provision
2011	116	74	42	36%
2012	134	112	23	17%
2013	153	126	27	17%
Source: Financial Statement (various Years), Ministry of Finance and Planning, Sri Lanka

Table 1 reports capital investment on development projects (provision and actual expenditures) for 2011, 2012, and 2013. It is quite surprising that nearly 36 per cent of funds allocated for capital expenditure under various development projects was not utilized in 2011 while the un-utilized amount remained around 17 per cent in later years. In other words, data shows that nearly one-fifth of capital provision was not utilized during 2012-2013. Hence, budget analysts must pay more attention when analyzing the impact immediately after the budget speech since what matter are not the figures in the paper but what really spent on the ground. As the Committee on Public Accounts identified, one of the reason of under utilization is the delays in the part of the Treasury to release the funds. This factor is often highlighted by key officials in many ministries that they do not receive funds on time thereby finding it difficult to carry out some of the activities identified. In addition, the effectiveness of the fiscal policy is also affected by the ‘actual amount spent’ on the projects because the spent amount also includes bribes and commissions charged by various parties. Several recent studies highlighted that corruption level has reached its peak at present thereby wasting a significant share of hard earned public money that could otherwise enhances the productive capacity of the economy.

Conclusion

Within a couple of weeks, 2015 budget will be presented in the parliament and analysts will start commenting on that. It is important that one takes into account the performances of the previous budges when discussing the pros and cons of the 2015 budget because one-shot analysis may hide many important dynamics in the fiscal policy directions and the relevance of certain policy proprosals. The appropriation bill, presented recently in the parliament shows that there is a positive improvement in allocating funds for human capital formation this time compared to previous years. However, what matter at the end of the day mainly depends on to what extent allocated funds are spent, certainly not on the provisions made in the budget. Hence, it is important that the Treasury provide funds on time so that respective ministries could carry out the tasks thereby achieving intended outcomes.