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Wed, 12 December 2018 14:17:38
Sri Lanka budget targets spell continuity, policy worries emerge
23 Nov, 2011 08:56:50
By Fuss-Budget
Nov 23, 2011 (LBO) - Sri Lanka's expects to extract a trillion rupees as taxes from the people for state spending in 2012, up 20 percent or 173 billion rupees from 2012 and borrow another 468 billion rupees to cover over-spending.
If the deficit target is achieved it would be the equivalent of 6.2 percent of gross domestic product in the economy next year, down from 6.8 percent in 2012. In rupee terms it would be only a 3.2 percent increase.


The planned 2012 revenue increase of 19.8 percent to 1,106.1 billion rupees is higher than a 13 percent increase estimated to be achieved in 2011 after planning for 17.9 percent.

This increase may seem as ambitious given that the country is heading for some balance of payments trouble. But some of the taxes implemented in 2011 have yet to run their full course.

If the targets are achieved, and even if missed by a small margin (as they seem to be in 2011) the state budget will not de-stabilize the country, or significantly impoverish the people as they had done for many years after independence from British rule.

The 2011 budget deficit (excluding grants) was 460 billion rupees or 7.0 percent of GDP, a little higher than the planned 433.7 billion or 6.8 percent. But it did not de-stabilize the economy with high interest rates or inflation.

Sri Lanka's Treasury has steadily cut its deficit over past three years giving space for citizens to grow faster with lower interest rates and lower inflation than in earlier years.

Total spending by the state would be around 21.2 percent of gross domestic product or 1,594 billion rupees after extracting as coercive taxes 13.3 percent of output of the people or 1,000.6 billion rupees as taxes.

Current Spending

Planned current expenditure of 1,107.9 billion is 8.7 percent higher, about the same growth seen this year, allowing the current account of the budget to balance (with just a 1.8 billion deficit) if the revenue target is achieved.

But the state has not been able to balance its current spending with total revenues since 1987 indicating that its total revenues are not enough to cover day to day expenses.

Even last year the state was not able to achieve the current account deficit of 52 billion rupees and ended up with a gap of 95.2 billion rupees.

But it is lower than 2010 gap even in nominal terms, so that is progress.

Planned capital expenditure is 487 billion rupees, an ambitious 28.7 percent increase, up from a 10.3 percent growth expected for 2011. Despite questions over the cost benefits of some projects, building infrastructure will increase the capacity of citizens to add value.

But if this target falls short, as it seems to have done in 2011, lower capital spending will also reduce the overall deficit.

Over the last three years taxes as a share of GDP has remained stable around 14.5 percent of GDP leaving more money in the hands of citizens to spend on useful economic activities which they judge to be most urgent and therefore gives the best results for the economy.

The so-called 'bureaucratic rule of two' says that the cost of providing the equivalent state output is twice that of the private sector.

The government for example is putting more than 4.0 billion rupees in tax money to a state bus service and 10.00 billion rupees to state airlines all which are making massive losses.

Though the targets of the budget spells continuity, worries about policy and policy formulation that has emerged has not abated with the budget.

Policy Worries

By de-valuing the rupee, the state has also got some breathing space. Devaluations increase inflation brining more taxes from import duties and local taxes, and reduces the real cost of salaries and value of locally denominated debt.

Real payments made to pensioners and the returns given to the employee's provident fund - the biggest debtor to the state - will fall as a result of the devaluation, helping the state budget.

But the way the de-valuation was implemented - as a fiscal measure in the budget - has added to the overall worries about policy uncertainty. Both forex and bond markets went into shock.

A run by foreign bond holders can nullify any benefits through a lower budget deficit.

The step devaluation will also not help avert the current pressure on the currency as the rupee will continue to be defended at the new level of the peg and the ensuing liquidity injections will put more pressure on the peg.

There are also fears that increasing policy uncertainties, especially relating to property rights due to recent expropriations, could undermine confidence of citizens and foreign investors alike.

The budget has laid plans to re-populate estate lands in the hill country with small farmers repeating attempts made in earlier programs elsewhere in the country.

There are also increasing concern over the lack of one service above all that a state should provide to the people, after taking a trillion rupees out of their tax money - that of rule of law and justice.

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1. Meeya Nov 23
A very good analysis, as usual. Congratulations.
While the macro targets of the budget are good, a lot of the incentives seem to be targeted very specifically, almost to the level of individual firms.

There also seems to be a fair amount of complexity involved in calculating how certain taxes/relief is to be applied, which will add unnecessary costs to firms and create work for tax consultants.

Government expenditure on interest and debt service is growing larger and remains one of the biggest concerns.