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The proposed contributory pension scheme for public servants is welcome since the country will have a serious problem in the near future with the current pension scheme for the public sector, Chairman Public Enterprise Reforms Commission (PERC) and former Treasury Secretary Dr P.B. Jayasundera said.

Addressing a seminar titled 'New vision for fiscal strategy', he said the proposed contributory pension scheme for public servants is a salutary development. "This will not only address the potential financial risks, but will also be conducive for future capital market developments," he said. The seminar was organised by the Sri Lanka Institute of Taxation.

At present there are 370,000 people drawing pensions and since the ageing population will increase within the next 10-20 years, it is bound to create problems in the future under the present system.

He said in 1972, Dr N.M. Perera, in his budget speech, had analysed the government pension scheme and seeing that it will create problems, had suggested a contributory system.

Dr Jayasundera said that if that system had been implemented in 1972 without, we would not be having this problem today.

Expressing his views on the proposed Value Added Tax (VAT) system, he said it will eliminate the cascading effect of the prevailing taxes since it has a wider base than the Goods and Services Tax (GST) and is expected to be extended to the retail level.

However, the creation of two positive rate bands with a wide gap (10 and 20) is not healthy. Therefore, it is advisable to narrow the difference between the two rates to make the system efficient, said Dr Jayasundera.

He noted that a golden opportunity to simplify the tax structure was lost because several taxes have been introduced despite VAT.

The absence of an effective targeting mechanism in the provision of welfare benefits results in high government expenditure and prevents the effective transfer of resources to the needy. Therefore, the proposed Welfare Benefit Law will make statutory provisions for an effective entry exit criteria for such benefits. This will enable the government to depoliticise welfare expenditure while rationalising public expenditure.

He said the task ahead for the new government in economic management is twofold and includes the restoration of economic stability and strengthening of macro-economic fundamentals as well as the revival of the growth momentum.

On the first task, he said that excess demand pressure stemming from fiscal imbalances to bring down domestic inflation must be reduced together with government borrowings to increase the funds available for private sector at lower rates of interest. In the meantime, the balance of payments should be improved to increase the external reserves which in turn will reduce the vulnerability to external shocks.

To revive the growth momentum, deregulation is needed to remove constraints to growth to have efficiency gains, liberalisation and privatisation and to create new investment opportunities for the private sector as well as promoting public investment in infrastructure.

Dr Jayasundera said that the budget has been framed with the objectives of reducing the deficit in the current account and the overall budget, reduce domestic borrowings and thereby release funds for the private sector at lower rates of interest.

The government's target is to increase budgetary savings while reducing the budget deficit (from 10.8 per cent to 8.5 per cent), public investments (from 5.9 per cent to 5.4 per cent) and domestic borrowings (from 8.85 per cent to 5.2 per cent). He said the reduction in public investments from 5.9 per cent to 5.4 per cent of GDP is not encouraging.

A marginal effort is shown towards reducing the overall recurrent expenditure which is also not sufficient, added Dr Jayasundera. Although recurrent expenditure includes high cost of interest, it is necessary to critically look at components such as salaries, pensions and subsidies if a substantial improvement is to be achieved.

Dr Jayasundera said that given the macro-economic challenges, it is not desirable to postpone the much needed reforms in the public service, public entities and welfare expenditure programmes, however difficult they may be. He also said that adjustment efforts through further reductions in public investments and increased taxation will not be conducive for medium-term growth.

Adviser Fiscal Policy P. Guruge told the seminar that the VAT will come into effect on July 1 and not on June 1 as scheduled earlier. The retail trade will be brought under the VAT system in 2003.

Earlier the GST and the National Security Levy were scheduled to be abolished and the VAT introduced on June 1, but to streamline operations, it was postponed to July 1, he said.

Mr Guruge said the main difference here is the introduction of two positive rates - 10 per cent and 20 per cent. There will also be zero ratings and exemptions.

Speaking of the threshold, he said the same threshold applicable to GST, ie Rs 500,000 per quarter or Rs 1.8 million per annum, will be applicable to VAT.

The lower band of 10 per cent will apply to essential goods and services which include essential foodstuffs, power, petroleum, fertiliser, pharmaceuticals and medical equipment, industrial equipment, agricultural and fishing equipment while all other goods and services will be charged at the standard rate of 20 per cent.

GST was introduced on April 1, 1998 and a standard rate of 12.5 per cent was applicable on all goods and services. Exports and services relating to exports were zero-rated while certain activities and items were exempted.

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