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| Sunday, 8 September 2002 |
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The National Budget The golden brains in the Treasury have already begun collecting estimates of expenditure and developing revenue proposals to present the National Budget in Parliament in November 2002. Their main task seems to be to reduce (or if possible eliminate) the budget deficit which the economists blame for high inflation and the rise in prices of essential consumer items, depreciation of the rupee against convertible foreign currencies, high interest rates and the adverse impact on competitiveness and business. Slashing expenditure is one way to reduce the deficit. The Treasury has, for some time, applied cuts on funds earmarked for expenditure. Expenditure cuts across the board are arbitrary and are not effective and when imposed too rigidly, can destroy the very objectives for which the funds were allocated. Attempts so far in trimming expenditure have not been successful. As the World Bank Vice President, Dr Mieko Nishimizu said in Colombo (Development Forum in June), Sri Lanka's main weakness had been implementation. During the year 2001, the Government budgeted for a deficit (in revenue over expenditure) of Rs.123 billion or 8.5% of GDP when anything over 5% is regarded as disastrous to the economy. The actual deficit was a staggering 10.8% of GDP (Rs.152 billion). Policy makers and bureaucrats recognize that revenue raising measures such as increasing consumption taxes and duties imposes a heavy burden on the people (as well as on businesses) and increasing income taxes encourage businessmen to evade taxes and is harmful to business and economic growth. They seek, and rightfully so, to find additional revenues without burdening the people and the business sector with higher taxes. How should the budget deficit be then reduced? The February 2002 budget of the new Government rightly sought to increase revenue by creating an environment in which economic (business) units and the economy will grow fast. The theory was to enhance the tax base and to keep low tax rates which affect people as well as business. But the growth in the economy was inadequate and revenue collections to date in 2002 have been below estimates. Fiscal measures alone are not adequate for the economy to grow. The environment in which people transact and business enterprises operate needs to improve. Law and Order, enforceability of contracts, speedy administration of justice, good property rights, consistent Government policies, equitable labour laws, relevant education and good infrastructure, in particular efficient ports, roads and telecommunications are all part of the formula required. What are the other measures available to raise Government revenue without increasing tax (VAT, Income Tax, Customs Duties etc) rates? The late Mr N U Jayawardena estimated (The Economist, 15 July 2002) the underground, or black economy to be worth some US $ 3 billion. The solution lies perhaps in tapping into the non-formal sector of the economy by implementing, among other things, the following proposals made by the Ceylon Chamber of Commerce some time back. Introduce Personal Identification Numbers (PIN) and insist that it be quoted (and electronically verified) for all transactions above a limit and also for specified transactions such as the purchase of air tickets, vehicles and property. Strengthen the tax administration by raising salaries to attract highly competent officers but eliminate the present incentive scheme (which often results in harassing the tax payers) and automate all operations at the Department of Inland Revenue and Customs (EDI - Electronic Data Interchange). These measures will reduce corruption at revenue collection departments of the Government, expedite import and clearance of goods, reduce tax payers time and release revenue officers to carry out in-depth investigations on random samples of tax payers and non tax registered enterprises. Undoubtedly, these proposals will help the Government to raise adequate revenue in the near term and bridge or substantially reduce the budget deficit, stimulate the economy and trigger economic growth. |
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