Comment

Growth or deficit the option

Last week, Deputy Finance Minister, Ranjith Siyambalapitiya said that the government aims to maintain the budget deficit at the 5%, level despite adverse political economic conditions prevailing in the country.

Some may think that this is a miracle and the government will produce a budget with over estimated revenue and under estimated expenditure. Some sectors already predict that the budget deficit would be double digit and their predictions are based on higher defence expenditure, subsidies already provided by the government for vulnerable sectors and higher expenditure on infrastructure or high government investment already planned.

In a budget different sectors are concerned on different aspects. Poor people are concerned with relief, government servants on a salary increase, and the business community on tax relief. But some economists, critics in the opposition and donors are concerned about the budget deficit.

A lower budget deficit is the second concept in the first documents of the neo-liberal economic policies. In the first papers on the Washington Consensus it is defined as "A redirection of public expenditure priorities towards fields offering both high economic returns and the potential to improve income distribution, such as primary health care, primary education, and infrastructure."

However, critics argued that in the implementation of proposals many countries went on to cutting public expenditure for social services such as education and health care. But companies didn't oppose government subsidies and tax benefits for businesses which reduced government revenue and widened the deficit. As a result over the last two three decades the policies became highly controversial, unpopular and rejected by many countries.

In 2004 November, after the 2005 budget was presented in parliament, at a post budget seminar organised by the business chambers treasury secretary Dr. P. B. Jayasundera outlined the new policy the government had decided to follow and reflected on the budget. He said that the new UPFA government was not ready to maintain a low budget deficit at the cost of economic growth.

What he pointed out was that the government had to increase expenditure to overcome deep-rooted issues in the economy and that the government had to increase investment.

Most of the developing countries resisted following extreme neo liberal policies and formulating their budgets to satisfy the World Bank and the IMF. After the serious financial and economic crisis, especially after the Argentinean economic crisis developing countries, intellectuals including chief economists of the World Bank had the courage to criticise these policies.

Simultaneously a new wave of changes in economic policies flowed across the world, especially in Latin America, in India and it is still flowing bringing left or centre left political parties into power. The most recent example is Daniel Otega's victory in Nicaragua. However, the significant feature is most of these new governments is not extreme left or totally reject what neo-liberal policies advocate.

At the Shanghai Summit in 2004 the WB signalled the change of its strategies and said that the bank would support countries to implement home grown economic policies and stop forcing governments to implement the World Bank's policies. Whether this is happening or not countries like ours have fairly better freedom to work on our own policies and vision.

Budget 2007 will be presented in Parliament this week. This is the second budget of the President and Finance Minister Mahinda Rajapaksa and the third budget on the same lines. With just a few days to go for the budget it is time to take stock of what has been achieved and what the government is doing.

Under the policies in the Mahinda Chintana, regional development programs provision of greater support to the farming community, rural infrastructure development and SME sector are a priority. The envisaged investment in the road sector has been increased by 26% from 2006 to 2007. Finance Ministry sources said that this would contribute to 2% of the GDP. In 2006 alone the medium term investment on rural roads is Rs. 25094 million.

Reducing the unsatisfactory condition of roads from 61% -40%, constructing 184 km of high mobility new road network between provincial centres, rehabilitation and improvement of 2500 km of national and provincial roads, reconstruction of 100 bridges and construction of 13 fly-overs, rehabilitation of 2,060 km of roads and 30 bridges in tsunami and conflict affected areas and upgrading 9000 km of rural roads and 3000 km of estate roads are among the medium term scheduled to be completed by 2009. This is only a small segment of a long list.

We now have to think whether the government should maintain a lower budget deficit at the cost of these projects.

Will FDIs come to these areas or the private sector invest on projects like this.

Economic performance during this year has given a reasonably strong signal and tells that our local economists are fairly good and more realistic than their Washington counterparts in formulating policies to match our ground realities. In 2006 the unemployment rate has dropped to 6.3% in the second quarter of this year from 8.3% in 2004 and 7.7% in 2005.

The economic growth rate is above 7% against a targeted growth rate of 6%. The last recorded growth of this magnitude was in 1978, almost 30 years ago. The growth has been diverse and was particularly experienced in agriculture, livestock, manufacturing, and construction as well as in small and medium term activities.