Budget 2016:

Experts caution against expanding public debt

by Lalin Fernandopulle

University dons dubbed the 2016 Budget as one that encourages people to live beyond their means given the huge fiscal deficit that needs to be bridged due to an enormously expanded public debt burden which will be passed on to the people through taxes to service loans.

Addressing a post-budget seminar conducted by the Sri Lanka Economic Association (SLEA)

last week in Colombo they said, “The move to increase domestic and foreign borrowing to finance public investment makes it obvious that we want to live beyond our means.”

President, SLEA, Prof. A.D.V. de S. Indraratna said the the entire tax system is highly regressive and added there would be a sharp rise in indirect taxes burdening the poor masses although Prime Minister Ranil Wickremesinghe in the policy statement said there will be a direct-to indirect tax ratio shift to 60:40 from 80:20 by 2020.

He said the proposed Budget deficit target for 2016 which is 5.9 percent of the GDP is almost this year’s target of six percent. The challenge for the government is to finance the Budget. The income tax projected for 2016 is less than this year while taxes on social security is higher than this year.

The original plan of 4.4 percent of GDP this year has been far exceeded revealing the government is unable to meet fiscal targets.

Government revenue has been declining since 2010. Revenue fell 12.3 percent of the GDP last year.

Economists say that the fall in revenue is due to the structural weaknesses in tax administration and collection.

The Budget deficit for 2016 is Rs. 740 billion, up from Rs. 675 billion in 2015.

The tax revenue for 2016 is estimated at Rs. 1,584 billion compared to Rs. 1,284 billion this year. However, total expenditure is Rs. 2,787 billion compared to Rs. 2,153 billion this year.

Professor of Economics, University of Colombo, Prof. Sirimal Abeyratne said the 2016 Budget taken in context is riddled with inconsistencies, confusion and trade-off effects where one would could not come to a comprehensive conclusion. However, he said if taken out of context or looked in isolation it is has good implications to the economy.

The Budget is a market-oriented. Considering the revenue and expenditure issues it is moving in the right direction compared to previous Budgets which were based on ad hoc policies. The move to promote local and foreign investments is a good decision.

However, bridging the huge Budget deficit will be an uphill task for the government. Expenditure is substantially high compared to revenue. Total expenditure is Rs. 2,787 billion while revenue is Rs. 2,047 billion.

The recurrent expenditure has been increased to Rs. 1,928 billion in 2016 from Rs. 1,612 billion in 2015.

“Fiscal consolidation is crucial. However, there is no attempt in the Budget to achieve it. Our debt is striking. Debt servicing is Rs. 1,265 billion this year. Tax revenue only covers a part of the debt payment.

We need to continue borrowing to service loans. Sri Lanka is one of the most indebted countries similar to Greece,” Prof. Abeyratne said.

“External financing through export promotion is essential to enhance revenue and bridge the fiscal deficit.

Vietnam’s export performance which was low compared to Sri Lanka in the early 1990s has grown exponentially today. We need to urgently improve export performance,” he said.

Prof. Abeyratne said the contribution from the private sector should be at least 10 percent of the GDP.

However, the private sector is too small to make a big contribution. World foreign direct investments has recorded exponential growth, reaching US$ 1,480.6 billion in 2006 from US$ 86.4 billion in 1986.

“World FDIs have been flowing out to developing countries following the recession in the US and the West.

It has increased from around 20 percent to around 80 percent today. Sri Lanka attracts less than US$ 1 billion of the world FDIs.

We need to boost FDIs. Reforms in State-Owned Enterprises are vital,” Prof. Abeyratne said.

“Therefore, when taken in the context of the current state of the economy it is not a comfortable Budget.

Next year will be crucial when we consider the Budget figures. Introducing reforms, greater private sector response to boost FDIs and increasing economic performance are vital to deliver what is promised in the Budget,” he said.