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| Sunday, 7 December 2003 |
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| News Business Features Editorial
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Budget 2004 : A Review Muttukrishna Sarvananthan, Research Fellow, International Centre for Ethnic Studies, Colombo. The Budget 2004 was presented in the midst of a sound economy with lower interest rates, lower inflation, reduced budget deficit and curtailed public debt. The prime lending rate dropped to 9.3% in September (from 12% in October at the end of last year), the Colombo Consumer Price Index dropped to 7.2% in October (from 9.6% during 2002), the budget deficit at the end of this year is expected to be 7.8% of the GDP (declining from 8.9% in 2002), and the total public debt would be 100% of the GDP compared to 103% in 2002. The per capita income at the end of 2003 is expected to be roughly USD 980 (LKR 93,000). It was quite easy for the government to prepare a good budget in the above favourable circumstances. Overall, the budget was favourable with tight fiscal control over public expenditure. Any government Budget has two components - government expenditure and government revenues. The present government has managed to curb public expenditure and debt, however it has not been able to mobilise the projected revenue through tax and non-tax sources. This is a cause for worry in budgetary planning. Public Expenditure The Government enacted a Fiscal Management (Responsibility) Act in January 2003. The unique feature of this legislation is that it was locally driven as a result of fiscal profligacy during 1999-2001 that resulted in negative GDP growth in 2001 for the first time in the post-independence history. According to the FM(R)A the budget deficit has to be brought to less than 5% of the GDP by 2006 and maintained thereafter. Besides, at the mid of each year a fiscal position report has to be presented to the parliament by the Finance Minister, which was done for the first-time in July 2003. This mid-year report is expected to reveal the fiscal position in terms of the original budget proposals for that particular year. If there are any deviations from the original estimates then the Finance Minister should spell out the reasons for such deviation/s and remedial action/s proposed to be undertaken by the government. Thus, the FM(R)A binds the government by law to restrict budget deficits to less than 5% of the GDP. Further, at the end of 2006 the total public debt should not exceed 85% of the GDP of that year (which stands at approximately 100% in 2003) and at the end of 2013 total public debt (including external debt at current exchange rate) should not exceed 60% of the GDP of that year. According to another clause of the FM(R)A during election times if any political party offers goodies to the electorate it has to estimate the fiscal implications of such goodies and make it public. The Election Commissioner is bound by law to enforce this clause. This is again a very timely clause, because political parties in Sri Lanka have a long tradition of promising various goodies at the time of election campaigns including "rice from the moon". Moreover, every public institution (departments, corporations, authorities) has to submit annual performance reports and accounts to the Ministry of Finance within a stipulated time period. Apparently, according to the Director General of the Department of Fiscal Policy in the Ministry of Finance, about 90% of the public institutions have complied with this condition this year. The Treasury did cut off funding to public institutions that have failed to comply with the deadline. The total public expenditure earmarked for 2004 is the same as that earmarked for 2003, i.e. LKR 353 billion excluding debt servicing (repayments and interest on public debt). Thus, there is a cut in public expenditure for 2004 in real terms. The public debt repayments and interest payments are expected to consume LKR 314 billion during 2004 or 47% of the grand total of LKR 667 billion public expenditure. The actual total public expenditure during 2003 is expected to be lower than the budgetary allocation as a result of stringent spending cuts imposed by the Treasury. Despite an indefinite ceasefire in place since February 2002 the defence allocations have been rising by about 5% for 2003 and 2004. The government contends that this is because of repayment of past debt on defence procurement during 2001-2002. It is important to note that the budgetary allocation for defence does not include pensions of retired personnel and disability benefits of injured personnel. The allocation for the Ministry of Finance has been curtailed by 56% between 2002 and 2004 because of drastic spending cuts across the board. Public expenditures on health services have increased by 24% while the public expenditures on education have increased by 10% during the same period. Yet, the public expenditures on health and education account for only 7% and 6% respectively of the total public expenditure earmarked for 2004 (Table 2), which are less than half that of defence allocation. Apparently there is no change in public expenditure allocated for Samurdhi poverty alleviation and Rehabilitation, Resettlement and Refugees Ministries (Table 1). In other words, the Ministries of Samurdhi and Rehabilitation, Resettlement & Refugees have experienced spending cuts in real terms.Despite repeated assurances by the GOSL to trim down expenditures on the Samurdhi poverty alleviation programme, because it is openly acknowledged by the government that at least half the claimants of Samurdhi benefits are non-deserving people, no concrete action has been taken to do so. This may be due to political considerations. A Welfare Benefit Law has been enacted this year, accordingly anyone claiming welfare benefit will be scrutinised about her/his eligibility. However, it is not clear whether existing claimants also would be screened or only the new claimants would undergo the screening process. Besides, anyone providing false information to claim welfare benefit is liable for prosecution under the new law. In spite of this legislation there is no indication of drop in expenditure on the Samurdhi programme. Public expenditure on rehabilitation, resettlement & refugees appears to be inadequate given the huge number of returning Internally Displaced Persons (IDPs) and their urgent needs. Besides, the public expenditure allocation for the Ministry of RRR is less that 1% of the earmarked total public expenditure for 2004. Nonetheless, most of the grants to returning IDPs are donor funded and therefore would not be foot by the Ministry of RRR. Further, many other reconstruction activities for the North & East (N&E) Province are captured by several other line ministries. Allocation of public funds to Provincial Councils and District Secretariats (Kachcheri) in the North & East are catalogued in Tables 3&4. Accordingly, the N&E Provincial Council is allocated the highest per capita expenditure of LKR 3,682 while the Western Provincial Council is allocated the lowest per capita expenditure of LKR 785. On the other hand, within N&E, Ampara and Vavuniya District Secretariats are the recipients of highest per capita expenditure around LKR 260 while Batticaloa District Secretariat receives the lowest per capita expenditure of LKR 188. The Jaffna District Secretariat is allocated LKR 231 per capita. However, this would be much lower because the current Jaffna district population is nearly 0.6 million due to return of IDPs (LKR 188 per capita). Therefore, the allocation of public funds to Jaffna district seems very low. However, several line Ministries also would be allocating funds to the Provinces and Districts. Hence, the figures are not the only sources of public funding to the regions. In addition, several bilateral and multilateral donors are funding development, resettlement, rehabilitation and reconstruction projects in all the Provinces and Districts. Most of these funding are either through the Provincial Councils or through the District Secretariats that are not included in the Budget allocations. The government has proposed a 10% pay rise for public sector employees and pensioners in order to mitigate the rise in cost of living. This is the first pay rise since 2001. At the same time the government has also proposed a Voluntary Retirement Scheme (VRS) to trim down the overblown public sector. Therefore, the cost of pay rise to the exchequer may be partly neutralised by the savings made by way of the proposed VRS. Public Revenue At the time of the presentation of the last budget (Budget 2003) in November 2002 the government expected the total revenue (tax plus non-tax) to be LKR 316 billion for 2003. However, it is now expected to be only LKR 292 billion. Therefore, there is LKR 24 billion shortfall in revenue collection. The major reason, attributed by the government, for this huge shortfall is the non-realisation of the revenue from the Value-Added Tax (VAT). The VAT was introduced in 2003, by combining the previous Goods and Services Tax (GST) and the Defence Levy, with a dual rate, i.e. 10% & 20%. The government felt that the dual-rate system experienced problems in implementation. Therefore, in the Budget 2004 a single VAT rate at 15% is proposed. This is expected to improve collection thereby increasing the revenue from VAT, though the net effect of the single-rate (i.e. loss incurred by reducing the 20% plus gains by increasing the 10%) is expected to be marginally negative. Although the price of goods currently charged 10% VAT (e.g. sugar, imported lentils, coconut oil, imported potatoes, imported onions, imported chillies, chicken, dry fish, electricity, LP gas) would increase, the price of goods currently charged 20% VAT (e.g. refrigerators, fans, CFL bulbs) should decrease. Besides, petrol, diesel, kerosene, pharmaceuticals, locally produced rice, fruits & vegetables, infant & baby foods, powdered milk, cereals, fertiliser, etc, are exempt from VAT. According to the Finance Minister, at present about 70% of the revenue from VAT accrues from the 20% rate. Therefore, it is argued that the overall effect of the single VAT rate would not result in increase in cost of living. Further, the public servants and pensioners receive a 10% pay rise from January 2004, which is higher than the current inflation rate of 7% (however it should be noted that public sector employees account for only 20% of the total labour force in the country). Moreover, the 20% surcharge on import duty has been reduced to 10% from January 2004, which would result in drop in prices of imported goods. Furthermore essential commodities are exempted from VAT. If we take all these factors into consideration the reviewer feels that the single VAT rate will not result in any rise in cost of living. For 2004, the anticipated total revenue of the government is LKR 332 billion. We do not know how attainable. A number of new tax measures are proposed, in addition to the single VAT rate mentioned above, to attain this targeted government revenue. The economic service charge and levy on cellular phone subscribers are two new taxes proposed. In addition, some loopholes in the existing tax regimes are plugged. The excise duty on alcohol is increased. The threshold for personal income tax is raised. Profits made by share trading in the stock market is going to be taxed at 15%. However, this is applicable to locals only and foreign traders in the stock market are exempted. Government revenue as a proportion of the GDP has continued to decline over the past 14 years. Government revenue as a proportion of the GDP has declined from 21% in 1990 to 16.3% (estimated) in 2003, which is expected to be 16.4% in 2004. This downward trend of government revenue is a cause for worry for policy makers. To improve the government revenue collection a Revenue Authority is expected to be set up by merging the Departments of Inland Revenue, Customs, and Excise. Although the Revenue Authority Act has been gazetted it has not been presented to the Parliament for approval so far. The proposed Revenue Authority is only expected become operational by 2005. Conclusion The present government has been able to manage the expenditure side of the Budget fairly well during the past two years. Strict public expenditure controls, voluntary retirement schemes in the public sector (such as the Central Bank, Port Authority of Sri Lanka, etc) and privatisation of public enterprises have curbed budget deficit and public debt. With the FM(R)A in place no future government can practice fiscal profligacy. However, a lot more needs to be done on the revenue side of the Budget. Presently, tax proposals in the Budget appear to be temporary and piecemeal measures. Therefore, a long-term and systematic tax regime has to be evolved to resolve the continuing decline in revenue collection as a proportion of the GDP. In this respect the following suggestions are mooted. The corporate and personal income tax system is based on self-assessment in Sri Lanka. However, tax compliance is very poor. There are about 32,000 registered companies in Sri Lanka out of which only 19,000 have opened a tax file with the Department of Inland Revenue. Further, less than 9,000 companies filed their income tax returns for the fiscal year 2001-2002, but only 2,850 companies actually paid any income tax at all. Thus, only 9% of the registered companies in Sri Lanka pay income tax. This certainly cannot go on like this. Stringent enforcement of tax laws is the need of the hour. Furthermore, broad-basing the personal income tax net is a must for improving tax collection. For example, public sector employees are exempt from income tax in Sri Lanka. But in neighbouring India public sector employees do pay income tax. Therefore, Sri Lanka should also consider making public sector employees pay income tax. However, current levels of public sector pay are quite low and therefore salaries have to be increased before imposing income tax. The Pay As You Earn (PAYE) income tax is one of the easiest and efficient ways of collection of taxes. It is high time to inculcate the ethos of everyone paying income tax for the use of public goods and services in Sri Lanka. |
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