Sri Lanka’s mini budget and economic possibilities

16 Feb 2015 - Editorial

While most Governments promise to carry out 100 day programmes after the elections, few in reality do so. Thus the pace with which the newly formed Government has moved on its election promises during the first month of its tenure is welcome. Here, the Government’s mini budget announced on 29th January 2015 has brought some relief to the rising cost of living, addresses in part those who are indebted, besides increasing payments to public servants and pensioners.

On the other hand, some argue this is yet another election budget with relief and hand outs ahead of the parliamentary election expected in a few months. This article seeks to analyse the implications of this mini budget for the trajectory of the country’s economic policy, raising issues that citizens should reinforce in any future economic package.

Recognising debt

One of the most prominent aspects of the mini budget is the extensive discussion of debt; both of the national debt and the widespread indebtedness of large sections of the population. Such a vocal acknowledgement of the issue of debt and indebtedness may be motivated by the Government’s interest in exposing the Rajapaksa regime’s policy of economic growth through debt. Nevertheless, the analysis of debt and relief measures for indebtedness in the mini budget is far ahead of what most economists and economic think tanks have analysed. This is a shameful reflection of the state of economic scholarship and analysis in the country, where serious issues, including debt prone to economic crisis and indebtedness dispossessing people, are ignored for years.

The mini budget has exposed the scale of debt including foreign borrowings which are not reflected in the calculation of the budget deficit. For example it lists a series of projects by institutions that have got Treasury Guarantees – which the state is liable for – totalling Rs. 525 billion. Similarly state owned enterprises such as the Puttalam Coal Power, Hambantota Port, etc have foreign borrowings totalling Rs. 309 billion. These figures expose the fact that total accumulated debt of the Government by the end of 2014 is not Rs. 7,373 billion as previously claimed but rather Rs. 8,817 billion, an addition of 20 per cent. In other words, total debt that the Government is liable for as a percentage of GDP is 88.9 per cent and not 74.4 per cent, which also means in per capita terms, or the average government debt per citizen is on the order of Rs. 427,000 and not Rs. 357,000.

This extensive discussion of national debt is paralleled by some debt relief for those suffering from indebtedness. For example, farmers can get a 50 per cent waiver on agricultural loans of up to Rs. 100,000 and interest payments on pawned jewellery of up to Rs. 200,000 held at state banks will be waived. Also, there is a credit card debt interest rate cap of 8 per cent over normal lending rates. While the mini budget is not adequately critical of microfinance and its impact on rural dispossession, it has nevertheless put a cap of 40 per cent interest rate per annum on microfinance loans.

Relief and Social Welfare

The mini budget in a move to address the rising cost of living has reduced prices of 13 essential food items. The special commodity levy of imported commodities are reduced in order to bring down the price of sugar, Sustagen, green gram, sprats, wheat flour, canned fish, black gram, turmeric and chillies. Furthermore, the price of bread, milk powder and kerosene oil have come down with the mini budget following the substantial reduction in the price of petrol, diesel and kerosene oil earlier. The oil price reduction is possible due to the tremendous fall in the world market oil price.

There are also increases for public sector salaries, public sector pensions, Samurdhi relief, etc. The budget also proposes to increase the guaranteed price of liquid milk, tea leaves and rubber as relief to producers. In this way, relief is central to the mini budget and is framed as a response to the previous Government’s call to tighten belts from the onset of the last phase of the war in 2006.

In terms of social welfare policy, the mini budget has made a significant shift in claiming to raise state expenditure on education and healthcare to 6 per cent and 3 per cent of GDP, respectively. While the Government rightly claims such increase in expenditure will take a few years, it is only with the next budget and changes to the revenue structure with increasing taxes that such state expenditure will become feasible. Now, state revenues are around 15 per cent and state expenditure is about 20 per cent of GDP, so the 9 per cent of GDP total for education and healthcare will necessarily require a change in the structure of the economy as a whole. Nevertheless, the commitment of this Government, including the recognition of education and healthcare as two pillars of our society, should be appreciated.

Principle of Redistribution

At the end of the day, the total expenditure of the mini budget is actually less than the original 2015 budget. How is that possible? It is because the mini budget redistributes expenditure, including from capital expenditure on infrastructure to recurrent expenditure in the form of salaries and other subsidies. This principle of redistribution is also reflected on the revenue side as taxes such as the one off Super Gain Tax on corporations and a new Mansion Tax on the houses of the wealthy are used to pay for relief of the marginalised sections of society. Some questions have been raised on the one off character of the Super Gain Tax targeting businesses close to the Rajapaksa regime, and whether such revenues to provide the salary hikes will be available in the future. The point here is redistribution; if the citizenry demands and Governments are forced to ensure there is redistribution from the haves to the have-nots and from massive physical infrastructure to much needed social infrastructure, then such relief becomes viable.

For three and a half decades, including these post-war years, there has been rising cost of living, falling real incomes and increasing indebtedness. Drawing from some of the progressive aspects of the mini budget, future economic policies can make a dent on the economic discontent of the population, provided such economic policies dampen austerity, financialisation and growth with inequality.

A sustainable shift in the economic trajectory will also require fundamental changes to the structure of the economy; including changing the relations between employers and employees and regulating the market; in terms of the flow of goods and capital as well as protection for labour. More radical moves towards redistribution would have entailed large increases in the minimum wage of private sector employees, including the much exploited garment and plantation workers. On such issues, the mini budget is wanting. Indeed, any UNP or for that matter SLFP Government, will for reasons of its class base find it hard to reverse the neoliberal trajectory that our economy has been on for nearly four decades.

Economic alternatives are necessary not just in the realm of redistribution, but also to fundamental aspects of the relations of production. Such a transformation of socioeconomic relationships should include a shift in power to the marginalised. However, as a starting point, economic policies should prioritise economic relief and social welfare spending, economic processes should avoid financialised accumulation that leads to widespread indebtedness; and an equitable economy should be built through the redistribution of wealth.

This editorial also appeared in The Sunday Times