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Saturday, December 5, 2020

Budget 2021: What is the rationale of reduing funds for health and increaing for defence? – Dr. Ameer Ali

Budgeting in the face of a combined attack on public health and national economy by a global pandemic is indeed a daunting task for any government. After all it is the people who are the producers and beneficiaries of an economy, and without the people there is no need for an economy.

Therefore, it is difficult to choose which one of the two should receive priority when drawing budgetary plans by a government. Although the budgetary measures for 2021 are yet to be submitted, the speech by the Prime Minister and Minister of Finance (PM-MoF) on the Appropriation Bill deserves some observations.

Credibility of information

Even though we are living in an information age, not all information we receive, read and hear is trustworthy. When accountants could show a private company’s profit as loss and loss as profit in order to avoid the taxman on the one hand and attract share market investors on the other, and when government statisticians could massage the actual data and shift them willy-nilly to satisfy the demands of rulers, how much credibility could one place on a company’s published balance sheet and a government’s appropriation bill or budget?

Or, how much trust could investors place on a company’s management and the public on government until facts on the ground speak for themselves? In an age of ever-growing information, credible information is a scarce commodity and therefore expensive to obtain.

One such statistical camouflage accomplished by the Rajapaksa Government has been exposed by Dr. Harsha de Silva from the Opposition, when he discovered that the PM-MoF had shifted Rs. 700 billion worth of 2020 expenses into 2019 accounts, which had already been audited and approved by the Auditor General.

By doing this “mathematical manipulation” the Government may have succeeded in showing to a nonplussed public how well it has managed to reduce the level of budget deficit within just one year of its term of office. However, this is a sinister and dangerous exercise which may be ok for an autocracy that commands two-third majority in a powerless Parliament but not for the general public and for the international community of economic managers such as the IMF, World Bank and credit monitors like Moody’s which will be closely checking the official data to come to their own conclusions.

State Minister Cabraal may dismiss the need for IMF help to manage the country’s economic and financial difficulties, but will he also dismiss its influence on the world of finance?

Sickness of Sri Lankan economy

There is no disputing the fact that the pandemic has added to and worsened the sickness of Sri Lankan economy. That sickness started long before the pandemic entered the country. Therefore, unless that sickness is properly diagnosed, suitable medicine could not be prescribed. Misdiagnosis is possible if the patent misreports or camouflages the symptoms.

For an economy its stock of statistical data independently collected by several agencies exhibit the symptoms, and camouflaging and manipulating that data would lead to wrong policy prescriptions which would only prolong and may even worsen the sickness. Politicians who come to power with populist promises always face this dilemma.

The situation is compounded in Sri Lanka by creating an autocracy in which budgeting is a meaningless exercise when the man at the top has the power to command all public and even private agencies in the country, including the Central Bank, to obey his orders and support his policies accordingly. Wasn’t that what GR said when he met the Bank Governor and members of the Monetary Board a few months ago? Wasn’t that what he also told Government officials when he visited Haldumulla in Uva a few weeks ago?

Twin crisis

The country is facing a twin crisis, a public health crisis and an economic crisis. In the Appropriation Bill for 2021, of an estimated total expenditure of Rs. 2.68 trillion only 159 billion has been allocated for health, which is 29 billion less than the allocation in 2020, while 355 billion has gone to defence. While public health is being starved of funds, security is fed with it. What is the rationale? Obviously, the autocracy needs a strong and supportive military in times of crisis when public discontent breaks out into open anger and rebellion against the authorities.

Meanwhile, the economy is shrinking. Although the Central Bank estimates the shrinkage as 1.7%, IMF puts that figure at 4.6% and World Bank at 6.7%. To compound the crises the Revenue Department has revised its target of collection for the year from its original Rs. 800 billion to 470 billion. Fall in import tax revenue and ad hoc concessions to businesses have created a revenue crisis. How revenue will be raised without hitting low income earners will be a daunting challenge. Increasing the rate of personal and corporate income taxes is unavoidable to reduce public finance deficit, but will the regime have the strength to tax its capitalist backers?

The Prime Minister proudly announced that the Government has fulfilled all its international debt obligations for 2020. May we ask how? Was it accomplished by generating a surplus or by borrowing from elsewhere? Obviously, it is the latter that made it possible.

Reality of the economic crisis

In spite all attempts to present a glossy picture about the state of the economy, the reality of the economic crisis is best reflected in the market place and consumer households. Supply shortages and rising prices are the twin evils harassing shopkeepers and ordinary consumers.

The Government’s uncoordinated policy of achieving some level of self-sufficiency in essential consumables, produced and distributed at affordable prices, by restricting imports and imposing ceiling prices, appear to have floundered and ended up in creating a flourishing black market.

For example, the price of sugar has been fixed at Rs. 85 per kg, and Sathosa has been given the right of distribution. That outlet seems to insist on the buyer spending at least a total of Rs. 600 before getting a kilo of sugar. In the market outside sugar is sold at around Rs. 150 per kg.

Similarly, import of condiments from India has been banned, but goods are being smuggled and sold at exorbitant prices. Some smugglers have been caught and the items they brought in are confiscated by the authorities, but what happens to those confiscated items no one knows.

Reports are also leaking out that those who are responsible to deliver Rs. 10,000 worth of goods to households under quarantine are delivering a smaller bundle (worth around Rs. 6,000) for that value. Adversity has opened avenues for unscrupulous profit making.

In the meantime, the forthcoming Budget is being touted by the PM-MoF and other ministers as development-oriented, couched in GR’s ‘Vistas of Prosperity’. The challenge facing the Budget is threefold: to save the people from corona, provide relief for millions of battling households and promote development. No amount of criticism of the Yahapalana regime is going to solve these.

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