Budget reflects ideological clashes within government

16 February 2015 03:40 am - 0 - {{hitsCtrl.values.hits}}

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By Chandeepa Wettasinghe
Top economists in the country slammed the new regime’s interim budget for political indecisiveness and failing to rectify past economic missteps, during a post-budget seminar organized by the Sri Lanka Economic Association (SLEA) and the University of Colombo recently.

“Does this reveal the political agenda of the new government? No,” University of Peradeniya Senior Lecturer Dr. Sumanasiri Liyanage said curtly.The interim budget is widely considered a welfare-oriented fulfillment of election promises, despite the traditionally open market oriented United National Party, comprising majority of the coalition government.

However, some may come up with an argument saying that the UNP has matured politically, attempting to create a political economy suitable for Sri Lanka.
Recently, Policy Planning and Economic Affairs Deputy Minister Dr. Harsha de Silva said that the new regime is following the German social market economy model, combining markets with minimum government regulation while enhancing social insurance.However, Former Central Bank Director and academic Prof. S. S. Colombage and University of Colombo Senior Lecturer Prof. Sirimal Abeyratne agreed with Dr. Liyanage.

However, cracks were shown within the UNP itself, as Dr. de Silva had subtly expressed certain reservations to certain policies enacted by Finance Minister Ravi Karunanayake through the budget.Meanwhile, the economists were also highly critical of the new policies threatening the country’s macroeconomic factors.

“The government is mixing up multiple objectives. They shouldn’t endanger the long term budget for short term gain,” Prof. Abeyratne said.
While SLEA President Prof. A.D.V. de S. Indraratne held to the belief that the interim budget was better than the November 2014 budget, all other panelists said that both of them were extremely bad; sacrificing long term growth for short term political capital.Karunanayake had previously stated that the interim budget would have far reaching ramifications, to be felt for years to come. However, it is doubtful whether he was referring to such negative impacts.

Dr. Liyanage stressed that the policies were unsustainable, and that the country would face austerity following the 100-day programme.Prof. Colombage quoted Singapore’s Former Prime Minister Lee Kuan Yew.“Sri Lankan budgets are an auction of non-existing resources.”

They were especially displeased with the selective intervention tactics of the regime in providing relief to the lower spectrum while taxing the super rich.
“Targeting to bring down commodities is selective. And the super gain tax is bad too; we have a legal framework which should have been used,” Prof. Abeyratne noted.He added that this severely harms investments and business, specially from foreign sources, and further added that actions which seem politically correct today may not be so when their ramifications are felt.

Meanwhile Prof. Indraratne expressed worry over the spending reduction on public investment.“I was perturbed. We have to take this into serious consideration, because public investment is one of the determinants of growth,” he said.Karunanayake had previously stated that the reduction in investment monetarily does not reflect a reduction in infrastructure development physically, as the spending reduction is offset by eliminating corruption.

The economists expressed worry over the recurrent expenditure overwhelming government revenue, and that this budget had managed to reduce the budget deficit only through the reduction of public spending and the one off-taxes which the regime promised would not be repeated.

This would mean that such expenditure would have to be financed by further borrowings once the one-off revenues are exhausted.Prof. Indraratne said he had hoped for a fall in public debt during the interim budget, but hoped it would happen during the next one.As a solution, Dr. Liyanage said that tax reforms should have been enacted, increasing income tax.“Over 80 percent of our taxes are indirect. It is necessary to increase direct taxes. And there is no correlation between increasing direct taxes and the reduction of growth,” he said.

This conforms to the views previously expressed by Central Bank Governor Arjuna Mahendran, who said that reducing the over 20 different tax schemes, most of which are waived through subsidies, to a simple few could increase transparency and increase tax collection by two to threefold.

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Budget reflects ideological clashes within government

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