Finance Minister Mangala Samaraweera presented his second budget last week. This was also the first budget of the United National Party-led government, after the end of the uneasy coalition government with President Sirisena’s Sri Lanka Freedom Party.
The general sentiment expressed on Budget 2019 is positive. It has tried to address a number of key socio-economic issues including labour reforms, increasing women in the country’s workforce and need for the improvement of physical infrastructure for disabled people, for them to make a meaningful contribution to the economy. Also, the proposal to introduce housing loan schemes for newly married couples and migrant workers is well-timed.
At the same time, many regard Budget 2019 as a practical budget. In other words, a budget formulated keeping in mind the political realities—the impending presidential and general elections.
Budget 2019 is also hailed for broadly staying within the fiscal consolidation path. In that sense, Budget 2019 appears to be the perfect budget—a fine balance between people’s aspirations and fiscal prudence. But unfortunately, nothing could be further from the truth.
One would argue that Budget 2019 is a step in the right direction. But it also has all or most of the fundamental problems of all the budgets presented in the recent times. Hence, it is gullible to think that Budget 2019 is radically different from the previous budgets presented by past governments.
Budget 2019 still forecasts a massive fiscal deficit—meaning the government expects to spend more than its income. According to Budget 2019 estimates, the government’s expenditure of Rs.3,149 billion exceeds its revenue of Rs.2,464 billion.
Clearly, the deficit will be financed through borrowings. Budget 2019 indicated the government’s plans to raise Rs.450 billion through foreign commercial borrowing.
Another area Budget 2019 is not different from any other budget is the Rs.2,500 allowance proposed to be given to all those who are in the public sector and the increase of pension payments. Measures like this will further draw people towards seeking employment in the public sector, which is already bloated. Besides, Sri Lanka’s public sector is notoriously unproductive and proposals like this indirectly amount to rewarding the unproductive, discouraging the efficient private sector workers in the economy.
Budget 2019 also shoots itself in the foot like any other budget by contradicting with the government’s much-touted policies. The case in point is the government’s intention to create a digital economy and phasing out para-tariffs.
While resorting to harebrained policies such as issuing tabs to schoolchildren at a time the developed nations are moving away from such digital devices back to text books and crayons, after disastrous experiments, Budget 2019 proposes to replace the 2.5 percent existing stamp duty with 3.5 percent Nation Building Tax (NBT) on overseas payments using credit cards.
According to the Finance Ministry officials, the rationale for coming up with this was companies like Uber and AliExpress are not subject to any taxes operating in Sri Lanka, whereas their domestic competitors pay corporate tax, VAT, etc. resulting in an uneven playing field. By doing this, the government is discouraging cashless payments—a key ingredient for a digital economy—and is introducing a new para-tariff contrary to its claim of phasing out para-tariffs which impede free trade.
Another area Budget 2019 strikes a chord with past budgets is targeting certain sectors to raise funds to plug the fiscal deficit—the easy way out—instead of taking measures to widen the tax net. Sri Lanka is said to be having only little over 125,000 tax files despite a workforce of eight million people.
Budget 2018 targeted the financial services and telecom sectors to raise the majority of the government revenue. The Debt Repayment Levy, which was introduced in Budget 2018 and came into effect in October, had a massive impact on the fourth quarter earnings of Sri Lanka’s banking sector.
Likewise, Budget 2019 targeted the vehicle importation sector to raise a sizeable part of the government revenue along with the usual suspects—the sin industries.
Allocation of more funds to the Samurdhi welfare scheme is another reason why this budget is no different to past budgets. Both senior and junior finance ministers of this government have gone on record saying that the funds spent on Samurdhi do not reach the intended beneficiaries. The scheme is also known to be politicized to the core. Hence, the government knowingly wasting funds that are scarce cannot be considered as prudent fiscal management.
Having said that, Budget 2019 can be different to past budgets if the government sticks to the fiscal targets set in the budget, without expenditure overruns, despite the upcoming elections and makes sure at least some of the progressive proposals in the budget are implemented.
Although the underlying fundamentals of Budget 2019 haven’t really changed when compared with the past budgets—mainly living beyond our means—Budget 2019 can stand out if at least two-thirds of the proposals are implemented.