Critical dissection of 2014 Budget

  • Stakeholders heap approval on initiatives addressed by the policy statement at Daily FT-Colombo University MBA Alumni Association Forum
By Cassandra Mascarenhas

A critical dissection of the 2014 Budget yesterday had stakeholders across the board lauding the policy statement, with industry leaders, economists and representatives of international organisations alike hailing the initiatives taken by the Finance Ministry to put out an all-inclusive, growth-oriented and cleverly crafted document.
At a post-Budget seminar organised jointly by the Daily FT and the MBA Alumni Association of the University of Colombo, leading private sector industrialists, economic commentators and public sector representatives all took to the stage to thoroughly analyse and interpret the much-discussed 2014 Budget.
Sound and cleverly crafted
Senior economist Indrajit Coomaraswamy asserted that the 2014 Budget is very cleverly crafted, given the resource availability and where the country is in terms of the electoral cycle. 2010’s Budget, he reminded, was laid out to simplify the structure and reduce rates and in this year’s Budget, that framework is broadly in place.
“We have had the increase of NBT on banks and the increase in the telecommunications levy – the authorities have determined that these are two sectors that can bear an increase in tax,” he noted. “Usually at this stage of the electoral cycle, there is enormous pressure for populist measures and while there are some populist measures – all budgets tend to have that – this year’s Budget has done well in terms of avoiding any major populist handouts which would seriously undermine fiscal discipline.”
The Budget proposals have covered a lot of areas, he pointed out, including the development of agriculture, dairy, the rural economy, infrastructure, women’s enterprises, community development, innovations in science and technology – all these and more have got some money, and more relief offered to professionals is interesting. “You can debate about the equity of such things, but in my view, if Sri Lanka is to transform itself into a modern competitive economy, it needs to retain its best people. I suspect that is the rationale behind this measure and I feel it is commendable.”
The necessary adjustments to the fuel and electricity prices have meant that the CEB and CPC are going to make far lower losses this year, so the losses of 2% of GDP will come down significantly this year, he observed.
“The overall budget deficit is programmed to come down from 6.4% to 5.8%. Now, the first half figures raise some concerns regarding revenue but the revenue performance is improving and that is the pattern – a lot of the revenue tends to come in at the last quarter. So overall, I think one can say with reasonable confidence that we are quite close to 5.8%.”
There is no serious issue on the external debt sustainability front, Coomaraswamy stated, adding that the path of fiscal consolidation that is underway is commendable and going in the right direction, with a broad balance between recurrent expenditure and revenue. Areas we need to be cautious about are arrears and contingency liabilities and the external debt dynamic.
Greater stability has been introduced to the budgetary framework by bringing out better balance between recurrent expenditure and revenue but that balance is coming out at 14-15% of GDP. He stressed on the need to get this balance up to 18-20% of GDP. The other issue in the medium term is funding the public service pensions. There is already an issue and going forward, that is going to become more of an issue as the population ages.
“We have excellent bilateral relations with China and proximity to India – we can leverage both. With a market of 21 million, it’s exports that are going to have to rise. If we want 8% GDP growth for 10 to 15 years, it’s got to be driven by exports – you can’t do it by selling in the domestic market. To get those exports, we need to leverage on our economic geography.”
Hits and misses
IMF Resident Representative for Sri Lanka and the Maldives Dr. Koshy Mathai stated that there are a lot of things that we should applaud in this Budget and that there are things that are worthy of praise.
“Consistency of the general policy framework, of tax rates – that is a very important thing and we’ve gotten accustomed to it and are taking it for granted nowadays, which is a wonderful development,” he stated.
While there is deficit reduction, there is still too high a deficit, too high a debt ratio in this country but things are improving and with this Budget, the deficit is being targeted to reach lower levels. Revenues are an issue and this Budget takes some important steps to increase revenues, he observed.
Pointing out some negative aspects, he noted that while the Budget is projecting 7.5 to 8% growth, the IMF predicts growth of 6.5%-7%. “If we are right, the revenues in this Budget are likely to be overoptimistic, which means that at the end of the year in the face of a revenue shortfall, once again there will be cuts in expenditure via capital or current.”
A second point was that while capital expenditure is good, certainly better than what it was before, compared to other countries, there certainly is room to grow. “Over the medium term, we need to be increasing that public investment figure further. Ultimately we are going to have to raise revenues. There will be scope for increased PPPs over time but I suspect that there is also going to be a need for the Government to increase its direct contribution.”
One issue that has plagued corporate income tax in the past has been the extension of tax holidays but the Government has adopted a much more strategic and considerate approach to granting tax relief. He recommended a comprehensive review of the tax holidays and exemptions that are out there in the system.
“I understand the motivation to extend the NBT to the financial sector but at the same time, I have some concerns that we are putting a tax on financial intermediation in a system where the banking system does not work all that well. This measure taken by itself seems to be a move in the wrong direction in terms of helping the efficiencies of the national intermediation which ultimately is going to be a key ingredient towards sustaining growth over the medium term,” Mathai pointed out.
On the reduced tax on professionals, Mathai expressed the view that the 24% rate should have remained, and instead opted to address other factors preventing the reverse brain drain. Using administrative measures to bring professionals into the tax net might be a more productive way to widen the tax net, he recommended.
He also called for increased staffing at the Inland Revenue Department and the addressing of issues with the simplified VAT system.
“We have seen the CEB and CPC being tamed and come close to breaking even and a lot of that is due to the very bold pricing decisions that the Government has taken. At the same time, some of it was due to favourable weather. So it’s not entirely clear to me that we have a sustainable solution to the problem already in hand. It would also be useful to consider looking at some other measures to improve efficiencies in the sector and I know that it is a focus of the Government,” he said.
Mathai also spoke of introducing an automatic pricing formula so that in the future, the private sector is not buffeted by large shocks but rather can see prices move up and down in small ways as the market develops.
Listing of minority stakes in State enterprises was another idea he put forward, which he stated would be a bigger boon to the stock market than the listing of many small companies. Finally, he addressed the issue of import substitution which has been highlighted in the Budget. “There is a reason to stop and think whether we need to promote domestic production or whether we should be instead relying on cheaper and possibly higher quality imports.
“Should we improve the balance of payments by reducing imports, which could possibly hurt local consumers and local firms which rely on some of those products and may be forced to pay higher prices or endure lower quality, or should we help the balance of payments by promoting exports? I would say that the second way is the more appropriate approach.”
Growth-oriented budget
Addressing the gathering after the rest of the speakers had had their say, Secretary to the Ministry of Finance Dr. P.B. Jayasundera highlighted the fact that many views from all stakeholders were taken into account when preparing the 2014 Budget, by following a very rich inclusive policy formulation process.
“The Government is listening to everybody because our Government is set up in a democracy. In Dubai, there is no nonsense there. Koshy Mathai spoke of Malaysia, but it too followed a no-tolerance policy. We are here just three years after a ruthless conflict so we can’t be compared to such countries,” he stated.
He added: “I have a national balance sheet to manage, and although the revenue we generate is not enough for the IMF, this is not so for our Government. I’m surprised that the IMF is even recognising our public investment.”
Malaysia reached it is today, to the current rate of public investment, after 40 years and Jayasundera stressed on the importance of putting things in perspective. “We first need to put our house in order, do what is doable and carry on forward. We were asked to maintain consistency, clarity and continuity and the President has balanced as much as he could to achieve these three objectives and that is what this Budget is all about. Perhaps, it’s not enough but at the same time, it’s not bad.” There is a perception here that people don’t pay taxes, which he disagreed with. “People here pay taxes and the level of compliancy is high. It is only a residual component that needs to be addressed.”
“This Government is the one that brought public servants into the tax net. Tourism is still not ready for refurbishments without tax holidays. People pay taxes in Sri Lanka – we gathered Rs. 1 trillion in the previous fiscal year. It’s not growing at the extent the GDP is growing, this is true, but people need to understand the context in which this is happening.”
There must be enough emphasis on exports and keeping in line with this, the President has emphasised all the big markets in the Budget – India, China, Brazil, Dubai and South Africa. Furthermore, a great investment has been made in education in this Budget, he noted. “We have accountants, lawyers, doctors, project managers, pilots and many more qualified people, so why not build industries and services based on such skills and not depend on the factories like we do now?”
“The Budget hasn’t even touched motor vehicles this time around; instead we are focusing on plugging up the loopholes.” Still on taxes, he stressed that the Government wants to address only the base. “The rates introduced are here to stay. The revenue ratio will be realised. We have a commitment and we take pride in delivering and this Government is very serious about credibility – we want to deliver on what we have promised.”
“VAT should come down but not in the way that the IMF suggests. The lessons to be learned are far beyond the World Bank and the IMF. Our expenditure can be further compressed. The war is over; there is no pressure through defence expenditure so we think having a recurrent expenditure at 13.5% is decent. Our services should be online, I agree, and the IRD will be computerised fully. Tax compliance will be feasible only if the tax rates are low.” “What if we don’t get more than 6% growth? When the world is growing at 3%, what’s wrong with 6% growth?” he questioned. The aim is for Sri Lanka to grow at a rate higher than the rate of inflation and the Central Bank is dedicated to maintaining this.
The plantation sector needs massive replanting and long term funding is necessary, he assured, and the financial sector reforms will happen, including those that encompass the insurance sector. “A massive number of far-reaching reforms to enable business to be conducted easier have been introduced and even small entrepreneurs and the self-employed have been addressed. What we need is a more competitive market environment, more quality assurance, and the removal of monopolies and oligopolies.”
Jayasundera also dismissed all claims of lack of transparency: “How more transparent can it be? Valuable information has been released to the public through Parliament, to reflect our public accountability. The fiscal management responsibility report has been released and should be debated. To me, the fact remains that as a responsible public servant, I can say the country is on a sustainable inclusive growth model and we are blessed with a leadership that will help us manage the task we have ahead of us.”
The forum which drew a record 800+ participants was supported by Sri Lanka Telecom Plc (Gold Sponsor), Access Engineering Plc and DIMO Plc (Silver Sponsors), Janashakthi Insurance (Insurance Partner), The Kingsbury (Hospitality Partner), KPMG (Technical Partner), Phoenx O&M (Creative Partner), Neo Ogilvy (Digital Partner), Gold FM, Hiru TV and Sooriyan FM (Electronic Media Partner), OfficeMax (Print Partner) and zMessenger (SMS Partner)