Business

Should we abolish the budget?

In this weekly column on The Sunday Morning Business titled “The Coordination Problem”, the scholars and fellows associated with Advocata attempt to explore issues around economics, public policy, the institutions that govern them and their impact on our lives and society.

By Aneetha Warusavitarana

On 5 March 2019, Minister of Finance Mangala Samaraweera presented the much-delayed Budget for 2019. The budget is a tool of extraordinary influence, which is used to affect government revenue, expenditures, and national policy. That being said, our budgets don’t appear to be exerting that influence or creating the impact they could. According to Verité Research’s budget tracker, only 8% of projects from the 2018 Budget are progressing, with a staggering 59% lagging behind in implementation.

Everyone has come to expect the budget, but what purpose does it serve? Why does it exist? During the rest of the year, the government continues to make decisions on policy, pass legislature, and try to run the country. The allocations made during the budget to specific ministries are not set in stone. The reality is that these allocations are moved around the government in a manner than bewilders all involved and when a year passes and the next budget is announced, it is found that budget promises have not been met and very little has actually been implemented.
Budgets, by definition, should focus on revenue and expenditure. In the case of Sri Lanka and the mountain of debt that we need to contend with, this is all the more important.

When looking at this year’s Budget, a wide variety of topics has been touched on. The Ministry of Finance has revised taxes on multiple fronts, with a focus on reducing the indirect tax base and increasing direct taxes. However, the Budget has not limited itself to detailing expenditure and revenues. There has been a substantial amount of general policy which has been included, bringing up the question whether there is a point to their inclusion in the Budget. Wouldn’t these general policies be better suited in a national policy document or election manifesto?

The policy decisions in the Budget 2019 have ranged from establishing a national pension plan and increasing government servants’ salaries to amending labour laws, and this is where the problem lies. Increasing government servants’ salaries would technically be the duty of the Ministry of Public Administration and Disaster Management (an apt ministry to handle the government sector) and salary revisions should follow a system, and not depend on ad hoc decisions. A national pension plan, while much needed, is not an endeavour that can be completed in a year. The same reasoning applies to amending labour laws. These two in particular will in all likelihood take at least a few years to be finalised and implemented.

The alternative?
The alternative to the current budgeting process is to follow a medium-term expenditure framework (MTEF). This framework integrates policy, planning, and budgeting for the medium term, combining a top-down resource envelope with a bottom-up estimate of the current and medium-term cost of existing programmes. The result is the alignment of macroeconomic stability and broad policies with more specific programmes. It is essentially a three to five-year rolling budget, which sets fiscal targets and allocates money for that time frame. This system addresses the reality that very few projects can be successfully implemented within a year and allows the government to acknowledge this and act accordingly.

What does a MTEF mean for policy?
Within this framework, policy proposals are considered in the medium to long-term context. Spending agencies have a stronger voice, as they have significant input into the design of sector strategies and some flexibility in managing their resources to meet their objectives. New projects are undertaken depending on whether they are affordable and implementable in the medium term, allowing the government to have a very clear and mostly accurate statement of fiscal policy objectives, fiscal deficit, and debt management.

At a project level, this framework creates two main wins. First, both policy and funding are more reliable and predictable. Second, it allows for policy to drive funding, as opposed to the reverse. This in turn means that budgeting is more strongly linked to results, as focus shifts to specific outcomes and what resources are required to achieve them.

What happens to the annual budget?
The annual budget will be announced, but it will simply reflect what is achievable in the short term within the larger three to five-year framework. This is beneficial as spending will be more specific and tied to clear targets. Funding is not allocated for an entire project, but only for the section of the project that can be reasonably achieved during the next 12 months. The entire budget is more focused on results and less on broad policy statements. Given the low levels of implementation mentioned earlier, it is evident that a greater degree of specificity, combined with a results-focused approach to the budget, is required.

What needs to be done?
Interestingly, even now, a substantial amount of planning follows the structure of a three-year rolling plan. The Public Investment Programme, or the PIP, is a three-year rolling document which details government expenditure of projects and programmes. The Ministry of Finance also publishes an annual medium-term fiscal strategy which establishes the general direction or objectives of fiscal policy for the next three years. According to the Ministry of Finance website, budget estimates are prepared in the larger context of a medium-term budgetary framework.
It appears that the key components of an effective medium-term expenditure framework already exist. The next step would be to align the annual budget more clearly with these components. Allocations should be made more specific, with clear ties to the three-year plan. New projects and programmes should be introduced, taking into account a three-year resource envelope and fiscal objectives. In other words, the budget in its current iteration should be completely overhauled and refined.

(Aneetha Warusavitarana is a research analyst at the Advocata Institute and her research focuses on public policy and governance. She could be contacted at aneetha@advocata.org or @AneethaW on Twitter. Advocata is an independent policy think tank based in Colombo, Sri Lanka which conducts research, provides commentary, and holds events to promote sound policy ideas compatible with a free society in Sri Lanka)