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Budget 2022: Falling short of expectations

27 Nov 2021

 By Prof. Anil Jayantha Fernando The 2022 Budget was presented to Parliament with much hope that it would be different from a traditional budget, and that it would put forward solutions to resolve the economic crisis and assist in achieving long-term development goals. However, it is nowhere close. Moreover, it has failed to achieve the standard objectives of a government budget, which include reallocation of resources for economic stability and growth, and solutions to income and wealth inequality and regional disparity. An examination of past budgets revealed that the Budget 2022 was merely symbolic in that it sought the Parliament’s approval to spend public money on strengthening political power centres. The new expenditure proposals demonstrated how resources had been allocated to fulfil political motives without providing substantive and logical reasoning. For example, the allocation of Rs. 42,063 million for rural development projects under the “Gama Samaga Pilisandara” – the highest amount allocated for a new expenditure proposal – points to the issue of illogical and irrational resource allocation. Accordingly, Rs. 3 million has been allocated to each grama niladhari (GN) division targeting four expenditure lines, namely, livelihood development, development of common infrastructure, environment and sustainable development, and social welfare and social development. Here, the requirements for expenditure are expected to be identified by a forum of government officials and rural political leaders in which the chief incumbent of the village temple, clergy of the kovil, church, or mosque, rural community leaders, and all the villagers can engage in. What is the rationale behind allocating such an amount for each GN division to develop needed infrastructure? It is more likely that this public spending would end up being used for politically motivated purposes. A significant proportion of the budget allocation has been channelled to the ministries run by the Minister of Finance and his family members. Political bargaining and power for those ministries will automatically increase at the time when money is released from the Treasury. Disparity in resource allocation and undemocratic practices in the budgeting process is reflected in these allocations. Furthermore, the disagreements and displeasure of some MPs and ministers in the Government indicate issues such as lack of transparency, democracy, and stakeholder engagement in the process of budgeting. The Government should have taken some steps to address the present economic crisis, by paying reasonable attention to arrest the inflation that people face at present due to their drastically declining purchasing power. The provision of a pragmatic solution to the external sector issue, which was aggravated by depleting foreign reserves and an increasing external debt burden, should have been an aspect of the Budget 2022. More questions than answers  The expectation of export earnings amounting to $ 19,000 million in 2022 compared to the estimated export earnings of $ 11,000 million in 2021 – meaning year-on-year increase of over 70% – indicates how impractical and deceitful the budget figures are. The Budget 2022 is full of decorative and misleading statements dressed without substance. The proposed “Social Security Contribution” intended to be financed with a 2.5% tax on turnover is a good example to show how inflation will further increase in lieu of social security, which is perceived as a good intervention by the Government. According to this proposal, the net impact of the 2.5% tax will be on inflation, as prices will increase when the goods and services reach consumers after going through several stages, from production to consumption, as the tax is added at each stage. On the other hand, no explanation has been provided as to how people will benefit from this Social Security Contribution. Similarly, there is no adequate information as to how the one-off 25% tax will be imposed on identified persons who have a taxable income of over Rs. 2 billion, creating a doubt as to whether it would be collected as planned or if the proposal would be withdrawn or amended in the future. Some news articles report that the pressure is building on the Government to reconsider this proposal. Time will answer this question. The education and health sectors are key drives in the pursuit of achieving sustainable development. Therefore, governments are pressured throughout the world to spend more on both education and health. However, it is noticeable that the proportions of public expenditure allocated in the Budget 2022 for education and health are trivial, and a big question arises as to how the Government will achieve the much-needed human capital development. The Budget 2022 has simply ignored those aspects and relinquished its responsibilities. On the other hand, defence has the highest budget allocation, without any proper justification. The resource allocation in the Budget 2022 is indicative of where we are heading, which is alarming and worrisome. The Budget 2022 continues on the same path as the Government’s predecessors by blaming the past and decorating the budget with attractive slogans without substance. In addition to the impact of Covid-19, which created mayhem around the country, climate change challenges and other global issues will also have a significant impact on national budgets. However, the Budget 2022 has only touched the surface of those aspects. For example, the proposal on forest conservation indicates that Rs. 2 billion was allocated to “increase forest cover by 30%, protect catchment areas, remove invasive plants and increase forest cover with beneficial plants”. The practicality of these proposals needs to be debated. What matters are the objective resource allocations and actions of the Government with genuine commitments. But how could you expect such objectivity from a government that, in a way, promoted deforestation in lieu of economic prosperity? Smoke and mirrors  One of the real issues that can be highlighted is the pressure on the Government on financing the budget deficit. The gross borrowing requirement of Rs. 3,200 billion for 2022, which was disclosed in Annexure II of the Budget, indicates the consequences. Even though a government can borrow money from both local and external sources, the present situation of Sri Lanka makes it unlikely that the Government will be able to obtain new foreign loans from the market except through projects or multilateral or bilateral arrangements, since the country is doomed with downgrades by international rating agencies and deteriorating official foreign reserves (which stood at $ 2.2 billion at the end of October 2021). Hence, the Government will have to depend on local borrowing and, as a result, the local interest rate is likely to increase sooner or later. In turn, it will increase the debt burden of the Government and put pressure on debt servicing, which has already surpassed total government revenue. This tendency of increasing interest rates was seen at the recent Treasury bill and bond auctions. The Government may finance the deficit by issuing more Treasury bills to the Central Bank, which is generally known as excessive money printing. Excess money printing will eventually increase the level of inflation in the country with a possibility of a hyperinflation scenario unless corrective measures are taken. Some may argue that excessive money supply will not cause inflation, by referring to concepts like modern monetary theory. However, that is not practical, particularly for countries like Sri Lanka, which does not have a coherent plan to push the aggregate demand and production with effective resource utilisation. The ultimate consequence of the Budget 2022 is that it will fuel inflation and lead to the denial of subsidies and concessions to those who urgently need it. The Budget lacks the faithful representation of the figures presented. For example, the budget deficit of Rs. 1,628 billion was stated as 8.8% of gross domestic product (GDP). Backward calculations revealed that the expected GDP in 2022 would be around Rs. 18,500 billion. A comparison of official statistics of the Central Bank of Sri Lanka (CBSL) revealed that the GDP in 2020 stood at Rs. 14,973 billion and it was Rs. 7,800 billion at the end of the second quarter of 2021, at current market prices. If the same progress continues, the expected GDP for 2021 would be around Rs. 15,600 billion. Hence, the GDP growth in 2022 will be around 18.6% at current market prices. But the real GDP growth expected in 2022 is around 4-5%. It implies that a huge inflationary impact would be there in 2022, as the GDP is expected to be Rs. 18,500 billion. Furthermore, the Budget 2022 has not reviewed as to why the originally expected total government revenue of Rs. 2,029 billion for 2021 was reinstated to Rs. 1,561 billion. This is almost a 30% drop. These window dressing practices have been a salient feature of government statistics in the recent past. The Covid-19 pandemic is used as a scapegoat for any failure, and people are being fooled by disregarding real facts, information, and reasons. It is evident from the Budget how the Government is trying to deceive the people by diverting their attention elsewhere, as it could not provide tangible concessions, especially in a context where people were hit by increasing prices and health issues as well as income losses due to the Covid-19 pandemic. One good example for this was the curtailment of the fuel allowance given to ministers and government officials by five litres and telephone expenses of government institutions by 25%. There are a few questions to ask. How much money is going to be saved from this proposal? How would such actions help improve the economic or social development of the country? What is the rationale for doing this? This proposal has already turned out to be a joke. However, it is a fact that people are angry at government officials and politicians. Hence, decision-makers of the Budget may have thought that people would perceive this proposal as a good move. Designed in the interests of those in power I suspect that the Government allocated resources in the Budget 2022 so as to achieve its political motives. As people know that the real spending and government public finance mechanism operates differently to that which is specified in the Budget, they do not pay much attention to the budget allocations. However, there is a dire need for public discourse on the roles, responsibilities, and accountabilities of governments and politicians, especially on public spending, which directly leaves room for conflicts of interest. The ignorance of budgets by the public will create more leverage for elected agents to maximise their own interests at the expense of the public without much difficulty and resistance. Similarly, the Budget 2022 proposals carefully articulate a plan to sell the remaining state-owned enterprises on the arguments of inefficiency and burden. The Budget indicates that there are 300-odd state-owned enterprises and that governments had invested over Rs. 670 billion in those entities with an annual expenditure of Rs. 75 billion to maintain them. Since these institutions do not provide returns on investments as expected, it is more likely that the Government will come out with subsequent proposals to sell them off without assessing their economic significance, but rather by considering its ability to face the present economic crisis and gain some underhand benefits from selling them. Another big question that arises from the Budget 2022 is how a disintegrated budget of this nature could promote a production economy. How could economic prosperity and growth be achieved through five hubs to anchor economic development when all public properties were being sold to foreigners? In conclusion, I would like to mention that, if this type of budgetary approach and management continues, more people will be pushed into extreme poverty while only a few will enjoy prosperity, with social inequality exacerbated in the future. Hence, it is the need of the hour for the people to unite, irrespective of any political or other identities, and to work on a plan that will enrich society through a participatory budget that would utilise the resources of the country in a sustainable manner with appropriate technology that will bring prosperity to all. (The writer is a faculty member attached to the Department of Accounting, Faculty of Management Studies and Commerce, University of Sri Jayewardenepura, and the Head of the Economic Policy Committee of the National Intellectuals Organisation)    


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