Submissions on the PPBL discussions on Fiscal Policy held on 22nd Aug ‘13 By Angelo M Patrick 1. Fiscal deficit, whatever the quantum may be or whatever its percentage to GDP may be, is a deterrent to the development of the country. Deficit can be funded through three sources, viz: • Domestic borrowing • Overseas borrowing • Printing money Each one of the above has its drawbacks. Domestic borrowing by the Government in the quantity it is bound to borrow, will push interest rates up and crowd out the Private sector in search of debt fiancé resulting in their growth retardation combined with the higher cost of finance. Overseas borrowing, whilst not likely to always materialize, will place an added burden on the Balance of Payment through incremental debt service. Hence a wider BOP deficit will place further pressure on the Rupee. Overseas loans are no longer available at concessionary rates as Sri Lanka has moved up from the status of lesser developed economy. Printing money would naturally lead to Inflation. It is obvious from the above that a Fiscal deficit has a debilitating effect on the whole economy. Priding ourselves in saying the deficit has declined from 115% of GDP to 85% of GDP amounts to only fooling ourselves. 2. The inputs required for the computation of Fiscal Deficit is Revenue and Expenditure (Current and Capital). Obviously we need an increase in Revenue and a decrease in Expenditure to eliminate or at the least contain the deficit. A look at the Current expenditure reveals that a near 70% of this is towards Public Sector salaries and Interest payments (local and foreign). The balance 30% is on Defense, Purchase and Subsidies. Can Salaries on Public sector be curtailed ?? – this is very political. We cannot get behind Interest payments. Can the Subsidies be reduced ?? – this again is Political. 3. Government Revenue is almost entirely from Taxation in many forms – Direct, Indirect, Trade taxes etc. If the Government should meet at least its Current expenditure it should raise Revenue to that extent. Whilst our Expenditure to GDP shows a marginal decline as a %, Revenue on the other side shows a dramatic decline. Tax Revenue has declined from 23% to 12% of GDP. The solution to the problem is not to increase tax rates, which would in turn deter private sector productivity and Capital formation. Low rates of taxation certainly gives a stimulus to the economy. It is well known that there is wide spread tax evasion. We require a strong Tax Administration to collect the taxes due and to widen the tax base to bring into the net the non payers. A scheme of Incentivisation and Penalising should be implemented, both of which should be sufficiently strong to bring in the desired results. 4. Capital expenditure should come from the Current account surplus where the Revenue exceeds the Current expenditure. Such Capital expenditure should be prioritised in terms of need of the economy and the Return to Society in Social and Financial terms. It is such strategic and prudent investments by the Government that lends credibility to its governance and incentivises the payment of taxes by society. Politicised forms of expenditure discourage tax revenue, which in turn will cripple the Fiscal budget. 5. The ideal situation is to have a Balanced Budget where the Revenue equates the Current and Capital Expenditure, which is the rule in the United States. Over the years the sins of Politicisation of Budgets catches up and Budgets are bound to be in a deficit phase, but here again it is best to keep the deficits under control and at a low ratio to the GDP as, when hard times are upon the country, the Government would be in a position to borrow to give the necessary stimulus for economic recovery. A case in point is Mozzambique who brought down their Budget deficit from 131% to 42%, thereby opening up space for Counter Cyclical Fiscal stimulus. They were able to stimulate the economy in a recession by increasing Government expenditure through borrowing as their was sufficient Fiscal Gap in the system. Such borrowings could be from the captive sources of EPF and ETF on long term bonds thereby keeping the interest rates down.
Posted on: Mon, 26 Aug 2013 10:28:01 +0000
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