Another budget day has come and gone. President Mahinda Rajapaksa may be given full marks for his presentation, which was short and devoid of theatrics and invectives which often characterise meandering budget speeches. However, it is doubtful whether he deserves full marks for the substance. Suffice it to say the budget didn`t leave either the detractors of the government or its ardent supporters happy. For, the critics were left without much ammunition and the true believers of the Mahinda Chinthanaya didn`t have much to crow about. However, for the public servants who hoped for a thumping pay hike, the budget came as a disappointment. They were given only a marginal increase in the cost of living allowance. Farmers and local industrialists were given some benefits or at least the government didn`t take away the concessions that it had given them earlier on.
The UNP and the JVP are sure to capitalise on the absence of a substantial pay hike for the government servants.
The government may claim as an achievement the economic growth of 7.7 percent for the last year but during the first six months of this year the economy has expanded by only 6.3 percent, though the projected growth rate is 7.2 percent. The unemployment rate has come down from 8.3 percent to 6.2 percent. Foreign reserves are said to have risen to $ 3,200 million. Foreign income has increased by 10-12 percent with a healthy growth in most sectors.
The decrease in the budget deficit from 8.2 per cent to 7.2 per cent is a positive sign. Public debt, too, is expected to come down to 90 per cent from 105 per cent (in 2004). The government revenue has increased to 17 per cent of the GDP, or Rs. 600 billion, which is said to be the highest in seven years. What is most striking in this regard is the sharp increase in the income tax revenue from Rs. 41 billion to Rs. 112 billion. Although there is still room for improvement, this kind of increase in revenue from direct taxes is welcome as its enables the government to depend less on indirect taxes which cause inflation. This increase may have been one of the reasons for the government`s decision to reduce VAT on petrol from 15 per cent to 5 per cent and its willingness to consider the removal of Excise Duty on petrol. However, subsidised fuel for three wheelers (with meters) doesn`t make any economic sense?it may make political sense to the government, given the sheer number of people dependent on those vehicles. The kerosene subsidy for the poor without electricity is also likely to be abused unless it is properly managed.
The government will draw flak from the peace lobby over the massive jump in defence expenditure from Rs. 63 billion to Rs. 117 billion. However, the government has sought to counter such criticism in advance: It says, `This expenditure was directed to strengthen the infrastructure facilities of security forces and there is an increased understanding that strengthening national security is an essential investment for long term development.` It also points out that the defence expenditure is still 3.5 per cent of the GDP while in many other countries it is well over 5 per cent.
The Business for Peace Alliance has already reacted to the sharp increase in defence expenditure. It said yesterday afternoon: `The increase in defence expenditure by 20% to USD 1.45 billion casts clouds on the hope for peace. This also implies that there will be cutbacks in large-scale investment projects. With the rate of inflation already at an unbearable level, such increased expenditure on non-constructive sectors will have a negative impact on the economy. This may also retard the progress of the proposed development projects. It has been pointed out that the current conflict reduces the economic growth by 2% annually.`
The question is how a country can cut down on defence expenditure vis-à-vis a determined effort by a formidable enemy to dismember it militarily, having scuttled all the peace processes in the past. It is not only war that takes a heavy toll on the economy. Corruption also does. As US Ambassador Robert Blake said recently in Colombo quoting a study, corruption has brought down the economic growth by two percentage points. So, all it takes for the government to compensate for the economic loss due to essential defence expenditure is to declare war on waste and corruption.
That the government is fully conscious of the adverse political fallout of the rising cost of living is manifest in its proposal to devise an efficient institutional mechanism to counter the private sector bent on fleecing consumers. The President pledged to set up a State Trading Wholesale Establishment, a company owned by the state, to streamline supplies to stabilise prices, to import essential commodities when required and to maintain buffer stocks. Now the government is talking! Better late than never there is no other way out. The government admits that its experiment with tax reductions on essential commodities by way of giving relief to the people has come a cropper as `the impact of such tax concessions did not seep down to consumers other than through Lak Sathosa outlets`.
Besides such measures, the government will have to strengthen the rupee if the prices of imports are to be kept at affordable levels. It seems to have pinned much hope on its 500-million-dollar loan which, it claims, has had the intended results, though one may reckon it is too early to draw such conclusions. The bond issue, it says, `has reduced domestic borrowing at an annual interest rate of around 17 per cent` and helped strengthen the exchange rate. Whether that loan will be properly utilised or go down the gurgler remains to be seen.
The government has been careful not to impose tax increases on essential goods. But, it has, among other things, extended the 10-per-cent tax levied on mobile phones to wireless phones. Taxes on motor vehicles and liquor, too, have gone up. An Environment Conservation Levy?apparently the JHU`s brainchild?will be slapped on every household with a vehicle and electricity connection, at the rate of Rs. 20 per month. It may look minuscule but the problem with taxes is that they are like politicians entering Parliament. They become bulky in no time.
The President may have passed the theory part of the budget but the practical part is yet to come and how he will fare remains to be seen. The proof of the pudding, they say, is in the eating.
This time round, the budget is more than an economic challenge for him. It will be a crucial political battle for him with the Rathu Sahodarayas and the UNP threatening to vote against it.
Defence expenditure, as well as his vow to defeat terrorism, is a carrot of sorts he has sought to hold before his troublesome political partner, the JVP, pulling in the opposite direction.
Will the Rathu Sahodarayas fall for it and will the President be home and dry?