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Everybody wants the support of the government to have a good life. On one
hand, economists recommend the government to fix all macroeconomic ills
whether it is general inflation or high cost of living or low economic growth or
balance of payment (BOP) deficit or currency depreciation or unemployment
or household income disparity or elephant attacks (or human attacks on
elephants) or recovery from wars or disasters (floods, droughts, earthquakes)
or social backwardness. On the other hand, they all find the government as
the scapegoat for all those ills, social and economic. Everything we tell the
government to do or what it does will end up in the national budget, mostly as
expenditure and debt, as things we propose for income are virtually rare.
In economics, the budget is the top macroeconomic policy or the fiscal policy
implemented to influence the aggregate demand (total spending on
consumption and investments) in the economy for promoting growth,
employment, resource utilization, etc., and setting the socio-economic policy of
the country. The other macroeconomic policy assigned to the Central Bank
(CB) is the monetary policy to regulate the monetary side of the economy for
same economic objectives, generally independent of the government, but with
close coordination to avoid policy conflicts.
* Information Problem
Its quality depends on the information system at micro level on all activities,
expenses, incomes, debt profile, operational targets, etc. If budget estimates
are not based on reliable set of such information, the estimates will be nothing
but adding some hypothetical changes to existing budget numbers. Generally,
people over-estimate expenses and under-estimate income or vice versa,
depending on the motives. In general, actual outcome is worse than the budget
as proved by several supplementary budgets and revised budgets. Therefore,
budget numbers could be highly misrepresentative unless information
reporting systems are maintained, audited and verified for reliability.
* Budget Structure
Several concepts are used to assess direct financial plight of the budget. The
current account, primary account and overall budget are used to understand
the plight of the budget gap. The current account is the gap between the
income (without proceeds of grants) and recurrent expenses (without
investment-related expenses) which shows whether the income is adequate to
finance routine expenses such as salaries and maintenance. Primary account
which is the gap between the total receipts (income and grants) and total
expenses excluding interest payments on debt stock shows interest cost
excluded- budget gap. When the overall budget is a big gap, above sub-gaps
are meaningless.
All income, expenses and borrowing have beneficial effects as well as adverse
effects to various categories of the public. What is underlying the budget is the
wider public service that arouses such effects. Public service broadly covers
all government operations such as policies, business stimuluses, regulations,
business enterprises, infrastructure facilities and social safety net. Therefore,
for making a reasonably objective and impartial impact assessment, we need a
list of all public services, their net cash flows, respective service deliverables,
targets set for respective deliverables at the time of making budget estimates
and performance status on such targets within the budget year or a
reasonably long period given to cover lactation periods of budget items and
policies.
* Generation of Employment
The state supplied infrastructure is the key for the economy. Road network
maintained by the government to support the economy is nearly 32,800 kms.
The railway’s operated service of 11.7 mn kms facilitated136mnof passenger
journeys at a subsidy of Rs. 7.6 bn. Paddy area cultivated on state irrigation
service is nearly 792,000 hectares or 80% of total paddy area which produces
nearly 4.4 million MT of paddy with a yield of nearly 4,300 kg per hectare for
self-sufficiency in rice being the staple food. The irrigated area for other field
crops under Mahaweli scheme is nearly 24,000 hectares along with the paddy
area constituting 12% of total paddy area in the country. If not for such
irrigation, the country would not have a domestic agriculture sector by now.
The state electricity capacity is nearly 2,890 MW or 70% of the total capacity
in the country. The forest cover is maintained at nearly 1.9 million hectares to
keep the climate and environment balance.
Human resource side, state health and education provided at low price in
increasing volumes decide the quality of human resource base in the country.
State student population reached 4.2 mn supported by state employment in
education rising to 258,000 while general education expenditure vote rose to
Rs. 19,460 per student. These are good performance numbers at any standard.
The quality of the education and employability of students are different
technical subjects. As regards health service, treatment for 60 mn patients
(nearly three times of each person in population) at a low annual price of Rs.
3,300 per patient supported by health employment of 64,600 is a significant
performance. Good health and education are unique returns to any country.
The cost of living and thereby overall inflation is kept low by administered
prices and subsidized prices and costs. Many commodities and services in the
household consumer basket are at administratively controlled prices with
virtually free health and education services. Various production subsidies
keep the cost at low. If not for such cost of living support, the country’s
inflation and wage demands would be greater and affect adversely the export
competitiveness and economic growth. The budget can control the inflation
overnight within the broader macroeconomic policy as against the intellectual
model-based monetary policy of the CB with unknown long-lags.
The government being the guardian of the society provides numerous services
to keep the social balance and justice under check. The basic role of
governments is to provide a stable environment for the economy. Everybody
knows how civil wars and societal insecurity would produce economic and
social catastrophes. The government spends 29% of its spending or 5.7% of
GDP or Rs. 35,280 per person on civil administration and defense to prevent
such catastrophes. Nearly 325,900 births and 139,400 deaths with post-
mortems were registered to keep track of the population care.
Whether debt stock is too high or economically and socially justifiable has to
be assessed on different economic criteria (See my article on public debt in
Daily News 26.09.2018) where just the debt number 77% or 100% or 200% of
GDP does not have any economic meaning, given its economic role in debt-
financed-macroeconomies.
This has to be assessed in the context whether the private sector or the market
mechanism is ready to govern the economy and society and provide more
productive economic environment. The poor service quality is a problem of
the state bureaucracy or those who manage public institutions. If the
management of public institutions is assigned as the return to those who
undertake political funding or those with permanent foot-prints aboard or
spending most part of the year in foreign travels at public funds while leaving
out best talents created by the public education, nobody can expect a quality
public service for the country.
It is the fundamental problem of low price charged on public service than the
cost and evasion of paying the price (tax) by those who are due. If the price or
tax rate is 12% to 14% of GDP while incurring a cost of 17% to 20% of GDP,
the resulting cash flow deficit of 5% to 6% of GDP is annual rate of debt add-
on. The leakage of budget/public funds from both the source (collection) and
use (spending) is well known. Although the Inland Revenue estimates tax in
default as Rs. 197 bn. as at end of 2017, professional lawyers and accountants
know well that it is much more due to creative accounting techniques and
legal interpretation of business transactions subject to tax due to confusing tax
circulars being a problem world over.
A CB’s Senior Deputy Governor commented at a Parliamentary Finance
Committee in July 2017, when discussing means to raise tax collection, that
tax revenue cannot be raised unless national income increases. The Committee
chair being a good practical economist responded that the matter was for
improvement of revenue collection on exiting national income. Although I, as
another Deputy Governor at that time, calcified the urgent need for a system
to prevent colossal evasion/robbery of stamp duties on land transactions, at
least by making aware the public of the due procedure for payment of stamp
duties and deed registrations. I am sure there is capable parliamentarians and
public servants who can fix this revenue problem though excessively painful.
In addition, the budget administrators do not have a macroeconomic policy
framework for the budget and, therefore, ad-hoc decisions taken to favour
segments of the public focusing on vote-base targets dominate the budget.
The eventual economic impact of both policies has not been quantified
separately or in aggregate in the CB’s macroeconomic models as they can’t
detect separately the lagged effects of policies, supply side changes and other
external shocks to the economy. Unlike monetary policy for regulation of
overall expansion of money supply and credit to cause an indirect impact on
the aggregate demand, the fiscal policy has sectoral and fast effects as
spending is made fast on identified activities. For example, recurrent expense,
i.e., 75% of total fiscal spending, takes no time to push the aggregate demand.
In this context, if fiscal expansion had been cut-down in the recent past as
some economists propose, the economy could be suffering from the protracted
recession by now, given the fact that the growth has been continuously low
(3%-5%)even with such fiscal expansion. This indicates that the private sector
is still not able to generate a level of spending (consumption and investments)
to boost the economy even with prevailing level of fiscal spending. As the
demand/spending has to come from credit, the credit delivery mechanism
(intermediation and private credit markets) has not developed to create a flow
of credit friendly to business environment. Therefore, the reduction of fiscal
front is not feasible without confronting a recession or slower growth and
employment.
Some argue to cut the fiscal front to fix the current problem of excessive
currency depreciation on the basis of theoretical macroeconomic calculation
that budget deficit always accompanies a current account deficit in the BOP
and/or private net savings (savings less investments) which are the sources to
finance the budget deficit. The two-handed economists know that the economy
will confront a severe recession and wide market imbalances if the fiscal front
is cut in this argument.
I recommend that the national budget officers have a list of public services,
their net cash flows and service targets achieved to justify the economics of the
budget professionally and counter-critics on the budget, at least to be fair by
those critics. The Auditor General and internal audits will verify the
information reporting/number crunching systems underlying the budget for
good governance of statistics.
These are not rocket sciences but the use of common sense objectively in the
national interest. Budget officers, official financial advisers and debt
managers to the government can get spiced up to make quality decisions for
national economic management if they listen, at no cost, to veteran business
leaders such as Dhammika Perera, Soli Captain, Jeff Bezos, Warren Buffet,
Jac Ma, Satya Nadella and many others how they resolve business
problems/bottlenecks and innovate businesses without any complaints to the
public.