Budget 2017 is elitist

By Rathindra Kuruwita and Umesh Moramudali-2016-11-21

The Budget 2017 was created by the elites for the elites, Jaffna based researcher, Ahilan Kadirgamar said stating that the trade and financial liberalization along with privatization propagated by this Budget will take the country towards financial doom.

?: What is your overall view of the Budget?

A: I am very concerned about this Budget because this is what you call an austerity Budget. When you implement austerity measures the role of the State is going to shrink. In other words the State will provide fewer services to the citizens, especially the services that are essential to the lower middle class and working classes.

One of the reasons for this is that the government has promised the IMF that it will reduce the fiscal deficit, or what we call the Budget deficit. This is the difference between the government expenditure and the government revenues. We went to the IMF in March this year because the Sri Lankan economy was in crisis. But the crisis was not necessarily caused by the Budget deficit; it was caused by another deficit, in our external account. In economics we talk about the twin deficits, one is the government's deficit and the other is the balance of payments – imports versus exports. So, our imports were much higher compared to our exports so we didn't have the foreign currency to pay for our imports that's why we have to go to the IMF.

IMF agreed to give us a US$ 1.5 billion loan and other donors like the World Bank and the ADB agreed to give us an additional US$ 600 million; together that is only about US$ 2.1 billion. Due to this infusion in June, the government in July was able to borrow another US $ 2 billion, so the reason for them to go with the IMF Agreement was also to borrow more money.
The IMF and World Bank believe that Budgets should be balanced at any cost. In the past economists believed that during times of economic crisis the government has to take loans to stimulate the economy as private businesses won't do so. During boom times the government should pay back those loans. Instead, we have been compelled to balance the Budget at any cost. However, another way of balancing a Budget is to increase revenues.

What is special about this Budget is that there is a reduction in expenditure. The total expenditure for 2016, allocated from the Budget, was Rs 2,787 billion it has been reduced to Rs 2,723 billion in 2017, so there is a decline of about Rs 64 billion. In Sri Lanka's history it is unprecedented. You never allocate less than the previous year, because every year there is inflation and there is economic growth. When you have an absolute decline of Rs 64 billion, in reality it is like slashing your expenditure by 10 per cent or even more, because you haven't accounted for growth or inflation. That is why we call this an austerity Budget. Unfortunately very few of our economists have identified this point.

Look at the education allocation. Last year, from the 2016 Budget, the government allocated 2.7 per cent of GDP for education. We applauded it because it indeed was a significant increase compared to the previous years.

When the allocation for education was announced, the Finance Minister, Ravi Karunanayake, declared that they allocated Rs 250 billion for the sector but when people looked at the figures carefully they found that the Minister has reached this number (Rs 250 billion) through an accounting gimmick. The real figure according to me was something around Rs 130 billion but still it was an improvement from previous years. But, during the 2017 Budget, Finance Minister Ravi Karunanayake said that the ministries in charge of education have spent only Rs 40 billion in the first nine months of 2016; because of that the Budget allocation for education for 2017 would be Rs 90 billion. But whose fault is that? Is it the fault of the people who had been demanding higher spending on education? I think the Minister of Education and the Minister of Finance can share the blame for that, they should have found a way to spend the allocation in a meaningful manner. The other question is, if the government spent only a fraction of the allocation for education in 2016, why wouldn't they do the same in 2017? How much of the Rs 90 billion, allocation will be spent?

?: The government believes that it can develop the country through increased financialization and liberalization. Various government leaders have repeated this, including the Prime Minister. What steps do you think the 2017 Budget has taken in this direction?

A: If you look at the plans of this government, you can identify three pillars of their economic policy.
Trade liberalization, for example through ETCA and proposed trade deals with China, Singapore and US. The government thinks we can develop the economy through opening up trade.

Financial liberalization through greater integration with global capital markets. For example, this is why they want to make the Port City a financial hub and through this Budget there are moves to financialize the economy in a serious manner.
Privatization, directly or through Public-Private Partnerships.

These are the measures through which the government plans to put Sri Lanka in an accelerated development path. But I believe that these steps will take us in a different and a horrific direction.

Greater income inequality, these measures will enrich the 1 per cent more, but the majority of the citizens will suffer. Even in their terms, I think it will be a disaster. I think the government won't mind an increase in inequality if the economy grows. But I would say even that will not happen. Trade liberalization at this moment is a really bad idea. The global economy is not doing well at all. In September this year the World Trade Organization made some important revelations. They said that trade is no longer outpacing economic growth as it used to. Trade has grown 1.5 times faster than the gross domestic product over the long term, and twice as fast when globalization picked up in the 1990s. This year trade will grow only 80 per cent as fast as the global economy, the WTO said, the first reversal of globalization since 2001 and only the second since 1982.

And the government wants to open up the economy now, at a time when no one wants to import and protectionists like Donald Trump are winning elections in the developed world. I have heard some economists say that trade liberalization will make us the gateway to Asia; I would say we will become the kitchen sink of Asia if we open up now. Everyone will come and dump their products into our market. Maybe our Prime Minister wants to help the world economy through trade liberalization, at the cost of Sri Lanka, but we are too small for even that to work out.

I am not for blindly opening up trade even in good times. I am not worried like the GMOA about foreigners flooding our country. Capital moves a lot freer than people and often with trade liberalization the bargaining power of the workers are weakened. People do not tolerate this forever, look at the US elections, the white working class helped the election of Trump. So their first pillar is bound to fall, having a devastating effect on us.

The second pillar is financial liberalization. Clearly they want to attract the global capital flows to Sri Lanka. We have seen this being tried for 40 years, in Sri Lanka and across the world. With financial liberalization we have seen an increase in inequality and frequency of financial crisis. Once you liberalize the financial sector, money can come in but it can also fly out fast. In fact the crisis in March was due to money going out of the country.

A lot of money that comes after financial liberalization goes into Finance, Insurance and Real Estate (FIRE). The global capital no longer comes and invests in factories but they get absorbed into FIRE sectors and most of these investments are speculative. They will come invest in real estate, create a bubble and make a quick buck. Not only the global elites but also the local elites will make a huge profit from this bubble. But when the bubble crashes, well then the ordinary Sri Lankans will have to pick up the pieces. We will have to bail out the local financial institutions.

The government has liberalized the banking sector and it is trying to liberalize and create a market for global insurance and pension funds. For example, the government introduced an insurance scheme for school children from the 2017 Budget and they will give subsidies to insurers for this. But how often do school children need these insurance policies? The insurance companies won't have to pay up at all. The government is just creating a huge market for global mutual and pension funds. As with trade liberalization, this makes easier for global capital to come, make a quick and significant profit and exit. Once again the 1 per cent will benefit but the rest will have to suffer.

The third pillar is privatization. As I said when they can't do it directly, it will be done indirectly through Public-Private Partnerships. I know that the government and the wonks try to market these partnerships as an elixir for everything but if you look at the experience from around the world we see that the public sector takes all the risk, the government gives subsidies and if things work out the private sector takes the profit through these partnerships. When things don't work out the people have to clean up the messes.

While it is true that privatization gives the government a quick and significant infusion of cash, we must remember that it is a onetime thing. The government can privatize an institution only once but what about the long run? The government likes to talk about corruption, so does the Opposition and they have established various institutions to investigate corruption but usually the biggest corruptions happen when you privatize. The State often sells institutions at a small price and often the private owner makes a profit from day one. This is a lot worse than the Treasury Bond scam, only it is legal.

?: What about the attack on labour? Since its election the government has been trying to change labour laws and if they are successful the bargaining power and the security of workers will be in jeopardy?

A: Indeed, in a way it is the fourth pillar of the government's policy. They want to attack labour through reforms to the laws. The government wants to allow the markets to determine important aspects such as job security and the number of hours that a worker has to put in. Our Labour Department already does not take any action against violations of the labour laws. The government wants to boost 'investor confidence' at any cost.

?: Infrastructure development is important to develop the economy; do you think the government has allocated adequate funds for this in the Budget 2017?

A: Infrastructure is important, but then again it depends on what kind of infrastructure we are talking about. I mean we need to upgrade our infrastructure related to health and education. What matters is identifying what people need and having a proper plan. We need to focus on infrastructure that promotes meaningful employment. Just building highways across the country will not be enough; we need to look at other aspects that make these highways useful. Look at the Southern Expressway; it is half empty all the time.

This government seems to believe that if they build the highways and power plants, the markets will take care of the rest. This is what the donors like the World Bank, the IMF and the ADB also promote. These agencies are also behind formulating our economic policy and most of our economists and think tanks also believe in this. Most of our economists and think tanks are in the payroll of these international agencies, so obviously they will support this government's economic policies. The public is not consulted or are aware of what is going on but ultimately it is the public who will have to suffer when we hit a crisis.

?: This government is big on reconciliation and economic development is also important for reconciliation. Especially, considering the economic woes faced by the Jaffna farmers played a role in the insurrection. How has the government attempted to address this, in this year's Budget?

A: Last year the government allocated Rs 14 billion for the Ministry of Resettlement and built 10, 000 houses. This actually benefitted the people and stimulated the economy because people in the area were able to work in the construction of these houses. In addition to these houses, the government also proposed to build an additional 65,000 houses and they tried to give the contract to a multinational company.

While the Ministry of Resettlement builds a house for Rs 800, 000, this multinational company proposed to build houses, with the same specifications, at Rs. 2 million each. And a lot of people were opposed to granting the project to the multinational company, for obvious reasons, and now the housing project has not been carried out.
Prime Minister once promised to convene a donor conference this year to seek funds for Northern developments but nothing has happened. The government keeps on making promises and keeps on breaking them, how can they win people over like this?
This year's Budget has nothing for the North and the East. I have been very critical of the Tamil National Alliance (TNA) and the Northern Provincial Council because they have done nothing for the people. But that is not an excuse for the government to let down the people.