MoF misled Parliament by providing bogus figures

Sumanthiran’s Committee flays Mangala’s Ministry

By C. A. Chandraprema-May 13, 2019, 6:58 pm 

The Parliamentary Committee on Public Finance in its report on the fiscal, financial and economic assumptions of the Budget for 2019, has issued a damning indictment of the Ministry of Finance stating that the MoF had deliberately misled Parliament. Due to doubts about the validity of the figures provided by the Ministry of Finance, the Committee on Public Finance has requested the Central Bank to formally assess the adequacy and validity of the assumptions framework of the current budget and to report to Parliament. The Treasury hitherto was a sacrosanct institution. The Treasury Secretary was the prima donna of the public service - in theory one among equals holding the position of ministry secretary but in practice standing above them all.

Today, this sacrosanct institution has had to stand before the Central Bank and be examined. The Central Bank is also no doubt a centre of excellence and technical competence but then the MoF is supposed to be the absolute bedrock of the country on which everything else is built. Now that image has been seriously called into question. The Parliamentary Committee on Public Finance is made up of the following Members of Parliament: M. A. Sumanthiran (Chairman), Susil Premajayantha, Bandula Gunawardana, Keheliya Rambukwella, Susantha Punchinilame, Bimal Rathnayake, Lakshman Wijemanne, Mylvaganam Thilakarajah, Mayantha Dissanayake, Mujibur Rahuman, Wijepala Hettiarachchi, Ashu Marasinghe, S. M. Mohamed Ismail.

One of the tasks of the Committee on Public Finance (CoPF) is to assess the fiscal, financial and economic assumptions used as bases in arriving at the budget estimates. Examined herein is the macro-economic framework relating to debt management, inflation, interest rates, exchange rates, fiscal deficits, and GDP growth. The CoPF observed that in past years too, many approved budget proposals have later been shelved or significantly altered, because the estimates and assumptions upon which the proposal was built was later found to have been defective and that such course corrections are costly, and are in essence failures of public finance management. The CoPF identified some of the fiscal measures in which the revenue or expenditure consequences are either undisclosed or obfuscated and explained that Parliament is not only provided with too little information, but is also substantially misled by the nature of information that is provided.

Going up or down?

One example given by the CoPF is the manner in which the revenues from the Betting & Gaming Levy are reported in the budget which led Parliament to be mislead on the fiscal consequences of the policy change. The ambiguous term ‘revised’ is consistently used while failing to specify that some revisions are tax increases, and others tax decreases.

The Budget Speech announced the revision of the license fee of casinos to Rs. 400 million per annum in a situation where the present rate was Rs. 200 million. This was a tax increase. A revision of the Betting and Gaming Levy on Rudjino games to Rs. 1,000,000 per annum was announced in a situation where the present levy was Rs. 200 million per annum - which represents a drastic tax reduction. The casino entrance fee was revised to USD 50 per person, in a situation where the present entrance fee was USD 100 per person the revision thus representing a halving of the existing tax. But due to the use of the ambiguous word ‘revision’ Parliament had no way of knowing whether the tax was going up or down. Measures that reduce collectable revenue, are presented to Parliament as measures that will achieve precisely the opposite.

The CoPF goes on to state that the way the Budget is presented is so vague that reductions in the Levy are presented as an increase and then Parliament is then misled even more by the Budget Estimates that present the consequence of these reductions as revenue enhancing rather than revenue decreasing measures! The Committee has pointed out how the reduction in the Betting and Gaming Levy charged from Rujino centres from 200 million to Rs. one million has been presented as an increase of Rs. 10 million in tax revenue. There are four casinos and ten Rudjino centres and the Rs. one million tax has been presented as an estimated increase of Rs. 10 million in the year 2019 instead of presenting it as a revenue loss (of Rs. 1,990 million) in 2019.

Likewise the reduction in the present entrance fee of USD 100 to USD 50 has been presented as an increase of Rs. 980 million in the Budget Estimates instead of presenting it as a halving of the present tax. The committee observed that a possible explanation for this discrepancy, is that due to the failure to collect these taxes imposed by previous Budgets, even implementing a reduced tax would result in an increase in revenue, if collected! The Committee observed that in such cases, the matter should be accurately, clearly and honestly reported to Parliament as measures that rectify the failure to collect taxes.

The Committee held that Parliament has a duty to investigate and recommend necessary action with regard to officials responsible for failing to collect these taxes over several years, resulting in serious loss of revenue and also that Parliament should be informed about the legal implications of the revisions to the Betting and Gaming Levy and be assured that the new measures will not serve to provide an undisclosed amnesty or reduction in unpaid taxes, that should be collected. If some taxes that are imposed by the Budget are never actually collected and are reduced in the following year’s budget thus giving the defaulters an unofficial amnesty, that could easily be construed as an organised racket.

Fluffing up revenue figures

The CoPF observed that the Budget Estimates fail to match with past data and with the fiscal, financial and economic assumptions provided. For example, revenue from the Pay As You Earn (PAYE) tax is expected to grow from an estimated Rs. 41 billion in 2018 to Rs. 65 billion, in 2019 – an increase of 57%. The Committee noted that according to the Department of Census and Statistics’ Household Income and Expenditure Survey for 2016, less than 5% of income receivers have a salary of Rs. 100,000 or above which is the minimum threshold for the application of PAYE tax. The reasoning behind the high increase in the collection of PAYE tax is that the full implementation of the new Inland Revenue Act involving rate changes, will contribute to increased revenue.

This is because the new Act, especially for PAYE tax, was applicable for only 8 months of 2018, while it will apply to the full 12 months of 2019. In 2018, when the upward revision of the PAYE tax was implemented for 8 months, the PAYE revenue increased by 25.7%. After reducing the nominal growth impact, the revenue increase of 8 months comes down to less than 20%. Presently, the growth estimated, above and beyond the nominal growth impact, is almost 50%. However, based on the reasoning provided, it should be below 10%. Therefore, there is a serious mismatch between the reasoning provided, and the growth that is estimated.

The CoPF stated that it is important to protect decisions of Parliament against being misled in the management of public finance, which is its constitutional function and responsibility. The serious mismatch in the estimation, as set out above, should be addressed as a matter of priority. Unless new information can be provided to the Committee and Parliament can credibly addresses the discrepancy in calculation and reasoning highlighted above, the final budget estimates should be revised downwards to address this discrepancy.

Revenue from the Nation Building Tax is expected to grow by 27.5% from an estimated Rs. 71 billion in 2018 to Rs. 91 billion, in 2019. There is a mismatch between the Budget Speech and the Budget estimates with regard to the expected increase in revenue due to revisions in the NBT tax. The budget speech mentions a positive impact of Rs. 5 billion in revenue gain from NBT changes. However, the budget estimates envisages a further Rs. 13.9 billion increase in revenue from NBT during 2019. This increase does not match with the information and assumptions provided with regard to changes in policy and resulting gain and loss in revenue.

The average annual growth of the NBT was only 12.3% from 2013-2017, as against the 27.5% expected in 2019. Analysis of past estimates shows that this is another category of revenue that has been constantly over-estimated. Actual revenue has fallen short by as much as 26.3% against estimates on average over a period of 5 years. In 2018, the NBT was overestimated by 18.0%, despite a substantial expansion in the application of NBT (such as by removing exemptions on liquor). As in the case of VAT and PAYE tax, there is a pattern of the estimated revenue from NBT being significantly overstated to Parliament at the time of the budget.

Central Bank to provide real picture

In the context of missing information on gain and loss implications, noting the historical trend for over-estimation, the Committee recommends, on prudential grounds, that the final budget estimates for NBT collection in 2019 be limited to an increase that can be justified and is credible.

The CoPF stated that overstating revenue estimates can lead the Parliament to agree on higher expenditure levels, which then, when revenue does not meet expectations, leads to higher budget deficits, higher debt, higher interest, and finally a problem of sustainability of public finance. Therefore this problem of over-estimation requires special vigilance, as it seems to be a systematic feature of budget information provided to Parliament, and over the years this has led Parliament to agree to spending proposals that have resulted in the country being heavily indebted and facing downgrades in its international risk status with regard to ability to service the growing debt.

The real GDP growth rate projections differ between published and unpublished documents. While the published Budget Speech states that this is projected to be 3.5% in 2019, in the same week, the MoF, in unpublished documents, represented to the Committee, that in formulating the budget, the number used for GDP growth projections was 4%. Because of the very large impact of the assumptions framework in all of the estimates that are provided for the budget, the CoPF, which has the mandate to report on the assumptions framework, requested the MoF to provide the underlying sources for the assumptions selected. The MoF represented verbally that they depend on third party assessments, such as the Central Bank of Sri Lanka. However, it has not been able to confirm in writing the sources or bases for the assumptions framework.

This creates a concern about the due diligence and professionalism, that underlies the assumptions framework on which all the Budget Estimates depend. A historical analysis of the Budget also shows that the medium-term assumptions frameworks have been significantly off the mark, and generally in a direction that painted an overly positive outlook for the future, which has the effect of misleading Parliament about the consequences of present budgetary decisions.

It is dangerous for public finance management, if the assumptions framework that underlies all aspects of the budget estimates, is selected in too cavalier a manner, without adequate due diligence and responsibility. Since the MoF has not been able to justify its assumptions framework, the CoPF invited Central Bank to formally assess and confirm to Parliament the adequacy and validity of the assumptions framework that has been tabled for the current budget.

(To be continued tomorrow)