Budget 2015: Financial Profligacy And A Gamble With The Economy

By R.M.B Senanayake -November 1, 2014 

R.M.B. Senanayake

The present budget for 2015 is a populist exercise which ignores the cannons of macro-economic prudence. It plans to disburse billions of Rupees by way of salary increases to public servants and pensioners and giveaways to various sectors and groups of the public by reductions of indirect taxes and charges for services such as the charges for water and electricity despite the providers not covering their costs including replacement provisions. The VAT rate is reduced to 11% from 12%.The charge for water is reduced by 10% for the first 25 units and there is a reduction of 15% in electricity tariff to industries. Duty on the import of vehicles has also been reduced

Budget Summary

Total Expenditure is to increase from this year’s Rs 1,922 billion to Rs 2,210 billion – an increase of 15%. Total Recurrent Expenditure is to increase from this year’s Rs 1,386 billion to Rs1, 525 billion- an increase of 12%. Total Revenue & Grants will increase from Rs 1,422 billion to Rs 1,689 billion. A Revenue or Current Account surplus of Rs 129 billion is shown although we have never had a Revenue Surplus for the last several years- a violation of the Golden Rule of budgeting which allows  a deficit only for Investment expenditure. The Primary Account which shows whether debt repayments are from tax Revenue or from more borrowings shows a deficit of Rs 96 billion. But this conceals the fact that borrowing for debt repayments are outside the budget- a wrong practice introduced by former Finance Minister Ronnie De Mel. Previously the practice was to transfer funds in the annual budget to a Sinking Fund which accumulated would provide the funds for debt repayment. This provision was removed to play down the budget deficit. But as pointed out by MP Vijitha Herath it understates the budget deficit as a factor in the macro-economic balance. He has stated that the budget deficit proper is Rs 1300 billion. For Economic analysis the budget must include all government expenditure and income and debt repayment is an expenditure properly charged to the budget. (Expenditure items which are permitted by special laws may not require parliamentary approval but that is for legal purposes and not for economic analysis). The budget deficit must equal the total government borrowing to fund the budget. The total borrowing requirement is Rs 521 billion after deducting the Debt Repayment of Rs 202 billion. To ascertain the impact on the macro-economic balance in the economy it should be added instead and the deficit becomes Rs 521 billion plus Rs 202 billion or Rs 722 billion. The local capital market cannot provide the necessary borrowings and Rs 261 billion has been budgeted from foreign sources including foreign commercial borrowings of Rs 195 billion.                                                            Read More