DiscussionDocument

PoliticalEconomy
BudgetDeficit,GovernmentRevenue&Expenditure:Issuesandconcerns

CourtesyofOneTextInitiative Research&Development

Abstract There is a close intertwining between the political agendas of successive governments, Sri LankanStateFiscalPolicy,theideologybehindSriLankaseconomicmarketanditspractical implementation. Although Sri Lanka started off on a socialistic welfare and development based model from the 1950s to the mid 1970s the Neo Liberal school of thought has dominatedtheSriLankanpoliticaleconomyfromtheLate1970sonwards.Hence,whatwe haveinSriLankatodayisaconfusingmixedsystemsocialistinpoliticalappearancebutneo liberalisoperation.ThishasaffectedSriLankanStatePolicyinaadversemanner.Itisthis affect that needs to be openly and more inclusively discussed. In this discussion the most criticalareaweneedtolookintoisSriLankasbudgetdeficit.Whereisitcomingfromand why is it there? This is intricately linked to the concept of accountability in the Budget Execution process in Sri Lanka. In what manner and through what mechanisms is the Government held accountable for the Budget it presents? Does existing law address this? Does parliamentary procedure for Budget approval address this? Do citizens have the authority to address this? These are the serious questions that need to be addressed. It is alsopertinentforustorethinkwhetherFDIsareagoodideaforanemergingeconomyto depend upon as external capital for development and growth? Furthermore, it is also a question about expectations and targets. How realistic are the Governments macro economictargetsandcanSriLankaactuallyachievethesetargets?

ADefinitionforthePoliticalEconomyofSriLanka Any study of the Political Economy will have to examine how political institutions, the political environment and the economic system influence each other. Our own analysis is based on the following knowledge frameworks [epistemological]1 on political economic thought; The association between politics and economics through the interaction of social, political and economic forces through a historical time period: Economies do not operateinsocial,culturalandhistoricalvacuums.Thepossibilitiesforadjustmentor change within an economic system, particularly during a given short period are conditionedbywhathasbeeninheritedfromthepast. The significance of political power in determining socioeconomic phenomena and the existence of conflict between different interest groups: Property relationships and institutions are significant. The behavior of an economic system reflects the deliberate exercise of power not only individualistically but by a broad class of peopleinresponsetoparticularsituations. The theory of the state as an influential force which is as effective in ordering the economic system as the market: Control of the market is more significant than being controlled by the market. The government is not external to the economic systembutanintegralpartofthatsystem. Political economy examines interconnections among states, communities and individuals breaking the barrier which casts doubt upon a simple and rigid distinctionbetweenthedomesticandtheinternational2. Whilethisexplainsthetheoreticalunderpinningsfromwhichwebaseouranalysisitmust beacknowledgedthattherearemanydifferentdimensionsinSriLankaspoliticaleconomy. Itisacomplexandelaboratesystemwhichmustbeexaminedfromthehistoricalcontextin
1 Epistemology: In this article refers to frameworks and parameters of certain knowledge areas which can be defined into examining (a) what is knowledge, (b) how is knowledge acquired and (c) how do we know what we know. 2 Prof.W.D.Lakshman(2010)PoliticalEconomyofTaxationandTaxReformsTaxOration,2010

whichitevolved..Hencethefollowingsectionwillprovideanoverallscopeofthepolitical economycontextinSriLankasinceindependence. TheHistoricalPoliticalEconomyContextinSriLanka: Policy Reforms in postindependent Sri Lanka: Sri Lanka had inwardlooking and state interventionist policies in the 1950s, 1960s, and part of the 1970s. During this period, the Government established public enterprises, nationalized private enterprises, and created statemonopolies.Bythemid1970s,SriLankahadbecomeastatedominatedeconomy.It had lossmaking stateowned enterprises (SoEs) overwhelmed with overstaffing, mismanagement,andpervasivegovernmentinterventions.Overmorethantwodecades,Sri Lanka had witnessed a series of economic policy shifts, largely shaped by changes in developmentthinkingandthepoliticaleconomyofdecisionmaking. Major policy reforms began in late 1970s: Macroeconomic stabilization, economic liberalization, private sector development, financial sector reform, and fiscal management reform have been the major pillars of policy reforms. In the late 1970s, policy reforms occurredaspartialreformsintradeliberalization,associatedchangestotheexchangerate regime, and subsidy removal3. A decade later, further reforms commenced and turned to privatization, labor market liberalization, the redesign of social security, and propoor growthinitiativestoreducepoverty. PolicyreformsinSriLankatendedtofollowswingsinthepoliticalpendulum.Twomajor politicalpartieshavealternatelygovernedthecountry:(i)theUnitedNationalParty(UNP), and(ii)theSriLankaFreedomParty(SLFP).Bothpartieshavesupportedstateinterventions in economic activity, and their differences have primarily been in the intensity of state intervention4.
Dunham,David.2004.EconomicLiberalizationandInstitutionalReform.InSamanKelegama,editor, EconomicPolicyinSriLanka:IssuesandDebates.Colombo:InstituteofPolicyStudies 4 Weerakoon,Dushni.2004.TheInfluenceofDevelopmentIdeologyinMacroeconomicPolicyReformProcess. InSamanKelegama,editor,EconomicPolicyinSriLanka:IssuesandDebates.Colombo:InstituteofPolicy Studies
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The first wave of economic reforms removed price controls and eased restrictions to foreigninvestment.In1977,UNPembarkedonaneconomicliberalizationprogramunder President J R. Jayawardena. The first wave of reforms included dismantling currency controls and adopting a single exchange rate, eliminating price controls, lowering import tariffs, easing restrictions to foreign investment, and deregulating the financial sector. A majority (80%) in Parliament helped push the reforms forward, complemented by robust external conditions in the wake of rising international tea prices during 19761977. Resurgence in growth followed, fuelled by a public investment program. Gross domestic product(GDP)grewby6%perannumbetween1978and1983,comparedtoGDPgrowthof 2.9%perannumduring19711977. Warbrokeoutin1983anddampenedeconomicgrowth.WhenSriLankasinternalconflict escalatedintoacivilwar,privatesectorconfidencealsodeclined,andtheGDPgrowthfellto 3.4%perannumduring19841989.Bylate1980s,SriLankaencounteredmajoreconomic problems, compelling the UNP Government to call for new elections. After the general elections in 1989, UNP returned to power, but with a smaller majority. The Government subsequently pursued macroeconomic and sector adjustments with assistance from the International Monetary Fund. While the Government succeeded in quelling the Southern rebellion,the conflictin the NorthandEasthasremainedintractableto date.Theconflict directlyandindirectlydampenedeconomicgrowthinseveralways.Theconflict(i)resulted indestructionofhumanandcapitalassetsandthedisplacementofpeople;(ii)discouraged foreign investment and tourism; (iii) diverted the Governments attention from its reform agenda; (iv) contributed to macroeconomic instability; and (v) created an adverse environmentforprivatesectordevelopmentandinvestments,particularlyintheNorthand East5.Thelingeringconflicthasabsorbedasignificantportionoftheattentionofsuccessive governments. On three occasions in the past, the Liberation Tigers of Tamil Eelam had agreed with the Government to a temporary cessation of hostilities. In February 2002, a Norwegianbrokered ceasefire agreement was reached between the Government and the Liberation Tigers of Tamil Eelam. The country faces conflict resurgence after peace talks

ADB(2007)SriLankaCountryassistanceProgramEvaluation:EvaluationofPolicyBasedlendinginSriLanka, Colombo,AsianDevelopmentBank

failed6.AreportpublishedbytheInternationalCrisisGroupanalyzedtheconflictleadingup totheunravelingofthepeaceprocess7. Privatization became a state policy a decade after the onset of economic liberalization. Lossmaking SOEs had become unsustainable with budgetary transfers to these entities averagingaround10%ofGDP.Privatizationbeganin1987andinitiallyhadaslowstartdue to the predominant use of SOEs as instruments of political patronage and employment protection.However,thesaleofSOEsgainedmomentumafter1989.Privatizationcamein twowaves: (i) (ii) Thefirstwave(19891994),whichdivested43commercialSOEs,and The second wave (1995thereafter), which divested and restructured several public utilities and services, including telecommunications and the national airline. Due to a lack in transparency in the first privatization wave the Public Enterprise Reform Commission was created in 1996 to effect privatization in a more transparent and structured environment8. The first wave of privatization occurred under President Ranasinghe Premadasa (19891993) and the second wave, under President Chandrika BandaranaikeKumaratunga(19942001).Coalitionbuildingwasamongthemainconcerns of President Premadasa, whose preoccupation with consolidating his support base partly shapedthereformprocess9.Furtherliberalizationenhancedtheincentivesforexports,and theeconomyrecovered.

Thefirsttrucewasin1987,brokeredbytheIndianGovernmentandenforcedbytheIndianPeaceKeeping Force.Thesecondtrucewasin1994,andthethird(ceasefireagreement)wassignedin2002.Temporally,four distinctphasesofarmedconflictcanbeidentified:19831987,19981994,19952002,and2006nowinADB _____________ 7 InternationalCrisisGroup.2006.SriLanka:FailureofthePeaceProcess.Brussels. Available:http://www.crisisgroup.org/home/index.cfm?id=4523&l=1 8 KnightJohn,MalathyandP.P.A.WasanthaAthukorala.2005.RethinkingPrivatizationinSriLanka: DistributionandGovernance.InJohnNellisandNancyBirdsall,editors,RealityCheck:TheDistributionalImpact ofPrivatizationinDevelopingCountries. 9 Dunham,D.andS.Kelegama.1997.DoesLeadershipMatterintheEconomicReformProcess?Liberalization andGovernanceinSriLanka,198993.WorldDevelopment25(2):17990.

ThePeoplesAllianceformedanewgovernmentin1994.Inlate1994,17yearsofUNPrule cametoanendwiththeelectionofthePeoplesAlliance,acoalitionofSLFP,otherparties, and splinter groups from UNP. This coalition did not reverse the economic liberalization process. The size of the state enterprise sector had diminished, and with it the scope to dispense employment and other sources of patronage10. This posed a challenge to the fragilepoliticalcoalitionundertheincomingPresidentKumaratunga,whichhadatenuous oneseatmajorityinparliament.TheGovernmentexpandedministerialpostsandprivileges to keep the coalition together. Consequently, the expansion of ministerial positions effectivelymadetheexecutivepresidencythecentralfocusofnationalpolicymaking. AUNPledgovernmentcametopowerinDecember2001,usheringcohabitationwiththe countrys President. President Kumaratunga was reelected in 1999, and the Peoples Alliance won the general elections in 2000. A year later, several key members of the PeoplesAlliancecrossedovertoUNP,whichledthePresidenttodissolveparliamentand callfornewelections.TheUnitedNationalFrontwontheparliamentaryelections,andUNP returned to power under Prime Minister Ranil Wickremasinghe. This brought a difficult period of political cohabitation between UNP and President Kumaratunga who had been reelected. The UNPled government renewed its commitment to economic policy reforms andprivatesectorledgrowth11.TheGovernmentpromotedsecondgenerationreformsto deepen economic liberalization by deregulation and further privatization, with macroeconomicpolicyaimedatstabilizationandadjustment.In2003,theGovernmentand theInternationalMonetaryFundsignedanagreementonapovertyreductionandgrowth facility. The Government called for fiscal consolidation, and reductions of subsidies and welfaresupportprograms. Bylate2003,thecohabitationledtoapoliticalcrisis,andanewSLFPledgovernmentwas formedafterelectionsinApril2004.AnewgovernmentwasformedbytheUnitedPeoples Freedom Alliance, a political coalition comprising SLFP, Janatha Vimukthi Peramuna, and
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Durham,D.2003.States,Reforms,andInstitutionalChange:TheDynamicsofFailure.InBertilTungodden, NicholasStern,andIvarKolstad,editors,TowardProPoorPoliciesAid,Institutions,andGlobalization.Annual WorldBankConferenceonDevelopmentEconomicsEurope2003 11 GovernmentofSriLanka.2002.RegainingSriLanka:VisionandStrategyforAcceleratedDevelopment. Colombo

other parties. Following the presidential election in November 2005, Mahinda Rajapaksa wassworninasthefifthexecutivePresidentofSriLanka.Thepoliticalplatformasreflected in the presidential manifesto (Mahinda Chintana)12 set the development agenda of the Government.MuchofthepolicyprogramintheMahindaChintanaisapromisetopromote socialprotection,smallandmediumenterprise(SME)development,andruraldevelopment. TheGovernmentemphasizedthat: (i) itwouldnotpursueprivatizationasawayofimprovingtheperformanceofSOEs, and (ii) efficiencyimprovementinitiatives(ratherthanthechangeofownership)would beusedasameanstoimproveSOEperformance. PostwarSriLanka,fromMahindaChinthanatoVisionforFuture:Thegovernmentleadby HonMahindaRajapaksemadethevictoryofthewarapossiblerealityin2009May.Inthe postwareraitisexpectedtoreformeconomicpolicyofthestateindependently,resilient anddisciplinedwitha stronggrowthfocus operatingasperinternationalstandards whilst maintaining the local identity. Hence, it is expected that the country will face economic reformstomakeittheemergingwonderofAsia.ThestatewillhaveaNational Economic Policyforthefirsttime.Forthenext6years,itisexpectedto IncreasethepercapitaincometowellaboveUS$4000 Maintainacontinuousgrowthrateof8% ConvertSriLankatobethenavalcentrepointalongtheIndianOceanSilkRoute ConvertSriLankatoanaviationhub Toachievethesetargets,theGovernmentwentforapolicyshiftinwhich; Thestatewasmadetoacquireagreaterleadershiproleintheeconomy,includingthe leadroleininvestmentsforinfrastructuredevelopment.Privatizationofstateowned enterprises was abandoned. None of this implied any abandonment of the market

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Available:http://www.mahindarajapaksa.com/MahindaChinthanaEnglish.pdf

orientationoftheeconomyandtheimportanceofprivatesector(bothdomesticand foreign)investmentsindirectlyproductiveactivityareas. Indigenous enterprise, big and small, has begun to receive greater thrust and promotionwithinthenewdevelopmentstrategyinanapparentpolicyofbuildingupa strongnationalbourgeoisie. ThevisionofSriLankatobecomeimportantasafivefoldglobalhub(Naval,Aviation, Commercial,EnergyandKnowledge)providesthebasisfortheextensiveinvestment andactivitiesofthegovernment. Enhanced economic growth has become the priority, but together with equitable distribution, regionally and in terms of income groups. The slogan of Sri Lanka to become the next Asian Miracle guides the growth acceleration initiative the economicwarwhilethereiscommitmenttopovertyalleviationandMDGsandthe developmentalworkintheformerlyconflictaffectedareasofthecountryintheEast andtheNorth13. Hence,therehasbeenacloseintertwiningbetweenthepoliticalagendasofsuccessiveSri Lankanpoliticalregimes,SriLankanStateFiscalPolicyandthe ideologybehindSriLankas economicmarket.AlthoughSriLankastartedoffonasocialisticwelfareanddevelopment based model from the 1950s to the mid 1970s, the Neo Liberal school of thought dominatedtheSriLankanpoliticaleconomyfromtheLate1970s.Hence,whatwehavein SriLankatodayisaconfusingmixedsystemsocialistinpoliticalappearancebutneoliberalis operation.ThishasaffectedSriLankanStatePolicyinaadversemanner.Itisthisaffectthat needstobeopenlyandmoreinclusivelydiscussed. PolicyIssuesinRelationtoSriLankasPoliticalEconomy Overall, the processes of policymaking in Sri Lanka could and should be more open and consultative,withgreatercontributionsfrom:MPs,themassmedia,civilsociety,theprivate sector, technical specialists, and policy thinktanks. Policy options should be posed more

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Prof.W.D.Lakshman(2010)PoliticalEconomyofTaxationandTaxReformsTaxOration,2010

clearly,andthealternativesdiscussedmoreopenlyandthoroughly.Thiswouldleadto(a) betterpolicychoicesand(b)abroaderacceptanceofthosechoices,leadingtomorepolicy stability. Therearefiveparticularlydifficultpolicyproblemswhichwethinkwouldbenefitespecially frommoresustained,opendialogue: 1. Budgetdeficit,GovernmentRevenueandExpenditureAnecessitytorestructure the public sector in a more realistic fashion to increase government revenue and reducethebudgetdeficit. 2. ReformingtheEducationSectorStreamliningEducationPolicyandInstitutionsto integrateyouthskillrequirementswithlocalandglobalmarkets 3. Low Tax Trap Reforming the Tax System to reduce dependency on foreign developmentandhumanitarianaid 4. Social Safety Nets Restructuring the objective of State Social Safety Nets to encourageSelfSocioEconomicempowermentandradicallyreformingdistribution methods 5. ClimateforPrivateInvestmentAmoredetailedpolicydiscoursewithaccurateand contextual data will be necessary to create a improved climate for private investment However,wefeelthatthemostcriticalareainrelationtothesepolicyareasistheBudget deficit,GovernmentRevenueandExpenditure.Thisisbecausethisfactorwouldaffectand inturn,beaffectedbyallotherpolicyareas.Furthermore,intheSriLankancontextpolitical actors,thestatebureaucracyandideologicalopinionmakersarethekeyplayersresponsible forStateFiscalPolicy. 10

01.Budgetdeficit,GovernmentRevenueandExpenditure BudgetasaFinancialcumEconomicPlan: Nationalbudgetsfocusonfindingtheresourcesforachievingnationalgoalsandallocating andspendingmoneyforactivitiesonthebasisofprioritiesdeterminedbythegovernment. Asafinancialandeconomicplanabudgetwillhaveasetofgoalsandtargetstoachievein theshortsingleyeartimeframeaswellasoverthemediumandlongterm.Basedonthose goals and targets of agencies, sectors of the economy all of which converge towards the nationalgoal,thebudgetallocatesmoney. OneofthemodelsofbudgetingisthatoftheBalancedBudgetwhererevenueisequalto theexpenditure.Thisishardlypracticableindevelopingcountriesthanindevelopedones. Another more common is the Deficit Financing model which seeks to raise aggregate demand.Underthismodelduringrecessionsexpenditurelevelsareraisedevenbygetting into debt for financing capital projects of the government without raising taxes. During periodsofboomorhighgrowththerewouldbeasurplusinthebudgetduetothehigher revenue expected to flow in that could be used to pay off the debts leavingamong other thingsmoremoneyforconsumption,savingsandinvestment.Thistrend,intheabsenceof adequatesavings,couldleadtoinflationcontrollingwhichandmaintainingpricestabilityis oneofthemaingoalsofnationalfinancepolicyandthebudget14. Models in budgeting in centrally planned economies like the former USSR were different fromthoseofthefreemarketeconomiesliketheUSAorUK.Intheformertypeofeconomy goals the targets were set by the central governments. The central government is not accountablein thesecountriesastherewerenoelectionsofdemocratictype.Hence,itis evidentwhythismodelthatwasinEasternEuropepriortotheColdWarfailed.
LeoFernando(2010)AnintroductiontogovernmentfinanceinSriLanka:TheoryandPractice,Colobmo, KarunaratneandSons.
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ClassificationofBudgets Forthepurposeofbudgeting,ofplanning/formulationandcontrol,theformatofabudget forpublicexpenditureisclassifiedintwoways; 1. Thesectoral/functional 2. Theprogram/projecttype Apart from this kind of classification all expenditure has two other sub divisions, namely recurrent and repetitive line item type, and the capital and development type. This latter can be called the vertical kind whilst the former can be call the horizontal manner of classification. With this understanding on the different types of budgets our focus will be moved in to analyzingtheproblemsintheprocessofbudgetinganditsfinanceadministration. KeyissuesintheSriLankanBudget BudgetDeficit: When a government plans to spend more than its income, it resorts to financing the additionalspendingthroughabudgetarydeficit.So,traditionaldefinitionofabudgetdeficit is the difference between total government outlays and the revenue receipts. But a complete and technical definition of deficit would be the difference between size of the governmentdebtattheendoftheyearandthecorrespondingsizeofthedebtayearlater, thusabudgetdeficitisfundedbyanationaldebt15. BudgetdeficitaddressesacriticalissuewhichaffectstheeconomicwellbeingofSriLankan citizens. Since the countrys independence in 1948, successive governments have implemented deficit financingpolicieswherebygovernmentalexpenditurehasbeenmade to exceed the revenue collected through taxes. In no year since independence has any governmentrunasurplusbudgetexceptfortheyears1954and195516.Moreseriousisthe factthatafter1987,successivegovernmentshaveruncurrentaccountdeficits;asituation

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ArticlesandEssays(June2010)ImplicationsofbudgetdeficitsinIndia,http://articlesand essays.blogspot.com/2010/06/implicationsofbudgetdeficitinindia.html 16 CBSL(2006),AnnualReport,Colombo,CentralBankofSriLanka

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wheregovernmentrevenuehasbeeninsufficienttomeeteventherecurrentexpenditure.17 Clearly, the government has been living beyond its means and we have reached a stage wheregovernmentwouldhavenooptionbuttoincuradditionaldebttorepaytheexisting debt. BudgetDeficitpercentageofGDP19902010 Year 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 *Source:18 Thekeyquestiontoraiseinthiscontextiswhereisthisbudgetdeficitcomingfrom&why isit?Itcouldbebecauseoftheinefficiencyofdeliveryinexpenditure19oranyotherreason. However, we need to admit the fact that budget deficit has been the main problem of government finance in the Sri Lankan context. What are the implications or underlying problems of having a budget deficit? In general, implications of heavy deficit budgets are impeded economic growth, real incomes of the people being lower than their apparent incomes,inflationinpricesofcommoditieswhichmakeslifeofcommonpeoplemiserable and higher government borrowing that prevent a decline in interest rates. Moreover, this BudgetDeficit(%ofGDP) 7.8 9.8 6.1 7.1 9.1 8.7 8.4 7.0 8.4 6.9 9.5 Year 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 BudgetDeficit(%ofGDP) 10.4 8.5 7.3 7.5 7.0 7.0 6.9 7.0 9.9 7.9

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ATFonseka(2008)SustainabilityofSriLankasPublicDebt,Colombo,PostGraduateInstituteof Management,UniversityofSriJayawardenapura 18 MinistryofFinanceandPlanning 19 CommentmadeattheOTIRoundTableonPoliticalEconomy,(May25,2011),Colombo

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becomes socially regressive, complicates exchange rate management of the country, increasescostoflivingandloseseconomiccompetitivenessasastate. Throughsuchdeficitbudgeting,ahighgovernmentspendingisproposedtocompensatefor fallingpublicspendingtokeepthemarketsingoodbusiness.Thatclearlyshowsthatdeficit budgetingisaimedatideallytakingcareoftheinterestsofthemarketandnotthepeopleof thecountry.Sincemarketsareownedbyahandfulofrichpeopleinthecountry,thebudget deficit suits and is best to bring them more and more benefits. Since, Sri Lanka has been followingthispracticesinceindependenceexceptinanyearortwo,nogovernmentssince thencanclaimtobepropeople,insteaditisprocapitalists(thehandfulofrichpeople)of thecountry.Theeconomicresultsofourbusinessandpeoplestandevidenceforthisasthis handful of rich in the country has been prospering regularly under each and every governmentwhilstthepeoplestillstruggleandsufferineconomicmiseries. GovernmentIncome/Revenue: Thekeyissueintermsofthegovernmentincomeintodayscontextisthattherevenuebase is too small to accommodate all the expenditure. Hence, there is a wider concern of the governments need is to raise the government revenues. One would argue that, the excessiveliberalizationandsmallgovernmentpoliciesafter1995ledtoagradualrelative dropingovernmentrevenues.ThedeclineintherevenueGDPratiofromthe2025percent rangethatwasfamiliarinSriLankabeganduringthisperiod.Itreachedthe1415percent ratiobythemid2000s. Governmentsrevenue(19902010) Revenue Year Tax 1990 1991 1992 1993 1994 61,206 68,157 76,353 85,891 99,417 Total 67,964 6,698 76,179 7,870 74,662 84,049 94,062 106,364 118,295 Grants RevenueandGrants

85,781 8,280 98,339 8,025 110,038 14 8,257

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010(c)

118,543 130,202 142,512 147,368 166,029 182,392 205,840 221,839 231,597 281,552 336,828 428,378 508,947 585,621 618,933 725,671

136,258 9,028 146,279 7,739 165,036 7,329

145,286 154,018 172,365 182,232 202,666 216,427 239,796 268,967 284,421 320,154 412,386 507,901 595,559 686,481 725,566 835,129

175,032 7,200 195,905 6,761 211,282 5,145

234,296 5,500 261,888 7,079 276,465 7,956

311,473 8,681 379,746 32,640 477,833 30,068

565,051 30,508 655,259 31,222 699,644 25,922

818,220 16,909

Source:MinistryofFinanceandPlanning As taxes and duties constitute the largest proportion of government revenue, greater attentionnaturallyneedstobepaidtothem.Therevenuegenerationinpostindependent SriLankahasundergonevariouschangesthatareeffectednotonlytofindresourcesforthe governments redistributive welfare expenditure programs but also to be used as instrumentsofeconomicpolicy.Thebroadchangeseffectedinthepastfewdecadesinthe caseofincometaxandotherformsofrevenueareindicatedinthetablebelow. Revenuesourcesandchangesinthetypesoftaxes(19482006) Type
Incometax Corporatetax Wealthtax Gifttax

Remarks
Highestbandat80%in199535%inthe90s Highestbandat60%30%inthe90s Introducedin1959,abolishedin1991 Introducedin1959,abolishedin1986

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Landtax Expendituretax Estateduty Capitalgainstax Nationaldevelopmenttax Surtaxonincometax Foreignexchangeentitlementcertificates Compulsorysavings Capitallevy Registrationofprofessions/businessestax Withholdingtaxat10%20%oninterest payments Businessturnovertax TurnoverTax(leviedbylocalbodies) Stampduty(remittedtolocalbodies) Nationalsecuritylevy(defenselevy) Goodsandservicestaxatthreedifferentrates

Introducedin1959,abolishedin1963 Abolishedin1963 Abolishedin1986 Abolishedin2002 Effectivein196163 Effectivein1962 Effective 196877 Effectivein197276 Effectivein1971 Effectivein196263 Effectivefrom1975

Effectivein196380 Effectivein1981 1997

Effectivefrom1992 Effectivefrom1998

PAYE(publicserviceexemptedfrom19802010) Effectivefrom1971 Dieseltaxandluxuryvehicletax Savethenationcontribution ValueaddedTax(replacingGST) Economicservicecharge Socialresponsibilitylevy Debittaxat0.1%onbankwithdrawals Dividendtaxat15%ondividendsonshares Cessonstockexchangetransactions Tariffsonimports Dutiesonexports Excisedutiesfromliquorandtobacco Receiptsfrompublicenterprises Effectivefrom1995 Effectivefrom1996 Effectivefrom2003 Effectivefrom2004 Effectivefrom2006 Effectivefrom2006 Effectivefrom2006 Effectivefrom2006 Abolishedin1993

These changes have been effected not only to find resources for the postindependence governments redistributive welfare expenditure programs but also to be used as

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instrumentsofeconomicpolicysuchastodiscouragetheconsumptionofinessentialgoods ortopromotesavingsandinvestmentortoprotectlocalindustries. Theabovedatefurtherhighlightthat,taxationistheoverwhelminglydominantcomponent among revenue sources of the government. The governments are advised mostly to cut downonthesocalledwelfareexpenditureseithertocutdownonconsumersubsidieslike thoseonessentialfooditemsortochargeuserfeesforfreelyofferedgovernmentservices to bring a solution to the whole problem on government revenue. In the kind of holistic development that was pursued in Sri Lanka no government had practiced this advice seriously.Thereisnodispute,alotofslackexistsingovernmentexpendituresandactionto reduce such waste could help expenditure reduction without adverse effects on desired popularobjectives.Thispathtoachievefiscalconsolidationhasnotbeenpursuedwithany serious intent by any government so far. So the attention essentially should be on raising revenuesandtheneedtodothisisseriouslyfeltandactionisbeingenvisagedforachieving thisobjective. On the other hand, in order to increase revenue administration of the tax may also be concernedasverymuchimportantbutissuesoftaxationgobeyondthissubjectandbeyond issues of its collectability. However, from the point of view of national development, taxation plays a very significant role in resource mobilization for capital accumulation and promotinghumandevelopment.Thepoliticaleconomyaspecthereisthestatecapacityto raise the required resources through taxation. The success or failure of raising required taxes provides one of the principal indicators and measurements of state capacity, power and political settlements in a society. Fiscal crises that emerge in some countries are indicativeofstatecapacity constraintsinraisingrequiredrevenues.Designingtax systems thatcanprovideincentivesforgrowth, canmeetdistributionaldemands andcanincrease revenue collection is central to state viability and effectiveness. It has been argued in the generalcontextthatinpostwareconomies,reconstructionoftherevenuebaseisessential for the reconstruction of a viable state and sustained peace (Jonathan Di John in The

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PoliticalEconomyofTaxationandTaxReforminDevelopingCountries).Thesignificanceof thisstatementappearsstronglyinthepresentSriLankancontext20. Financing Year Foreign 1990 11,644 Domestic 13,508 Privatization 841 2,850 1,200 2,995 3,001 4,728 22,499 4,389 134 401 8,589 5,693 10,223 2,437 1,020 Total 25,152 36,320 25,763 35,295 52,470 58,198 64,642 62,732 85,947 76,493 119,396 146,722 134,022 133,251 156,752 172,397 205,745 246,045 309,644 476,361 445,076

1991 19,329 16,149 1992 7,361 15,551 1993 9,855 24,241

1994 11,778 37,696 1995 21,224 33,972 1996 10,160 49,754

1997 9,958 30,275 1998 10,197 71,362 1999 1,484 74,876

2000 495 118,500 2001 14,538 123,595 2002 1,978 126,351

2003 43,117 79,911 2004 37,071 117,243 2005 47,773 123,604

2006 41,942 163,805 2007 100,907 145,137 2008 2009 2010(c) 4,643 230,807 243,788 314,287 245,554 201,288

Source:MinistryofFinanceandPlanning

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Prof.W.D.Lakshman(2010)PoliticalEconomyofTaxationandTaxReformsTaxOration,2010

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SriLankadoesnotanymorequalifyforreadyaccesstodevelopmentassistancefundsinthe formofgrantsandloansoneasyconditionsfromthedonorcommunity,asitusedtobeafew yearsagowhenitwasinthelowincomecategory. In order to finance the economic war the government has turned to certain bilateral country sources for project funding. Certain strategic changes in the countrys international politicalrelationshavealsobeenbroughtaboutintheprocess.Inaddition,fundshavebeen raisedfrominternationalcapitalmarkets bymeansofsovereignbonds. Inthisexercise,the relatively large Standby Arrangement of the IMF, approved in July 2009, has helped by improvingthecountryscreditworthinessinternationally.Thesefundraisingpracticesdonot appeartohaveledtoanyseriousthreattofinancialstability.Becauseofstrongerincomeor revenue side improvements, it is forecast that the overall balanceofpayments and public finances would improve in the short and medium terms. Sri Lankas longterm foreign currency sovereign credit ratings have been raised by relevant international agencies. Whateverthemethodsadoptedintheshortruntomobilisetherequiredfundsforfinancing development projects, eventually it is tax revenue buoyancy that is required because tax revenuesareneededtorepayinfuturetheloanstakentodaywithinterestaswellastomeet thecontinuallyrisingnewresourceneedsofthegovernment. The other aspect of global tax influences emanate from commitments made in numerous agreements the country has signed with international organizations and mutually with a numberofdifferentcountriesinrespectofregionalcountrygroupings.TheinfluenceofWTO regulations and the commitments made under bilateral free trade agreements on foreign tradetaxesisofparticularimportanceinthisregard. The government is faced with the need to raise revenues from the current level of 1415 percent of GDP to higher levels of above 20 percent of GDP that are visible in more developed countries in the world and were familiar to Sri Lanka itself prior to the early 1990s.Suchstrongerresourcemobilizationeffortisessential.Thisoughttobedonewithout adverse impacts on the processes of investment and on living conditions of the low and middle income groups. The best that can be done is to widen the tax base rather than increasingtaxrates. 19

Themainthemeemergingfromapoliticaleconomyperspectiveontaxation,includingasan essentialingredientanhistoricalview,isthatwhiletechnicalandadministrativeaspectsof tax reform are crucial, an understanding of the sustainability of reforms requires an understanding of how reforms become legitimate and accepted by the people. Because taxation affects incentives and distribution simultaneously, tax reform requires either a degreeofsocialconsensusthatsuchpoliciesareinthecollectiveinterestand/oritrequires astatewiththeabilitytocoercethosewhochallengeitstaxreformproposals.Thefocuson institutional designs and other technical issues of tax would be incomplete if the political nature of taxation is ignored. Of critical importance is the development of bargaining mechanisms between the state and elite groups, who generally control much of the economysproductionactivities. Inadditiontoplacingtheoverallburdenofincreasingtheexpansionofgovernmentrevenue completelyonthetaxsystemitistothinkofnewmodesofincomegenerationaswell. ForeignDirectInvestments(FDIs)areconsideredanothermode ofrevenuegenerationfor thecountry.Therecentbudgetshavebeenprovidingspaceformoreandmoreinvestments. ItseemsthatSriLankaisprovidingtaxandvariousotherconcessionsfortheinvestors.On the other hand, if one analyses the FDIs to Sri Lanka during the past few years and repatriationsfromthoseFDIsismuchlargerthanthebenefitsforthecountry21.Ananalysis on the FDIs from 1995 to 2002 highlights how 46% of FDIs had been repatriations. In this context,thechallengeistomakeFDIsaprofitablemodeofrevenuegeneration.Itisafact that Sri Lanka is trying to follow the political economic model of the South East Asian countries.Inthatcontext,weareawareaboutthedevelopmentChina,Singapore,Malaysia and South Korea attained in the latter part of the 20th century. With 245 Million Dollars worth FDIs during 19952000 china recorded an annual GDP growth of 8.6% whilst Singaporeattained6.9%with49MillionDollarsworthFDIs.Moreover,itrecordedat5.7% inSouthKoreawith33 MillionDollarsworthFDIsandwith31MillionDollarsworthFDIs MalaysiacouldattainanannualGDPgrowthof5.7%.Lookingatthesestatisticsonecould argue that FDIs play a key role in obtaining government revenue and increasing growth

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Jayantha Kelegama

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rates.AdetailanalysisonthecontributionofFDIswillexplainthatinordertoactuallymake profits and make it a positive contribution to development it is essential to get more and moreFDIstothecountry.Therefore,SriLankawillhavetomakeitafriendlyenvironment forinvestors. Onewouldarguethatthecontemporaryclimateinthecountryisnotinvestmentfriendlyat all. Corruption, bribery, no transparency in doing business, no investment friendly legal system, Sri Lankas present foreign policy could be mapped as some of the negative developmentsthatconstraintaconduciveenvironmentforFDIs.Ontheotherhand,lackof continuity in policy, political climate within the country, lack of predictability in terms of economicdevelopmentsalsomatterwiththisregard. Expenditure If one analyses the budgets of Sri Lanka for the past decade or so, it is evident that not having a control over recurrent expenditure is one of the serious problems in todays budgets. Total,currentandcapitalexpendituresofgovernments19902009 Year Total Expenditure 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 91300 109060 114587 135950 157475 195881 212786 228731 253808 267611 Current Capital Year Total Current Capital

Expenditure Expenditure 71771 83756 89639 102288 127084 154159 175148 184749 199648 207271 19529 2000 25304 2001 24948 2002 33662 2003 30391 2004 41722 2005 37638 2006 43982 2007 54160 2008 60340 2009 21

Expenditure Expenditure Expenditure 322048 371264 389441 409782 473486 583504 710174 828920 976317 1156991 254279 303362 330847 334693 389678 443350 547960 622758 743710 879575 67769 67902 58594 75089 83808 140154 162214 206162 232607 277416

Source:MinistryofFinanceandPlanning Theabovestatisticsclearlyindicatethatabout6570%ofthetotalgovernmentexpenditure isallocatedforitsrecurrentexpenditurewhilethecapitalexpenditureisalwaysextremely smallinpercentage.TheMostinterestingcasestudywiththisregardisthemilitarybudget. IfoneanalysesthemilitarybudgetofSriLankasince1991onemayseethatabout80%ofit isforrecurrentexpendituresduringthewar.Infact,mostironicallyinthepostwarperiod theonlybudgetproposaltabledinparliamentindicateabout95%ofrecurrentexpenditure fromthemilitarybudget.Thisisaninterestingphenomenontostudy. Themoreimportantaspectofgovernmentspending,capitalexpenditurehoweverwhichis really developmental expenditure on the infrastructure and capital transfers to public enterprisesshows a steady and unwholesome decline after 1980s and has only continued declininginthefirstdecadeofthenewmillenniumaswell.Thislowfigurecomparedwith the growth in recurrent expenditure indicates poor policy strategy for growth and development. Anotheralarmingtrendistheriseininterestpaymentsthatisanindexofthegovernments economic liabilities to the public as well as foreign creditors. The amount of interest paymentsandthemagnitudeofthepublicdebtitselfhaverisendramatically. Therehasbeenanincreaseinpublicspendinginthecategoryofpublicservices,duringthe past three decades mainly due to the war andit seems tobe continuingeven in the post warperiod.Foratleastthelast50years,SriLankangovernmentshavegivenemploymentto ahigherproportionofthelabourforcethaninmostcomparablecountries.Thedataclearly indicates that the proportion continues to increase steadily. For the last two decades, governmentshavealsomadeSriLankanoteworthyintheextenttowhichtheyhaveallowed theirownrevenuestaxandnontaxrevenueslikefeesandchargestodeclinerelativeto thesizeofthenationaleconomy.Inshort,governmentemploysmoreandmorepeoplebut raises less and less revenue (as a proportion of national income). For each person in its employment,governmenthaslessandlessmoneytospendeitheronequippingthatperson towork(withoffices,computers,trainingetc.)orondoingalltheotherthingsgovernment 22

needs to do (build bridges, buy medicines, regulate telecoms etc.). These figures are indicators of the deeper issue of the inefficiency and unproductive nature of much of the publicservice.Thisisadifficultproblemtosolvebecauseoftheverypowerfulexpectations ofgovernmentjobsforpoliticianssupporters.However,thesamethingwassaidoffood subsidiesinthe1950s,1960sandearly1970s,andyettheywereabolishedquitequickly. The Presidents budget can be seen as one of the key areas of expense for the past few years. To be more specific, it is surprising that at times it exceeds other major budgetary headsi.e.educationorhealthcareincomparisonasapercentage. Within discourse on reducing the government expenditure it would also be important to analyze the fund allocations for government projects. Most importantly, whether the governmentsshouldallocatemoneytoprojectsthathavebeenrepeatedlyreportedlosses? (i.e.MihinLanka)Withthedeclineintheprivatizationprocess,statecontinuestotransfer resources to loss making institutions like CEB and several others could have enlarged the budgetdeficitwhilsttheamountofrevenueflowinghasnotbeenmatchingtheincreasing expenditure,makingthesituationworse. Transfer payments to households as welfare benefits through various projects such as janasaviya&Samurshiya,whilstraisingtheincomeofthelessaffluentinsocietyandtheir purchasingpowertobeusedfortheconsumptionofessentialitemsforlivingitisimportant toseeksolutionstoprotectpeoplefromtheseharsheconomicconditionsratherthanmere providingwithanallocation. IssuesofBudgetExecution: One of the main problems is the delay in obtaining money from the Treasury which itself suffersfromthesameproblemduetothedecliningrevenueandtheslowerrateofinflow. This delay affects mostly locally funded small projects as the highest priority of state spendingliesinpaymentofmonthlysalariesandmakingothertransferpayments.Thison theotherhandmarksanunderexpenditureinthecapitalbudgetmostofthetime.Evenin the case of foreign aided projects, some of which are financed on the basis of 23

reimbursement foreign aid, implementation has got delayed due to the low rate of spendinginthecapitalbudget. The basicsof fiscal planningshould focus on preparing realistic targets for GDP growth or investment or savings or even inflation. Selecting fiscal policies consistent with macro economictargetsproposalsforrevenueandexpenditureisalsoanimportantaspectwith this regard. Moreover, government should set realistic fiscal targets in terms of revenue, expenditure, debt, debt servicing which are indeed consistent with policies and macro economictargets.Inadditiontotheabove,havingasystem(MIS)inplacetomonitorand evaluaterevenueandexpenditureduringthefiscalyearandmakingrequiredadjustments tofiscalprogramtomeetmacroeconomictargetsarealsoimportantwiththisregard. The question once again with this regard is how realistic these targets are? Can the governmentactuallyachievethesetargets?Thefollowingfiguresclearlyexplainwhythere aremajorproblemswithinthesebudgets,particularlywithunrealisticbudgetarytargets. Reviewofunrealisticperformanceandtargets Indicator Investment: GDP Domestic Savings:GDP Inflation: GDPDeflator BudgetDeficit 7.08.5 5.111.3 14.417.3 20022006 21.228.0 2007A(T) 27.9 (32.0) 17.6 (19.8) 14.0 (8.5) 7.7 (7.6) GDPGrowth 4.07.7 6.8 (7.4) 2008A(T) 2009A(T) 27.5 (31.5) 14.1 (20.4) 16.3 (12.5) 7.7 (6.8) 6.0 (7.0) 24.5 2010T2,T1 27.8 2011T 30.5

(32.5,24.0) 33.0 18.0 18.6 ?

(21.2,16.6) 22.4 5.7 (8.5,9.0) 10.2 (5.5,7.0) 3.5 (8.2,3.5) 6.0 7.0 7.5 4.9 6.5 8.5 7.58.0 6.8 6.0

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Sources22: The above table indicates how unrealistic the targets given by the budgets are in comparisontothefiscalperformances,exceptthatrecenttargets(2009,2010)seemtobe morerealisticthaninpreviousyears. RecentBudgetEstimatesv.Actual Category 2007(AE) Rs.Bn. Revenue 584(621) 2008(AE) 655(751) 2009(AE) 703(855) 2010(M9) 812(582) 2011 964

Expenditure Recurrent o/winterest Capital Amortisation Deficit Source23:

1,193(1,275) 615(588) 183(169) 262(351) 316(337) 609(654)

1,411(1,487) 736(708) 212(210) 294(386) 380(392) 756(736)

1,749(1,704) 883(825) 310(250) 350(405) 516(475) 1,046(849)

?(1,275) 926(711) 350(278) 359(207) ?(357) ?(693)

1,982 1,017 354 414 551 1,018

Thenumbersgivenaboveindicatesthatinrecentyearstherevenueisbelowandrecurrent expenses are actually above the targets. Also it is important to note that there was no budget prepared or presented in 2010. The table further indicates that there has been a small tax base whilst non tax revenues are also low. The significant characteristic these figures relate is that the state expenditure had been more than double the revenue in
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20092011targetsfromCBSLAnnualReportTable1.5andFMR2009,2011[Achievements(A)wellbelow targets(T)forprevious3years]PresentedbyDrAnilaDiasBandaranaikeforOTIstakeholders Ministry of Finance; presented by Dr Anila Dias Bandaranaike to OTI stakeholders

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recentyearsandrecurrentexpenditurealonehasexceededrevenueeveryyear.Outofthe revenuegenerateddebtservicingexceededitby17%in2009whilstanother40%ofitgoes for salaries. This provides a clear insight of finance management in the country and how efficientthebudgetorfiscalpolicymanagementhadbeen. It clearly signifies that the macro economic targets placedby the governments have been unrealisticandtheapprovedbudgetestimatesupto2009weremuchoptimisticcompared to outcomes. A budget not being prepared and presented in year 2010 is a very bad precedentintermsoffinancepolicyguidanceandmanagementinthecountry.Totopup with these, government investment targets were also unrealistic and the state debt had been rising eventually. To make the situation worse debt servicing exceeds total revenue whilstexternalcommercialdebthavebeenrising.Theseunsustainablefiscalconditionswill indeed stifle the entire economy and will never lay a solid foundation for the future developmentsofthiscountry. Given the above context, theexpectations from an annual budgetshould focusmainly on analyzingthepreviousyearsperformanceagainsttargets,withreasonsfordeviationswith particular focus on strengths/weaknesses of performance and positive/negative effects of domestic/external factors. Moreover, the budget should present policies to address weaknesses and build on strengths identified in the analysis, including capacity building human and technical to improve fiscal performance. In addition, budget Debate and stakeholders should provide, and Government should accept, constructive criticism to supportandimprovethebudgetaryprocess. As stated earlier the most critical area we need to look into is Sri Lankas budget deficit. Where is it coming from and why is it there? This is intricately linked to the concept of accountability in the Budget Execution process in Sri Lanka. In what manner and through what mechanisms is the Government held accountable for the Budget it presents? Does existinglawaddressthis?DoesparliamentaryprocedureforBudgetapprovaladdressthis? Docitizenshavetheauthoritytoaddressthis?Thesearetheseriousquestionsthatneedto be addressed. It is also pertinent for us to rethink whether FDIs are a good idea for an emerging economy to depend upon as external capital for development and growth? 26

Furthermore, it is also a question about expectations and targets. How realistic are the GovernmentsmacroeconomictargetsandcanSriLankaactuallyachievethesetargets? Parliamentary budget debates on these topics focus on petty, rather than fundamental, issues whilst there is little critical analysis in the media coverage of Budget and polarized (binary) responses from most stakeholders. That could be mainly because of the fact that theMembersintheParliamentpaymorefocusonaddressingthegallerythanbeingserious onissuesandtheirroleinthelegislature. Another problem is the frequent escalation of prices of supplies and services due to inflationandthedepreciationoftheRupee.Oncemoneyisallocatedforaprojectthereis rarely an automatic revision of rates. Hence, the work is generally affected waiting for budgetary provisions through a supplementary estimate, which means disruption of the normal work of implementation and consequent uncertainty in the situation till the additionalfundingisapproved. Someissuesinrelationtobudgetexecutionareinrelationtotheorganizationalcapacityof executingagenciesaswell.Theseexecutionagenciesareessentiallygovernmentandwith issuesandconcernsonrecruitmentstothegovernmentserviceaquestionontheircapacity is inevitably raised. In Fact, there is no inducement to public servants to raise their productivityaswell. An evaluation is to be carried out for each and every government project to verify if the projecthasbeensuccessfulandwhetherprojectgoalsareachievedintermsoftheexante cost benefit analysis expectations. Most projects have dragged on well beyond the target datesforcompletionorhavegotabandonedduetopoliticalreasons.Financialauditsmost ofthetimetakesplacebasedonpoliticalrelationshipsandarehardlyreliable.Hence,itis important to conduct independent finance audits and evaluations to ensure efficiency in budgetimplementation. Issues in terms of financial management in public enterprises could also be considered as critical in the context of budget implementation. Over staffing in most of the public 27

organizationshasconsequenceonpoorperformance.Thisisaproblemmainlybecauseof the political appointments given by the MPs in power to the unemployed youth in their electorates. Moreover,lackofproperplanningintermsofthecapitalprojectsisalsoidentifiedasakey issueinthecontextofbudgetplanningandimplementation. Corruption and mismanagement is another critical area to focus on in the budget implementation process. Often parent ministries or minister staff seems to be using the vehiclesofaministryorrelatedorganizationsandcanbehighlightedasoneofsuchissues. This malpractice is rampant during election time and as it happens at the instance of the politicalmastersthereisnoaccountabilityforthisantisocialpracticeaswell. There are frequent statistical inconsistencies in official documents that confuse stake holders, particularly those published by the Department of Census and Statistics gives a different picture to that of the Ministry of Finance or the Central Bank. Links between assumptions,budgetproposalsandfinancialoutcomesarenottransparentinthebudgetsin general and they rarely compare targets vs. actual or critical selfanalysis of reasons for deviations. Options/Recommendations Theoptions/recommendationstoovercomethehighlightedissueswillbeanalyzedinthis sectionunderfourmainsegments. 1. EfficientBudgetplanning/preparation 2. IncreasingGovernmentRevenue 3. RationalizingGovernmentExpenditure 4. EfficientBudgetExecution 28

1. EfficientPlanning/Preparation In the process of planning the budget it would be better to obtain the contribution of variouscommunitiesandactors,giventhefactthatSriLankaisamultiethnic,multicultural society. The best way to accommodate various viewpoints would be to have an annual consultation in the processat regional levels. Federation of Chamber of Commerce would beabetteroptionwiththisregard,givenitsnetworkallaroundthecountry,includingthe NorthandEast. OntheotherhandaParliamentaryselectcommitteeonbudgetwouldbeabetteroptionto enhanceknowledgeamongsttheMembersofParliamentonfiscalmanagementingeneral. In addition, establishing a Parliamentary budget office similar to that of the congress to assistthehouseanalyzetheyearlybudget,reportontheeconomicandbudgetoutlookto theParliamentandtoserveasaneutralbenchmarkagainstwhichmemberscanmeasure the budgetary effects of the proposed legislation. In addition to an institution within the Parliament, one outside it would also be beneficial in the process to monitor and provide inputintermsofresearchanddiscussions. Anyorganizationintheprivatesectortendstoconductanevaluationofthepreviousyears budget execution prior to presenting the budget for the upcoming year. Hence, it is importanttoestablishamechanismtoconductanannualbudgetaryevaluation/vettingfor all the government institutions that ensures every Ministry will produce their Annual DevelopmentPlansbasedonthoseevaluations. SriLankahasintroducedaFiscalResponsibilityAct,enactedbytheParliament.Thisdoesnt seemtobeinproperimplementationuptodate.Therefore,astheinitialstepitwouldbe better to implement the existing Act and then to bring amendments as necessary in its implementation. Budgetpreparationinthepresentcontextisconfinedtoalimitednumberofbureaucracies. Inthisprocess,itwouldbeimportanttotakethecontributionoftheresearchandprivate sectorinstitutionsaswelltoensureabetteroutcomeandtoensurethatviewpointsofthe 29

stakeholderthatcontributetothestateseconomyarerepresentedinitsfiscalplanningas well.Inthisprocess,budgetaryplanningshouldgobeyondthecomparisonsandanalysison expenditureandrevenuetomakeitsustainableanddevelopmentfriendly. In most countries in the world universities make a significant contribution in providing research input for the development of several trades. In fact, the universities in Sri Lanka have extremely weak links with the government or private sector in order to make a significantresearchcontributionforitsdevelopment.Researchinputforplanningaswellas execution of the budget should be ideally conducted by the universities. At least this mechanism should be established for the betterment of both the government and the universitysystem. Since the term of office of the President D B Wijethunga it has been the practice for the President to hold the Ministry of Finance in Sri Lanka. This should be changed and be handed over to a Member of Parliament as finance responsibility is completely with the Parliament. Ontheotherhand,thishas constrainedtheopposition to poseany questions andobtainclarificationsfromtheMinisterasthePresidentisnotnecessarilypresentedin Parliament. This has serious implications not only in planning but also in execution, responsibilityandvariousotheraspectsaswell. 2. IncreaseGovernmentRevenue SriLankahashadtaxcommissionstimetotime,todecideonitstaxpolicyforthecountry. Howeveritisproposedtoestablishacontinuingtaxcommissiontobringtimelyproposals. Inadditionitisimportanttointroduceproperprocessesfortaxadministrationaswell. Welfare services rendered by the government are a significantly higher expense for the country and were therefore proposed to introduce a meaningful charge for essential welfareservicesasarevenuegenerationmechanism.Itseemsthatmostpeoplearealready charged for some services informally and this needs to be formalized to introduce a meaningful charge. Although this was proposed by various rulers in the past it was never implementedduetopoliticalreasons. 30

Moreover, the state as an employer is burdened with a huge administrative cost and reduction of this cost with the use of more ICT facilities would reduce expenditure. Furthermore,althoughthereareinfrastructureprojectstakingplacealloverthecountryin grand scale there is nodiscussion on introducing revenuestreams for them. For example: howtogenerateincomefromthehighways?Inthiscontextitisimportanttoconsiderand introduce revenue streams for these infrastructure projects as they will indeed be a good modeofrevenuegeneration. GovernmentinpoweratpresentseemstobeprovidingvariousconcessionstoattractFDIs tothecountry.Itisindeedbeneficialtoraiseprivateinvestmentstargetingbothforeignand domesticinvestments.AsthediscussiononidentifyingissueswiththisregardhighlightedSri LankaneedstobringaconsiderableamountofFDIsinordertomakeprofitoutofit.Inthis process,itisalsoimportanttoidentifyinnovative,yetsuitableareasofinvestments. Whilstthesearespokenofbasedontheformaleconomyitisalsonottoforgetthebenefits oftheinformaleconomyandrevenuegeneratedwithinitforthecountryaswell. Thinking of innovative mechanisms to raise revenues, it would be profitable licensing valuable assets with optimal price options as well. Whilst these could be few options to think through in order to increase the revenue of the state, it is vital to rationalize the recurrentexpensesofthebudgetaswell. 3. Rationalizerecurrentexpenditure: InthepostwarSriLankawithafocusofmakingitanemergingwonderoftheAsia,there should be a conscious effort to reduce some budgetary lines such as defence and invest moreonareassuchaseducation,researchetc. Government as an employer has been providing jobs for thousands of graduates since independence at a serious cost. This has consequence the present context of one governmentservantforevery17employeesandoneofthelargestgovernmentservicesin the world. Freezing fresh recruitments from today also will not make a significant 31

contributionaswealreadyhavealargeamountemployedbythegovernment.Hence,itis tofocusonmakingthegovernmentservicemuchproductivetobenefitoutoftheirservice. In addition to the public service, the loss making government projects should also be reducedandstrategicallymanagedwithintheeconomy. JanasaviyaandSamurdhihadbeenfamoussafetynetmechanismsamongstthepeopleand thegovernmentssinceindependenceseemtobespendingagreaterportionofmoneyfor those as well. In fact, what is important is to ensure that people are supported to be economicallyindependentandtocomeoutofthisdependencysyndrome,increasingtheir consumptionpowerandqualityofliferatherthanmerelyspendingmoneyonthem.Witha significantly large aging population in the country it is of greater importance to think of sustainablymechanismsofincomegenerationforthemaswell. Howeverasafact,governmentneedstoimprovetheefficiencyofallitsexpenditure.Inthat process probably it could lay the foundation stone by paving the way for a smaller and efficient statestructure. Moreover, reducing wasteful state expenditure by decreasing extravaganzasandreducingpressureongovernmentspendingthroughdivestingnonstate responsibility activities and raising productivity of public service through introducing performancerelatedremunerationsystemswouldbesomeoptionstoconsider. 4. Effectivebudgetexecution Efficiencyismorerealisticwithinatransparentsystem.Henceinthebudgetexecutionitis primarily important to present transparent performance indicators every year. The GovernmentandOppositionmembers,citizens,civilsocietyandotherstakeholdersshould takeresponsibilitytoreview,understand,monitorandcritiqueBudgetestimatesandfiscal performance.InthecontextGovernmentsbeingopentocriticism,inthenationalinterestto improve fiscal management and discipline is also vital. Civil society organizations should raisepublicawarenessonfiscalandeconomicissueswiththeassistanceofmediaandpolicy makers and create financial & development related information digestible for public consumption.Inadditionjournalistsshouldbeorientedonpoliticaleconomyingeneraland sessionspriorandafterbudgetdebatesasameanofmakingcitizensinformative. 32

Establishing mechanisms for performance evaluation of previous years budget prior to presentation of a new budget as a practice and introducing means and ways for effective implementationofFiscalresponsibilityActiscriticalinbriningeffectivenesstotheexecution process. Theorybehindtheproblem:AdaptationofNeoliberalpolicies? The issues of which countries like Sri Lanka face in terms of budget deficit, recurrent expenditureandoverallgovernmentfiscalmanagementhavearisenwithintheneoliberal economic policies that dominates not only Sri Lankan economy but also the economic policies within most of the developing countries in the world today. In contrast to its predecessor, structuralism which encouraged state involvement in the market, neo liberalism promotes the concept of a private market in which the states role is severely limited. Intheacademicdebatesonecanidentifygovernmentbudgetdeficitsandcurrentaccount deficits as being relevant to the transition to neoliberal policies. Both deficits come as a resultofgovernmentinterventioninthemarket.Believingthattheprivatesectorwouldnot invest the governments tend to make investments themselves in collaboration with the privatesectororcreatestateownedenterprises.Governmentbeingthebiggestemployeris also a consequence of this phenomenon. The problem with this is that the government ventures are not always profitable. This means that government needed to operate the deficitsinordertomaintaintheseinstitutionsandkeeptheemployeesetc.Thefundsused for this purpose come from the state budget and consequentially the government has ended up with a large budget deficits as the operating costs along with the initial investments overshadows the return. The current account deficit also occurs within this contextnaturallyindeed. Thecurrentaccountwhichrecordstheflowofimportsandexportsrunsadeficitwhenthe amountofgoodsimportedexceedsthecountriescapacitytoexport.Exportstendtodecline mainly because of a lack of competitive products, policies that weaken the agricultural exportsectorandpoliciesthatlimitedothersectorsincentivetoexport.Ontheotherhand, 33

economicpoliciessuchashighertaxratesandovervaluedexchangeratescreateincentives to import than producing domestically. Are these imbalances in the economy actually perpetuated by the governments unwillingness to initiate reform? Or is it a general problemwiththeneoliberaleconomicsystem?Orisittheboth? Inordertounderstandthis,itwouldbeimportanttounderstandtheEastAsiaDevelopment ModelimplementedinTaiwan,Hongkong,Singapore,SouthKorea,Malaysiaetc.basedon an exportoriented economy. The difference in development between East Asian economies and developing economies i.e. Sri Lanka, Latin America based on three key economic indicators seem to suggest that East Asian economies benefitted largely from exportoriented policies. Per the IMF and World Bank interpretation, economic success in EastAsiaisaresultofitsintegrationintotheinternationalmarketaswellasitsmaintenance of a stable macroeconomic environment. Low inflation, floating exchange rates and conservative fiscal policies has created an enticing environment for investors and an easy transitionintotheinternationalmarketwithoutincurringlargecurrentaccountdeficits.The misappropriationoffundsaccompaniedbyrisinginterestrates,reductionintradeactivity, unpredictable political environment etc. caused many developing countries to default on theirforeignloanslimitingthefinancialassistancefromIMFandWBonly.BasedontheEast Asian development model they encourage to implement the structural adjustment programs and increase the role of the private market in the economy, essentially forcing neoliberalpoliciesupondevelopingcountries2425. In this context, it is safer to assume that the success or failure of neoliberalism in a developing country is dependent on their access to world markets. In order to promote economicprogressincountrieslikeSriLankainthisline,first,wemustdevelopadomestic marketthatencouragesthecreationofcompetitiveindustries.Second,advancedindustrial nationsmustbewillingtoopentheirmarketstodevelopingcountries.Inaclimatewhere the advanced industrial nations are in a dilemma how realistic is this is another crucial question. The question then trickles down to the assumption that the current problem

24 David, Bushnell. "History of Latin America." Encyclopedia Britannica. 2010. http://www.britannica.com/EBchecked/topic/331694/Latin-America 25 Oatley,Thomas. International Political Economy. 4th ed. Vikram Mukhija. New York: Longman, 2010

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ideally goes beyond the context of developing countries but to the entire neoliberal economicsystem. The contemporary world system doesnt seem to be kind to neoliberalism, based on the motionthatmarketsareselfcorrecting,allocateresourcesefficientlyandservethepublic interest.ItwasthesamemarketfundamentalismthatunderlayThatcherism,Reaganomics in favor of privatization, liberalization and independent central banks focusing single mindedly on inflation. For a quarter century, there has been a contest among developing countriesandthelosersareclear.Countriesthatpursueneoliberalpoliciesnotonlylostthe growthsweepstakes,whentheygrewthebenefitseventuallyaccrueddisproportionatelyto thoseatthetop. Defenders of market fundamentalism want to shift the blame from market failure to governmentfailure.Butthatwontbringjusticetothosewholosttodate.Today,thereisa mismatch between social and private returns. Unless they are closely aligned, the market system cannot work well. Neoliberal market fundamentalism was always a political doctrine serving certain interests. It was ideally never supported by economic theory according to some scholars. It should not now be clear it is supported by historical experienceaswell.Hence,theprobleminthesystemwillcontinuewhilsttheprobleminthe developingstateswillbecomemuchsevere.

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