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FINANCIAL CHRONICLE™ » DAILY CHRONICLE™ » Little incentive for govt. to stick to budget deficit target

Little incentive for govt. to stick to budget deficit target

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Senior Vice President - Equity Analytics
Senior Vice President - Equity Analytics
A senior economist believes the government has little incentive to contain the budget deficit this year while the public does not seem to care too much about the government’s fiscal performance either.

According to the latest data released by the Central Bank tax revenue grew 14.05 percent year-on-year during the first six months of this year to Rs. 496.8 billion while recurrent expenditure grew 17.4 percent to Rs. 563.8 billion and capital expenditure grew 40.94 percent to Rs. 235.8 billion. The deficit had increased by 39.64 percent to 302.9 billion and estimated to be 4.03 percent of GDP. The deficit target for the full year is 6.2 percent of GDP.

Dr. Muttukrishna Sarvananthan, Development Economist, Principal Researcher, Point Pedro Institute of Development, told The Financial Review that the expenditure was likely to be under estimated.

"The official figure on government/public expenditure I believe is an under-estimation because I have heard that Colombo-based big construction companies involved in major infrastructure development projects in the East, North, and South have not been paid their dues for a long time now," he said.

"Apparently, the government owes billions of rupees to such construction firms for their completed work. This deferred payment is the price such construction firms are paying for getting contracts from the government without due process of going through tenders. This is why such firms are not blowing the whistle about the debt the government owes them. It is the perfect quid-pro-quo between the present government and big businesses; an anecdote of crony capitalism."

A senior professional in the construction sector told The Island Financial Review that these non-payments had accumulated overtime and would become a huge problem later on. "I believe the government owes contractors over Rs. 2 billion. The biggest defaulter is the Road Development Authority. Projects undertaken for the Ministry of Economic Development however, do not face these problems," he said not wanting to be named.

Getting back to Dr. Sarvananthan, he said there was no external pressure for fiscal restraint by the government this year, as was the case during the previous few years when the IMF monitoring the government’s fiscal performance under the US$ 2.6 billion standby facility arrangement which concluded this year.

"In addition, there are rumours that the Northern Provincial Council election may take place early next year and even a snap parliamentary poll later next year. If this is true, there may not be any cut in public spending both recurrent and capital in the foreseeable future as the government expenditure is usually high during election years. Besides, everyone in the public sector wants a pay rise, including the lecturers and professors of economics," Dr. Sarvananthan said.

"The government has quite successfully outsourced the potential inflationary pressure from high budget deficit by increasingly borrowing from abroad. Who is concerned about budget deficit anyway?" the economist asked.

Public focus heightens in November each year when the government presents its budget to parliament, and this too to the various concessions and taxes. Little attention is thereafter paid to monthly fiscal performance indicators.

According to a recent report published by the Central Bank last week (September 21, 2012): "Large fiscal deficits can cause a number of adverse economic consequences. Expansionary fiscal policy could lead to raise inflation and interest rates of the economy discouraging investments. High borrowing by the government would result in crowding out of private sector investment. The reduction in investment in turn affects employment as firms/businesses reduce their demand for labour and other factor inputs. All of these lead to a reduction in national output, which in turn leads to trade deficits and balance of payments problems, and a reduction in the overall wellbeing of the people. Accordingly, large fiscal deficits are considered to be one of the key economic issues faced by developing countries."

In 2010, Central Bank Governor Ajith Nivard Cabraal told the government that reckless spending could threaten the macroeconomic stability in the country. Months later, Treasury Secretary Dr. P. B. Jayasundera lashed out that the Central Bank was bogged down in theories and had no idea of the realities in the country.

A respected think tank, the Institute of Policy Studies once said the government’s fiscal indiscipline was the bane of macroeconomic stability in the country.

However, with the end of the decades long conflict in May 2009, the government has improved its fiscal performance a great deal, with monitoring by the IMF proving useful as well.

After peaking at 9.9 percent of GDP in 2009, the budget deficit eased to 8 percent in 2010, 6.9 percent in 2011 and is expected to reach 6.2 percent this year.

In 2010, C. J. P. Siriwardena, then Superintendent Central Bank Public Debt Department, told a forum presided by Economic Development Minister Basil Rajapaksa that: "Each time the budget deficit increases by 1 percent, the net borrowing requirement of the government increases by Rs. 54 billion and the debt stock increases by this same amount. If interest rates increase by 1 percent, the government’s expenditure on interest payments would increase by Rs. 10 billion and if the rupee depreciates by 1 percent it would cost the government Rs. 9 billion. This is why it is important for the government to bring down the budget deficit to sustainable levels so that interest rates and inflation can be maintained at low levels."

According to Dr. Sarvananthan, the habit of presidents in this country holding the post of finance minister undermined transparency and accountability because a president is not even answerable to the judiciary. "This seriously undermines transparency and accountability. In a company the CEO would never the hold the position of a CFO (chief financial officer) as well," Dr. Sarvananthan said.

The country’s fiscal process is governed by the Fiscal Management Responsibility Act.

"This Act should be further strengthened with penalties for non-compliance and it should be able to limit public expenditure by introducing statutory controls," Dr. Sarvananthan said.

He said a parliamentary budget committee must be set up while steps are taken to enhance the capacity of legislators to engage in effective, informed and constructive budget debate through in-house research facilities or external expertise.

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