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FINANCIAL CHRONICLE™ » FINANCIAL CHRONICLE™ » Welfare measures in the budget could trigger inflation, economists warn

Welfare measures in the budget could trigger inflation, economists warn

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Quibit


Senior Vice President - Equity Analytics
Senior Vice President - Equity Analytics
More borrowings could further aggravate Sri Lanka’s debt crisis while the revised budget filled with welfare measures could trigger inflation, economists warned on Thursday.

Speaking at a panel discussion on the budget held at the auditorium of the Colombo University’s Department of Economics, the three panellists were also of the view that the new regime and the previous one were moving away from an economy dictated by free market policies to a welfarist system with growing intervention by the Government.

The panellists were Dr. Sumanasiri Liyanage, Senior Lecturer, University of Peradeniya; Prof. Sirimal Abeyratne, Senior Lecturer, University of Colombo and Prof. S.S. Colombage, former Director, Central Bank and former Professor of Economics, Open University of Sri Lanka. The event was jointly organized by the Colombo University’s Economics Department and the Sri Lanka Economic Association (SLEA).

Prof. A.D.V. de S. Indraratna, SLEA President, who chaired the meeting, said that public investment as a percentage of GDP fell to 4.9 per cent from 6.2 per cent in the November 2015 budget which was a worrying phenomenon because public investment is the reason for growth. But he noted that this may be due to rationalization in the budget through cutting costs and reducing waste while physical infrastructure and work remained the same.

Dr. Liyanage said the budget is one that is valid only for 100 days while after the next poll there will be another budget. This budget doesn’t reveal the economic policies of the government, he said, adding that the government’s austerity measures may not be the best solution for the crises at hand.

He said indirect taxes account for 80 per cent of the revenue while the balance comes from indirect taxes, a scenario that has been unchanged over the years. He urged the authorities to increase direct taxes.

The super gain tax, he revealed, was a counter-productive step as this is taxing profit which is the driver of economic development. “I think this strategy won’t work,” Dr. Liyanage said also reminding the small audience of economists, economic students, analysts and journalists that though it was stated that the health and education spend had risen, in reality (and money terms) it had not if one looks at the budget figures closely.

Prof. Abeyratne said that selective intervention through commodity prices, and imposing taxes on certain companies and individuals can be more harmful than realise any benefit.

“Multiple objectives of government are being mixed up which eventually distorts the economic outcome. This has happened before too,” he said.
He said he didn’t see any clear message in the budget while posing the question; “What is the policy direction to the investor community? There doesn’t seem to be one.”

Prof. Colombage, while acknowledging that the new government had to work within a certain framework, noted that there is no clear economic and political ideologue in the budget probably due to the multi- party structure of the new regime.

He recalled former Singapore Prime Minister Lee Kwan’s view that Sri Lankan budgets are an auction of non-existing resources. “It is the same in this case,” he said, adding that there is no clear macro-economic management framework in the budget.

He pointed out that interest and exchange rates should be determined by the market in a free market system but the Central Bank still governs it.
He said Sri Lanka is drifting away from market-driven economic policies towards a state of subsidies, transfers and price controls.

Rev. Prof. W. Wimalaratana, Head, Colombo University’s Department of Economics, and Chandrasena Maliyadde, SLEA Vice-President were also associated with the discussion.

http://www.sundaytimes.lk/150215/business-times/welfare-measures-in-the-budget-could-trigger-inflation-economists-warn-135956.html

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