Sunday Island Editorial

Budget thoughts

06 October 2016

The 2017 budget due to be presented next Thursday has not evoked any sense of anticipation or major expectation. The people are very well aware of the government’s need for revenue and the reality that state expenditure in recent years has far outstripped inflows to Treasury coffers. With the VAT amendment already in place, the major source of needed cash is known and the war drums on that score have already been beaten by opponents of the government in the so-called Joint Opposition. An encore is probable and the issue will, no doubt, be flogged to death all over again. Nobody likes to pay taxes and although essentials have been excluded, a lot of steam has been already generated on VAT on hospital charges including medical consultations and on telecommunications. High earning consultants could have done themselves proud by agreeing to a fee reduction freeing patients of the additional expenditure caused by the VAT imposition. Given what they earn, they could well afford to do so. But nobody seems to have thought of it or called for it. Everybody and his brother now have a phone and higher phone bills must necessarily bite. But unlike in some previous years, though not recently, there was no evidence of ‘beat the budget’ shopping.

Already cigarette and liquor prices are up and the budget is not expected to do any more on this account. Given today’s price of a cigarette (Rs. 50 for a popular brand), and to a lesser extent a bottle of arrack (Rs. 1,250 for VSOA), ordinary people will surely wonder how any but the affluent can afford to smoke or drink any more. But they do and will continue to do so. While governments, both past and present, have used price deterrents to reduce the deadly habits – or should we say addictions? – of alcohol and tobacco, they have done no violence to the interests of state coffers into which both controversial industries pour mega bucks. The manufacture of both harmful products continues to be immensely profitable, the price stick notwithstanding. On top of that there is the thriving illicit liquor and legal beedi industries about which the legitimate manufactures routinely complain. These too are also immensely profitable for those who engage in them.

Finance Minister Ravi Karunanayake has gone public with the statement that the budget is going to be "revolutionary"; but how so nobody really knows. He is also on record saying he is going to reduce the long running deficit which this country has lived with. He wasn’t revealing any budget secret when he indicated that it is projected to be 4.7 percent of GDP next year against the 5.4 percent estimated for this calendar year. However, it is generally known that budget outcomes too often fall short of projections. The capital gains tax about which both he and the prime minister have talked about is coming, but not for share market transactions, he has confirmed. Though no details have been offered the minister has said that this tax will not apply for properties held for over 10 years but those who have made killings on real estate in the short term must cough up a fair share of such gains to the state.

Passenger car prices in this country have been exorbitantly high historically and more so in recent years, on account of the huge import taxes loaded on them. While the revenue authorities will have little compunction about increasing these, they have also to factor reduced imports if prices are too high and the resultant revenue implications. When fewer vehicles are imported, and the condition and congestion on our roads makes this a logical objective, the government collects less from what has long been a cash cow. There have been suggestions to tax vehicle use rather than acquisition of vehicles. The sharp reduction in fuel prices following the 2015 presidential election and ahead of the parliamentary election that followed was undoubtedly a vote gathering inducement. Taking it away especially when global oil prices are down will be unpopular. Whether the government will risk this now remains to be seen. But continuing IMF support will only come at the price of ensuring a lower budget deficit. Increasing vehicle license fees moderately will not raise much cash but tax collectors universally act on the premise that "little drops of water, the mighty ocean makes."

Whatever the finance minister plans to do on Tuesday, he will have to balance the imperatives of what is politically possible against the necessity of meeting conditions necessary for IMF support. Given the massive debt service and repayment obligations, the salary and pension bill of a bloated public service, bleeding state-owned enterprises and many more, Mr. Karunanayake is faced with an unenviable task on Thursday. He has characteristically projected an air of ‘can do’ optimism although what happened last time round cannot be easily forgotten. A lot of what is done is likely to be on the macro economic front. The chances are the already accomplished VAT is where the consumer will pick up the highest tab and the budget will hopefully protect those segments of society most needing succor.