In present world of political economies, annual budget of any country, whether rich or poor, brings hopes of new state concessions to all from the poor to multi-national investors. Immediately after presenting the budget, diverse political and economic comments are made on the extent of concessions of the new budget. Such diversity is normal as consumers of the budget are diverse. The concession-tone is high-weighted as the budget is marketed by political leaders for public votes.
Types of concessions also change over the time depending on the status of development of the economy. In Sri Lanka, the list of concessions has improved from free rice, free education and free health to low-income family grants, housing, electricity, water, fertilizer subsidy, free school books/uniforms and access to modern ICT. Although production and employment-focused concessions are mentioned from time to time, their tone is suppressed by social/consumer concessions.
Why National Budget?
* Spending
The prime duty of any government is to maintain law and order for people to live better. Living requires earning depending on skills, resources and competitiveness. The government also has to look after desperately poor and disabled persons for social justice. Any additional public duties that various governments wish to deliver top up the list, for example, infrastructure investments, state enterprises, forestation, environmental protection and supply of housing amenities. At present, the list is difficult to be counted. All these require the government to spend. Any extension of the list will increase govt. spending.
* Tax and Debt
The government taxes people to finance spending. If the tax income is not sufficient, the budget is a deficit. The government needs to borrow to finance the deficit.
Government can print money to spend without charging tax. It can be done only for few years. Too much money in circulation will erode public confidence in money and banks and destroy economies. Even borrowing too much will cause same as it leads to printing and creation of money through credit. The world has many experiences in such episodes from the past to present.
As governments in general spend more than its tax income, deficits and borrowing have become essential parts of national budgets.
* Budget Numbers
Accordingly, a national budget is a financial plan, i.e., spending, income and borrowing, for next year’s operations of the government. It is no different from the budget of a family or a business entity, except the government can tax public and borrow easily to spend even if it is technically insolvent. As the past numbers are available, it is easy to plug new numbers to represent new policies/operations envisaged as there is no accountability to realize the numbers.
Economics of National Budget
* Supporting Aggregate Demand in the Economy
As governments have become big by spending through tax and debt in countries, national budgets have become a significant part of macroeconomics. Its economic channel is the total/aggregate spending in the economy. As countries have the access to various resources, natural and human resources, there should be sufficient demand/spending for goods and services that will encourage entrepreneurs to mobilize resources and produce so that people find employment and income to live better. Unlike scattered public, the government can decide spending without depending on income.
* Causing Multiplier on Income and Employment
Therefore, in periods of low growth of production, income and employment, the government can raise spending financed through debt and printing of money. Such spending (government purchases of goods and services) within a short period will immediately raise the income of many people. They in turn increase their demand/spending whereas business enterprises will invest and increase production to satisfy the new demand.
This demand-supply increase will continue in several rounds. As a result, production, employment and income will rise in multiples over the time (fiscal policy multiplier). If the government does this for several years, growth of economy and employment will be faster. This view has been formalized by John Menard Keynes, a renowned economist in 1930/40s. The only concern here is the interim increase in inflation due to increased aggregate demand until new production and supply take place in the economy later. Therefore, as long as unemployed resources are available, the government does not have to worry about inflation as what most matters for the public is employment and income. Inflation is a secondary matter on the purchasing power of income.
This economic view is common whether govt. spending is on consumer concessions or economic concessions. However, spending on investments through economic infrastructure such as roads, airports, ports, reservoirs and education/training will raise the capacity of production where mobilization of resources, production and employment will further multiply. One can think what will be the economic-loss if the government cuts or terminates spending on maintenance of economic infrastructure.
* Country experiences
Whole world recognizes the macroeconomics of national budgets. Therefore, budgets cover a wide mix of national policies through spending, taxes and debt to intervene and influence in the national economy and social growth as the incumbent government believes desirable. For example, tax system is used to raise govt. revenue, redistribute national income and encourage priority production sectors. Some countries use cuts in general or specific taxes to encourage private spending (investments and consumption).
For example, the US general tax-cut effected in early 2018 is expected to add nearly US$ 1.5 trillion to budget deficit over next 10 years (a deficit of US$ 779 bn or 4% of GDP in 2018). China last week announced a cut in growth to 6% from 6.5%, an increase of budget deficit to 2.6% from 2.4% and 1% tax cut for top tax bracket to address the economic concerns of trade disputes with the US.
The composition of spending also is similarly used. Debt is broad based across sources and instruments for better management of budget deficits to be fair by taxpayers who have to repay debt.
In managing the budget, some governments believe more on market mechanism or capitalism with state regulation to promote fair competition while some believe a dominant government or socialism in the economy. At present, we see governments managing the budget at various points between the socialism and capitalism.
All capitalist countries used Keynesian policy or govt. spending to fight the economic depression in 1930s. During the last decade, all western countries have been using this policy to recover from the global financial crisis 2007/09. Germany accepted a mass of Syrian refugees in 2016 to generate a new flow of spending through its budget to promote the economic recovery. Post-1977 Sri Lanka recorded fast growth through govt. spending (spending of 34% and budget deficit of 11% of national spending or GDP).
At present, the national budget deficit is a key driver of macroeconomies of almost all countries, except few advanced economies with budget surpluses such as Germany, New Zealand, Norway, Singapore and Hong Kong. The budget deficits of some of the rest stand at even close to middle double digits (% of GDP).
Sri Lankan National Budget
* No Solution to Depressing Economy
Similar to all past budgets, last week’s budget also saw a lot of nice words (even without checking the accuracy, e.g., the Federal Reserve signaled lower rates since end of October 2018) on consumer/living-support concessions while the opposition alleged inadequacy of concessions. While some praised the budget as empowering people, official economists commended for fiscal consolidation and primary surplus (1.5% of GDP, i.e., budget surplus before interest payable on debt) for some complacency.
However, nobody seems to assess whether the present budget would be a major macroeconomic policy to stimulate the depressing economy as shown by low consumer inflation (NCPI falling from 5.5% in January 2018 to 1.2% in January 2019) and low growth (GDP growth falling from 5% in 2015 to 3% in 2018) way below official targets and expectations. The sudden foreign capital outflow during the second half of 2018 has caused a considerable shortage of foreign reserves, liquidity crunch and increase in interest rates that cause further downturn of the real economy until foreign capital is recovered. The government debt has increased to 84% of GDP in 2018 from 76% in 2017.
* No Rationale for Cut in Fiscal Front
The budget proposes to cut the deficit to 4.4% of GDP in 2019 from 5.3% in 2018 with a marginal increase in growth of the economy to 3.5% in 2019from 3% in 2018 (see Table below). A further gradual reduction of the deficit to 2% in 2024 is declared. However, there is no indication how such a reduction in fiscal front will promote higher growth through the private sector. Although 2018 budget also had proposed a reduced deficit to 4.8% of GDP from 5.5% in 2017, the present budget revised the actual 2018 deficit to 5.3%. Therefore, these numbers are nothing but estimates of numbers. Further, given the depressing state of the economy along with the reduced world growth (China and west), the macroeconomic or practical rationale for the such budget estimates is hard to understand unless a paradigm shift in managing the productivity of public funds and public services is invented.
* No mechanism to improve Fiscal Productivity
The budget of any company matters for its sustainability due to new business targets (investments, leverage, production, income, profit, employment, cost and productivity management, etc.) and its monitoring. That encourages and empowers the company staff to secure targets if they wish to survive. The national budget usually contains similar adjustment of numbers with impressive texts. Although national budgets cannot be same as commercial budgets, any budget is essentially the financial side of business operations which require targets of deliverables and monitoring.
National budgets need two layers of monitoring, i.e., targets of deliverables within the government and within the macroeconomy, separately. The monitoring should involve in assessment of productivity of policies and utilization of funds (taxes, payments and debt) on both sets of targets.
Unless such productivity is considerably improved, no governments can practically scale-down its fiscal front without a downturn of the economy. No government has invented this monitoring mechanism other than the mechanism for spending across each public service/project/entity where the life of bureaucracy is easy without targets and monitoring. Grave abuses in taxes, spending and debt have adverse impact on productivity of both the government and the economy. Claiming the ownership for national macroeconomic performance is unfair as they are the results of both private sector and government sector whereas macroeconomic indicators (such as inflation, growth and unemployment) not being exact sciences can be interpreted any way economists wish.
The government has an army of economists trained internationally and the Central Bank (performing as the fiscal agent, financial adviser, debt manager and money printer managed by its international economists). There is a high profile National Economic Council that claims to be managing the economy. It is strange that they all have failed to understand elementary economics of productivity of the national budget in the depressing economy.
* Budget being a Routine of the Economic and Political Bureaucracy
Therefore, the national budget is only another element of the bureaucracy that has to anyway exist, with or without regard to any productivity in economic sense. The government has the power to tax, borrow and spend, despite the virtual insolvency in view of enormous difficulties in servicing/repaying debt. As such, any government can go with a national budget by passing the resulting debt to future generation. It is grave social injustice of the parents to enjoy debt and die while leaving debt without earning assets to their children.
Urgent need to innovate Macroeconomic Governance System
Although the government is only about 20% of the national economy (in terms of spending), the macroeconomic productivity of public service funded by such spending is not analysed. Therefore, the government needs a new public service governance system based on targets of deliverables and cash flow/financial management of each service as part of national budget management. This is what the Parliament should examine at the third reading of the national budget for each Ministry and state entity on allocation of public funds whereas the second reading should examine macroeconomic impact of the national budget.
All political parties who seek next public license to govern the country may present a proposal how they would do this as what the public want is only better living standards through income and employment at own feet. What we have is an open economy in which people can find resources, skills and employment around the world to secure better living standards, i.e., good food, housing, energy, technology, health and education, without government concessions and red tapes whose costs are passed back to the public as tax and debt. The empowerment that the public need is not the concessions but a good economic/business environment to secure better living standards. For example, if the government provides free education as concessions to all where graduates have to wait for any government job and unemployment rate increases with higher education, the free education lacks economic/business opportunities.
If the government does not innovate the process of national budget to monitor and maximize macroeconomic benefits, the bureaucracy of the national budget, i.e., spending, tax and debt, will end up only in burst of a debt bubble and public bankruptcy. This has happened even in countries such as Greece and Spain that we thought as developed countries.
Given the massive scale of abuses in govt. debt market and mismanaged debt pile along with non-monitoring on productivity of the national budget, it is not unreasonable to expect similar debt bubbles and default in Sri Lanka in the next decade unless the budget productivity issue is fixed urgently. Hope that the government will wake up at least at that time.
(The writer is a former Deputy Governor of the CB and chairman and member of 6 Public Boards with nearly 35 years of public service. He authored 5 economics and financial/banking books and more than 50 published articles.)
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