Originally appeared on the Morning
By Avishka Jayaweera
In his recent Budget speech, President Ranil Wickremesinghe stated: “It has been difficult to allocate resources to health, education, and other important sectors due to the lower level of Government revenue generated from taxes in comparison to other countries.” However, increasing revenue is only one side of the coin. On the flip side, an equally important aspect of a state’s finances is expenditure.
It is only logical that if one tends to spend in excess of what they earn, effectively living beyond their means, their spending is unsustainable in the long run. The same holds true for a state. If a state spends beyond its earnings, it has no alternative but to borrow money to finance its expenditure. However, such borrowing can only be sustained for so long. This is Sri Lanka’s folly.
Except for 2017 and 2018, Sri Lanka has regularly run on a primary deficit [1]. The deficit has largely been financed through debt and money printing. It is the foreign component of this debt, which kept growing incrementally, that is responsible for the crisis Sri Lanka faces today. There is a limit up to which creditors are willing to extend loans to the country. Once Sri Lanka’s credit rating was downgraded and it lost access to the International Sovereign Bond market, the Government could not finance the current account deficit, causing the balance of payments crisis.
Government expenditure and the 2023 Budget
It is clear that the Government must balance its Budget, which is what the International Monetary Fund (IMF) Staff-Level Agreement with the Government aims to achieve by aiming for a primary surplus of 2.3% of the GDP by 2025 [2]. The Government appears to be attempting to do this purely by increasing taxes. This places a high burden on consumers who are already facing diminishing standards of living and an inflation tax, caused by excess money printing among other factors.
What then is the alternative? The answer, although politically unpopular, is relatively straightforward. It lies in cutting down on State expenditure. State expenditure must be scrutinised and prioritised. Instead of reducing expenditure in the 2023 Budget, the Government has increased expenditure by 31% from the 2022 revised Budget to Rs. 5,819 billion.
Expenditure must be rationalised. Calls to cut Government spending do not mean reducing the amount spent on health, education, or social welfare. There are more obvious areas where expenses can be cut, freeing up resources to be used in these aforementioned areas that are of national importance. Defence and security spending is one of the main culprits. The Ministry of Defense has the third highest Budget allocation of all ministries.
Defence and public security spending
Allocations for defence and public security spending have risen in the 2023 Budget to Rs. 539.2 billion, which comprises approximately 1.78% of the GDP for 2023 [3]. The allocations for defence and public security spending have constantly been on the rise, with a 9.1% increase in the 2022 revised Budget and a 10.2% increase in the most recent 2023 Budget.
It has been 10 years since the civil war and Sri Lanka is yet to demilitarise. In fact, since the end of the war in 2009, military expenditure has consistently been on the rise. According to a publication in 2021 by Daniel Alphonsus, not only did military expenditure not return to pre-conflict levels, but even when adjusted for inflation, the military spending post-conflict (from 2009 to 2017) was higher than the spending during the wartime peak [4]. Defence expenditure as a percentage of the GDP was three times higher than in the last period of peace [5].
It must also be noted that 88% of the spending on defence and public security is for recurrent expenditure. Most of this is to sustain an active military force of around 250,000 – incidentally, the 17th highest in the world, exceeding even the military force sustained by the UK [6].
The defence expenditure also includes spending on a Police force of 74,835 officers and a Special Task Force of 8,860 [7]. In 2021, 34.6% of Government salaries and wages were spent on defence [8]. Bearing such a high cost on maintaining an active force during peacetime is not only overspending but is also an inefficient allocation of these resources.
The need for action
Reduction of these active personnel will not only lower Government expenditure but with proper programmes, provide valuable labour that can be utilised in an effective and productive manner in the private sector. While the proposal in the 2023 Budget speech mentions that armed force personnel will be allowed to retire after 18 years, it is unclear if this is optional or mandatory. Further, whether this proposal would even be implemented remains to be seen.
Many Sri Lankan citizens today find it difficult to simply get by due to the crisis brought about by the mismanagement of public finances. While the public is burdened with paying more in taxes, the Government should ensure that the public spendings are efficient, effective, and deliver good social outcomes. It is difficult to justify maintaining a large standing army or a vast defence expenditure in a time of peace.
(The writer is a Research Assistant at the Advocata Institute. He can be contacted at avishka@advocata.org. The Advocata Institute is an independent public policy think tank. Learn more about Advocata’s work at www.advocata.org.)
(The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.)
References
Central Bank, Annual Report 2021.
IMF, Press Release No. 22/295.
Based on 2023 Budget Estimates; Public Finance.
Daniel Alphonsus, Sri Lanka’s Post-War Defence Budget: Overspending and Underprotection, South Asia Scan, Issue No. 15 (Singapore: Institute of South Asian Studies, November 2021).
Daniel Alphonsus, Sri Lanka’s Post-War Defence Budget: Overspending and Underprotection, South Asia Scan, Issue No. 15 (Singapore: Institute of South Asian Studies, November 2021).
The International Institute For Strategic Studies, ‘The Military Balance 2021’; Global Fire Power.
Sri Lanka Police, ‘Performance Report 2019’.
Calculations based on Central Bank, Annual Report 2021.