Should we abolish the budget?

In this weekly column on The Sunday Morning Business titled “The Coordination Problem”, the scholars and fellows associated with Advocata attempt to explore issues around economics, public policy, the institutions that govern them and their impact on our lives and society.

Originally appeared on The Morning

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By Aneetha Warusavitarana

On the 5th of March 2019, the Ministry of Finance presented the much-delayed budget for 2019. The budget is a tool of extraordinary influence, which is used to affect government revenue, expenditures and national policy. That being said, our budgets don't appear to be exerting that influence, or creating the impact they could. According to Verité Research’s budget tracker only 8% of projects from the budget 2018 are progressing, with a staggering 59% lagging behind in implementation.

Everyone has come to expect the budget, but what purpose does it serve? Why does it exist? During the rest of the year the government continues to make decisions on policy, pass legislature and try to run the country. The allocations made during the budget to specific ministries are not set in stone. The reality is that these allocations are moved around government in a manner than bewilders all involved, and when a year passes and the next budget is announced, it is found that budget promises have not been met, and very little has actually been implemented.

Budgets by definition should focus on revenue and expenditure. In the case of Sri Lanka and the mountain of debt that we need to contend with, this is all the more important.

When looking at this year’s budget, a wide variety of topics have been touched on. The Ministry of Finance has revised taxes on multiple fronts, with a focus on reducing the indirect tax base and increasing direct taxes. However, the budget has not limited itself to detailing expenditure and revenues. There has been a substantial amount of general policy which has been included, bringing up the question of whether there is a point to their inclusion in the budget. Surely these general policies would be better suited in a national policy document or election manifesto?

The policy decisions in the budget 2019 have ranged from establishing a national pension plan, increasing government servants’ salaries, to amending labour laws, and this is where the problem lies. Increasing government servants’ salaries would technically be the duty of the Ministry of Public Administration and Disaster Management (an apt ministry to handle the government sector) and salary revisions should follow a system, and not be dependent on ad hoc decisions. A national pension plan, while much needed is not an endeavor that can be completed in a year. The same reasoning applies to amending labour laws. These two in particular will in all likelihood take at least a few years to be finalized and implemented.

The alternative?

The alternative to the current budgeting process is following a medium-term expenditure framework (MTEF). This framework integrates policy, planning and budgeting for the medium term, combining a top-down resource envelope with a bottom-up estimate of the current and medium-term cost of existing programmes. The result is the alignment of macroeconomic stability and broad policies with more specific programmes. It is essentially a three to five year rolling budget, which sets fiscal targets and allocates money for that time frame. This system addresses the reality that very few projects can be successfully implemented within one year and allows the government to acknowledge this and act accordingly.

What does a Medium-Term Expenditure Framework mean for policy?

Within this framework, policy proposals are considered in the medium to long term context. Spending agencies have a stronger voice, as they have significant input into the design of sector strategies and some flexibility in managing their resources to meet their objectives. New projects are undertaken dependent on whether they are affordable and implementable in the medium term, allowing the government to have a very clear and mostly accurate statement of fiscal policy objectives, fiscal deficit and debt management.

At a project level, this framework creates two main wins. First, both policy and funding are more reliable and predictable. Second, it allows for policy to drive funding, as opposed to the reverse. This in turn means that budgeting is linked more strongly to results, as focus shifts to specific outcomes and what resources are required to achieve them.

What happens to the annual budget?

The annual budget will be announced, but it will simply reflect what is achievable in the short-term, within the larger three to five-year framework. This is beneficial, as spending will be more specific, and tied to clear targets. Funding is not allocated for an entire project, but only for the section of the project that can be reasonably achieved during the next twelve months. The entire budget is more focused on results, and less on broad policy statements. Given the low levels of implementation mentioned earlier, it is evident that a greater degree of specificity, combined with a results-focused approach to the budget is required.

What needs to be done?

Interestingly, even now a substantial amount of planning follows the structure of a three-year rolling plan. The Public Investment Programme or the PIP, is a three-year rolling document which details government expenditure of projects and programmes. The Ministry of Finance also publishes an annual medium-term fiscal strategy which establishes the general direction or objectives of fiscal policy for the next three years. According to the Ministry of Finance website, budget estimates are prepared in the larger context of a medium-term budgetary framework.

It appears that the key components of an effective medium-term expenditure framework already exist. The next step would be to align the annual budget more clearly with these components. Allocations should be made more specific, with clear ties to the three-year plan. New projects and programmes should be introduced taking into account a three-year resource envelope and fiscal objectives. In other words, the budget in its current iteration should be completely overhauled and refined.

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Aneetha Warusavitarana is a research analyst at the Advocata Institute and her research focuses on public policy and governance. She could be contacted at aneetha@advocata.org or @AneethaW on Twitter. Advocata is an independent policy think tank based in Colombo, Sri Lanka which conducts research, provides commentary, and holds events to promote sound policy ideas compatible with a free society in Sri Lanka.

On PM's economic statement: most important is to liberalize trade and investment

By Ravi Ratanasabapathy

The article first appeared on the Daily News

The Prime Minister’s statement on the economy to parliament on October 27 struck many a right note and has the ingredients to take the country to the goal of doubling per capita income by 2025.

Most important was the promise of reforms to liberalise trade and investment, to attract foreign investment and restore emphasis on exports.

It is important that the sentiments expressed in the Prime Minister’s statement must follow with practical yet bold economic policy reform. A detailed policy document has been promised and would hopefully contain the necessary implementation plans.

The rest of this brief note is aimed at understanding the policy pronouncements in the context of Sri Lanka’s political and socio-economic priorities.

Improving the business and investment climate

The statement promises a lot: simplifying the process of registering a business, getting construction permits, electricity connections and bank credit, registering property, protecting minority investors, the payment of taxes, trading across borders, the enforcement of contracts, the resolution of insolvency and reforming labour laws.

The Prime Minister’s target to bring Sri Lanka into the top 70 countries in the World Bank’s Doing Business Index by 2020 is welcome. Sri Lanka currently languishes at 110 in the index amongst 185 countries and its position has actually dropped by one place under the current administration. Policy reform to increase the ease of doing business is uncontentious and will draw broad political support from across the spectrum.

However the government must be bolder. Whilst ease of doing business has improved in the last few years, Sri Lanka can do much more to expand general economic freedom in the economy. The Fraser Institute, which publishes the annual index of economic freedom ranked Sri Lanka 111 among 160 countries. The index now ranks countries in the region like Nepal higher in terms of economic freedom than Sri Lanka with India only just behind. Beyond just looking at ease of doing business, Sri Lanka should also focus on other aspects of economic freedom including removing of outdated and arbitrary regulation, reversing recent follies such as Soviet-style price controls and truly living up to the promises of liberalising international trade and investment. In this vein, the proposed establishment of a single window for investment approval in the Prime Minister’s speech is a welcome move.

Sri Lanka can emulate, and where necessary adapt, the best practice policies from other countries such as New Zealand and Australia which rank highly in terms of economic freedom

Trade liberalisation: repeal of the Export and Import Control Act

The Government promises to repeal this archaic piece of legislation and replace it with new legislation based on that of Singapore. If implemented in the true spirit of Singapore’s legislation, this would be extremely positive.

Singapore is generally regarded as a free port and the Government only restricts the import of goods seen as posing a threat to health, security, safety and social decency. Around 99% of imports to Singapore are duty-free.

The policy statement makes reference to “a low tax regime”, the lessons from East Asia and other parts of the world is that the tariff regime needs to be low and uniform. This minimises loopholes, corruption and simplifies customs processing. A low uniform rate of duty eliminates disputes with classification and enables documents to be processed on a self-declared basis (with customs only focusing on misstatements of price and quantities) which results in faster, simpler clearing of goods.

While sentiments to keep a low tax regimes are laudable, a commitment for a low uniform tariff policy should be the goal.

State enterprise reforms and financing of infrastructure

The proposed debt/equity swaps of the Mattala Airport and the Hambantota mark an important step towards reducing the Government’s debt burden. The Government should also convert other infrastructure projects such as the highways into PPP projects by auctioning operational rights.

The statement promises investment in infrastructure in logistics to improve connectivity to global supply chains. Whilst we all welcome investments in critical infrastructure, all new projects should be implemented through public private partnerships to prevent further accumulation of public debt.

The report published by the Advocata Institute on “The State of State Enterprises in 2015” shows that the state has over 245 enterprises in its books, of which only a small number actually reported their financial position. The proposed formation of a Public Commercial Enterprise Board to manage SOEs and the creation a Public Wealth Trust, a centralised body to hold the shares in SOEs is therefore timely. Hopefully these mechanisms may prove to be the first step in imposing accepted reporting practices and better management of State enterprises. Sri Lanka can learn from Singapore’s state enterprise holding company Temasek and other experiences around the world.

Additionally, the listing of the shares of SOE’s on the Stock Exchange would also impose discipline in reporting and is something the Government should explore. Minority stakes could be offered to the public which would raise revenue to the state, allow public participation in SOE’s and broad-base the CSE; even while the majority stake is still controlled by the Government.

The recent announcements regarding the closure and amalgamation of Mihin Lanka into SriLankan Airlines is encouraging but the previously announced partial privatisation of the debt-ridden airline has not yet materialised.

The proposed Public Enterprise Commercial Board should be given a wide mandate to restructure and reform SOE’s including assessing the strategic need for such enterprises, the closure of unviable enterprises and to privatise enterprises where there’s enough commercial interest. The new structure will hopefully be just the first step on the long road to improve overall accountability and governance of these state enterprises.

It is unlikely a one size fits all solution would work for reforming all state enterprises in what would inevitably become a politically charged issue. However the public appetite for bold reform in this area is high with the realisation that the cumulative losses over the last ten years amongst the 55 strategically important enterprises amounted to Rs.636 billion.

Some areas of concern: SME’s rural agriculture

Several proposals including the one to expand SME finance through quantitative targets enforced by the Central Bank must be viewed with caution. Dirigiste lending to push bank exposure further to higher-risk sectors may boomerang on lenders, especially public sector banks, resulting in losses. Any difficulties SME’s may face with access to credit need to be examined carefully and appropriate solutions developed in consultation with financiers.

The establishment of rural modernisation boards and agricultural marketing boards will need to be examined more closely. No details are available so the exact role of these bodies is not clear but the current flawed agricultural policies have pushed up food prices for consumers. Sri Lanka’s food prices are the highest in the region and the priority should be to lower the cost of living through appropriate reforms to the sector.

Apart from a few areas of doubt the overall economic statement is broadly in the right direction and if properly implemented could boost growth and improve the welfare and prosperity of Sri Lankans. The government however has a demonstrable problem with policy inconsistency over the last few years, even amongst its own ministries and between Ministers of the same party. Whilst some diversity of opinion is expected from a coalition government, some of the policies enacted in the recent past have run counter to this and other broad policy pronouncement from the Prime Minister.

These broad ideas will hopefully pass the implementation test and we await the publication of the detailed strategy document.

The writer is a Fellow of the Advocata Institute, a fee-market think tank based in Colombo. www.advocata.org