Budget 2019 should not fall into the pitfall of being an election budget

When an election is around the corner, the Minister of Finance is under pressure from his party colleagues to relax tight budgetary controls

Race to offer free goodies to voters in election years

The tradition in all developing countries has been that just before elections, politicians in power choose to offer the general public a host of unaffordable free goodies in the hope of winning their votes. Since voters expect them and politicians could offer them at no personal cost, this practice goes on unabated. 

The corollary is the stunting of the growth momentum due to the allocation of scarce resources away from investment for unproductive consumption. Sri Lanka had had this experience ever since it became independent from the British in 1948.

 

Politicians wishing to bribe voters should bring money from homes

The Budget 2019 to be presented shortly in Parliament runs this risk because there are at least two elections in the pipeline. When an election is around the corner, the minister of finance is under pressure from his party colleagues to relax the tight budgetary controls which he had been following previously. On the side-line, the Central Bank also comes under increasing pressure to relax its monetary policy. Both measures, it is believed, will allow the government party members to go before the voters and demonstrate their people-friendliness. 

However, a forgotten fact has been the reaction by the opposition parties to the goodies being proposed by the governing party. In order to win the voters away from the government party, they propose to double or treble the value of the goodies being proposed. For instance, if the government party proposes to provide employment in the government service, say, to 50,000 unemployed graduates, the opposition will come forward to absorb double that number to the government service.  

The eternal battle to provide free goodies to the people at the expense of the taxpayers has cost Sri Lanka dearly in its past growth initiatives. For instance, during 1961-2017, its average annual economic growth amounted only to 4.8%. In comparison, Singapore which had followed the opposite economic policy of getting citizens to pay for better public services had maintained an average economic growth of 7.4% during this period. The hard rule adopted by Singapore with respect to politicians willing to be good Samaritans, according to its first Finance Minister Dr. Goh Keng Swee, had been that if they wished to incur vote catching expenditure programmes, they should have brought money from their homes

This eternal battle to provide free goodies to the people at the expense of the taxpayers has cost Sri Lanka dearly in its past growth initiatives. For instance, during 1961-2017, its average annual economic growth amounted only to 4.8%. In comparison, Singapore which had followed the opposite economic policy of getting citizens to pay for better public services had maintained an average economic growth of 7.4% during this period.  

The hard rule adopted by Singapore with respect to politicians willing to be good Samaritans, according to its first Finance Minister Dr. Goh Keng Swee, had been that if they wished to incur vote catching expenditure programmes, they should have brought money from their homes. 

 

Present economic conditions unsuitable for budgetary relaxation

The current economic conditions and fiscal situation in Sri Lanka do not permit the Government to go willy-nilly in its finances. Economic growth has been slowing down from 2013. According to the projections by the World Bank in its recent Sri Lanka Development Update 2019, in the next three years, it would be on average a dismal 3.5%. The country is saddled with a massive debt repayment problem in which it has to spend more than what it earns to repay the principal and pay interest. 

Though domestic debt could be rolled over by issuing new debt to the people, the Government cannot do the same for foreign debt since rolling over involves borrowing anew from foreign markets to repay the maturing debt. After the 52-day constitutional debacle toward the end of 2018 during which there was no government in the country, all the three rating agencies downgraded Sri Lanka’s credit rating, a warning issued to foreign investors that they should take a hard view on the country. So far, this has not been corrected. 

In the absence of any new borrowing from external sources, the external debt that had matured in January in 2019 had to be repaid by using the country’s foreign exchange reserves. It cost a little more than $ 1 billion to Sri Lanka bringing down the freely available reserves to $ 5.2 billion when its next 12-month obligation of foreign debt repayments will amount to $ 5.9 billion.     

The current economic conditions and fiscal situation in Sri Lanka do not permit the Government to go willy-nilly in its finances. Economic growth has been slowing down from 2013. According to the projections by the World Bank in its recent Sri Lanka Development Update 2019, in the next three years, it would be on average a dismal 3.5%. The country is saddled with a massive debt repayment problem in which it has to spend more than what it earns to repay the principal and pay interest

The rupee had come under increasing pressure for depreciation and any holdup would have been possible only by releasing the borrowed dollars to the market. The budget is out of alignment with the targets agreed with the International Monetary Fund when the country got an Extended Fund Facility or EFF in 2016. The IMF has finally given one year’s breathing space to Sri Lanka by postponing the timeline of satisfying the achievement of targets till end 2020. 

These tight fiscal targets are like cutting down the sugar supply to a diabetic so that it could build up its inner system to recover from the ailment. But, when more sugar is given to him through an election budget, there is no possibility for the patient to recover. This is the paradox faced by any minister of finance: he wants to cut the sugar supply but his colleagues and opposition parties force him to abandon the idea. 

 

Sri Lanka is a republic of meta-beliefs 

Strangely, this situation is not known to those in the government as well as those in the opposition. Perhaps they are aware of it but pretend ignorance because it serves their purpose. That is because to remain in power or to come to power they should keep the electorate supplied with as many free goodies as possible. In making the choice, they could always sacrifice the future prosperity for short-term immediate gains. The population is also attuned to this mentality perfectly through successful ‘blind faith building’. 

When a society as a whole believes that it can live comfortably without doing anything, it is called a meta-belief and if anyone who writes or argues against it, he is considered as a freak. The underlying rationale is that if my neighbour can live comfortably out of the free goodies supplied by the government, why should not I too enjoy them? It does not matter whether I am myself paying for it and what the politicians do is to organise it formally to collect it from me and give back to me. I do not see the reality that the cost is collected from me. I have been made to believe that it is collected from rich citizens and therefore, it is perfectly normal to get them to share wealth with me. 

It is then engraved into a right: right to free education, right to a government job, right to free health services, right to a vehicle and so on. The whole of the Sri Lankan society from top to the bottom or across lives with a set of unchangeable meta-beliefs. Hence, Sri Lanka is not just a Democratic Socialist Republic; it is a Democratic Socialist Republic of Meta-Beliefs. 

 

Politicians too contribute to perpetuate the belief system

These meta-beliefs were initially installed in the mindset of the citizenry by the country’s political leadership for personal gain. Then, the leadership soon found that while pampering to these meta-beliefs, it too can function as an extractive institution. Accordingly, the political leadership became a benevolent dictator functioning under the realms of democracy. As a rule, a free goodie is first given to people posing as if they are being helped out; then, it is helped out to politicians too. Thus, when free vehicle permits were granted to public servants to satisfy ‘a right’, it was offered to legislators too as a right. When the public servants began to sell those vehicles or vehicle permits to appropriate to themselves the duty-free allowance foregone by the government, legislators also followed the suit. Now it is believed to be a right and therefore, no one would consider it as an instance of misappropriation of public faith.  

Offering free goodies is a poor way of helping the poor. But it brings in the adverse consequence of misallocating resources from investment to unproductive consumption. Studies on growth dynamics in Sri Lanka have revealed that the main driver of economic growth in the country has been the accumulation of capital arising from high investments, supported by increases in productivity. A budget aiming at winning elections by offering free goodies to people will impede both capital formation and improvement in productivity

This is only one instance of building meta-beliefs in Sri Lanka’s society. There are many more that are encompassing the socio-politico-economic system of the country. Anyone attempting to change them would surely have to face acrimonious objections coming from all quarters of society. 

 

Society cannot rob from itself into prosperity

But, it is an instance of society robbing from itself to have a good life. Can I rob from one pocket of my trousers and become richer by putting it into another pocket? Surely not. The secret to become richer is working harder than before and not by transferring money from one pocket to another. This rule is valid for the entire society as well. 

Without working and merely relying on government free goodies, nobody could upgrade his conditions. But, then, why do people harbour this meta-belief within them? That is because they are told that moneys are taken from the rich and transferred to others. 

When Indian Prime Minister Narendra Modi decided to demonetise the high value currency notes, the reason given was that the rich had been hoarding their wealth in those high value notes and by demonetising them, they would be forced to hand them over to the banking system, enabling the Government to redistribute the same among the poor. Any policy presented suggesting redistribution of wealth from the rich to the poor could easily be sold to the people at large because they believe that it is possible. 

But in the Indian demonetisation exercise, it is now revealed, it is the poor who had suffered and not the rich people.

 

In reality, the poor are the payers

But in actual practice, it is the poor people who are either victimised or have to bear the true costs of such redistribution. Take for example, inflation. Inflation hits most severely those who are unable to adjust themselves to the expected inflation. They are able to protect their assets from the harmful effect of inflation by either transferring into other assets or by simply taking money out of the country. Those who just sit without doing anything will have to bear the full brunt of inflation. 

The rich people normally insulate themselves from inflation by transferring their assets into real estate, gems, gold or foreign exchange. The poor people who do nothing will have to experience a reduction in the real value of the assets they are holding. It is on them that the full burden of inflation is normally placed.

 

Grade Five Scholarship Scheme works against the poor

Another example has been provided by researchers at the Institute of Policy Studies or IPS with regard to the real beneficiaries of the Grade Five Scholarship Examination being conducted by the educational authorities in Sri Lanka. The purpose of the examination has been to permit the students in less privileged schools in remote areas to gain admission to good schools in the city and those in poor families to get a bursary to support their studies. But Ashani Abayasekara, a researcher at IPS, has found that both goals are not being fulfilled by the way the examination is conducted in Sri Lanka. 

The examination is extremely competitive and to gain the pass mark which is around 80% per subject, a student has to compulsorily attend tuition classes from Grade 2 onwards. Only the middle and the rich classes can afford to do so. Thus, by natural selection, the students from poor families cannot score the pass mark. Then, a half of those who get the pass marks are those who are from good schools. They do not have to change the school after passing the examination. 

Another reason that has gone against the poor as observed by Abayasekara has been the threshold limit of the income to be eligible for a bursary. That income standing at Rs. 50,000 per family per annum is too low an income, disqualifying many of the poor students from the scholarship since they have no means of paying for the tuition fees for three years to get a good score at the examination. Even if they become eligible for a bursary, it is nothing much since the bursary amounts only to Rs. 500 or $ 2.50 a month. Hence, a public expenditure programme aiming at helping the poor has indeed gone against the poor.

 

Growth is stunted by the free goodie system 

Thus, offering free goodies is a poor way of helping the poor. But it brings in the adverse consequence of misallocating resources from investment to unproductive consumption. Studies on growth dynamics in Sri Lanka have revealed that the main driver of economic growth in the country has been the accumulation of capital arising from high investments, supported by increases in productivity. A budget aiming at winning elections by offering free goodies to people will impede both capital formation and improvement in productivity. 

Hence, in the long run, the country loses. Then, what about the short run? In the short run too, the country loses because when one party offers one set of free goodies, the opposition party seeks to better it by offering more goodies. Thus, the government that makes the initial offer loses because it cannot win the faith of the voters. The country loses because we are producing a nation that believes that it can rob from itself into prosperity. At national level, such a thing is not possible.

As such, the Budget 2019 should not fall into the pitfall of being an election budget.

 

(W.A. Wijewardena, a former Deputy Governor of the Central Bank of Sri Lanka, can be reached at [email protected].) 

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