Budgeting for future – prioritising inclusion and equity

• Budgeting with integrity: Lessons from the past and pathways to reforms
• Appropriation Bill: Formulation and oversight
• Revenue reforms: Creating a more inclusive and equitable tax system

Former Minister of Highways, Higher Education and Investment Promotion Kabir Hashim

With a packed audience including politicians, academics, researchers, media personalities and civil society leaders, the Budget symposium themed ‘Budgeting for the future – prioritising inclusion and equity’ was held last week. 

Coalition for Inclusive Impact (CII) Director and WFD Country Director Sanje Vignaraja delivering opening remarks said that the CII together with other stakeholders has organised the event to discuss the Appropriation Bill for 2025 that was presented to the Parliament on 9 January 2025 and will look at revenue reforms and also based on inclusive and equity gaps in expenditure. 

The symposium was organised in collaboration with Advocata, Arutha Centre for Poverty Analysis (CEPA), Verite Research, and the exclusive media partner was Daily FT. 

“We are hoping to draft key recommendations based on discussions and present them to the Committee on Public Finance (COPF) which was done last year as well as a pilot program,” he said. 

Delivering his presentation on ‘Budgeting with integrity: lessons from the past and pathways to reforms’, Verite Research Executive Director Dr. Nishan de Mel covered two main areas for better budgeting – integrity, which is informational problems of the Budget and accountability which means behavioural problems in the Budget, which is mostly happening after the Budget. 

Showing examples from when working at the COPF and writing reports on budgets, he said missing consistency in data in a Budget is a serious concern while explaining the differences of a Budget and Government’s policy statement.

Budget – Govt.’s financial plan

“The distinction of a Budget from a mere policy statement is, it is where the Government has a financial plan for executing the ideas and policies that they would put forward. If you get a Budget in which there are no numbers, there is a question of a hole in numbers that there is a not really a Budget,” he said adding that historically from 2019 new ideas of proposals that are put forward in the Budget do not have a number attached to them, which make them really questionable.

According to Dr. de Mel, in 2002 100% of proposals in the interim Budget didn’t have numbers but they had high percentages attached to proposals. 

“We have highlighted this trend in our Budget reports for the Government emphasising to resolve because if you get a Budget with a large number of proposals not having numbers that means actually that Government is quite unstable in execution,” he stressed while highlighting the issue of mismatch in numbers in three Budget documents – Budget speech with annexures with all numbers, draft estimates and Budget proposals given with the speech. 

“We have found that every year for the last eight years that the numbers that are given in different documents do not match up. They are structured differently and different classifications are used to add these numbers. Not only the numbers given in those documents contradict each other, even numbers in the same report contradict each other. I would say there is really a professionalism problem,” he stressed. 

Dr. de Mel further said that provincial council wages and salaries reported in the budget speech and the draft budget estimates as transfers making the parliamentarians confused to understand what was the budget because it was reported in different formats and they do not have means of reconciling them unless the Finance Ministry provides them additional information. 

He claimed that similar to audit reports had not been followed up, recommendations and requirements put forward by important committees had not been followed up and did not see anything had been changed. 

Honesty is hardly heard 

 According to Dr. de Mel’s view honesty, which is hardly heard, plays a major role in budgets as they can be misrepresented. He has cited an example how honesty has brought different notions on a query in the budget discussed at the COPE that the annual levy for carrying on the business of gambling and casino, in which was revised to Rs. 1 million and the Budget said the impact is the Rs. 10 million increase in the revenue. 

He said honesty was hardly heard and the accountability of the Budget was not there. “The State Minister of Finance was not aware about that and these things are not happening at political level but at the bureaucratic level,” he added 

Meanwhile, he said since no fiscal rule was followed, the Budget itself was violating fiscal rules. “In some years the budget was compiled with fiscal rules but the outcome was not there and no consequences happened for violating the fiscal laws. Then we will have another fiscal law,” he explained and said the issue got aggravated when another fiscal rule was imposed ignoring previous ones.

“The new fiscal law that has been passed suggested that Sri Lanka’s primary expenditure should be limited to 30 % of the GDP. We wrote that was a very unorthodox proposal as no precedence in theory or empirical research was followed. Only 10 countries in the world have less than 13 % of the GDP of primary expenditure. Sri Lanka among them. It is no good to be in this list,” he cautioned. 

Dr. de Mel said that Sri Lanka reported two exceptional situations, where Sri Lanka is the only country in the world with the absolute limit on primary expenditure and the only country in the world to have primary expenditure based rule or the lowest in the world in terms of primary expenditure. “These things are detrimental to the country because they effectively take away from the Government to have good spending like healthcare, education, etc.,” he said adding excessive discretion given to ministers the ability to change taxes under special commodity levy provisions is detrimental and would lead to corruption like in the sugar and bond scams. 

“The IMF, having understood this and after we made representations, put a commitment to restrict ministerial authority to introduce tax changes without prior approval of the Parliament because that leads to lots of corruption. The Government has to complete that action by June 2024 but it was not done. Then after the negotiation with the IMF reviewed program, this commitment was removed,” he stressed. 

Dr. de Mel concluded his presentation giving four recommendations to maintain budget integrity and accountability. They are well-formulated proposals each backed by supporting documents with assumptions and updates, revise laws and regulations that constrains better fiscal behaviour and outcomes, improved oversight of budget implementation by executive and legislature and remove room for excessive discretion in matters that impact the Budget.

Real challenges in Budget formulation

At the panel discussion moderated by Daily FT Editor in Chief Nisthar Cassim, National Development Bank former CEO and former State Finance Minister Eran Wickramaratne answering the question on what are the real challenges in formulation of Budgets and prior consultations, said Government of the day discloses some of their proposals in the manifesto according to their political agenda but unfortunately between the manifesto and the actual budget, there was often a gap.  “More inclusion is lacking and the private sector representation may be there to some extent but civil society is never. In the past we have seen the Treasury inviting public recommendations and do they really take their recommendations to count,” he asked.

He said although the Budget cycle started in July each year all information were provided and during August to September they invite spending agencies, ministries and other stakeholders to give their proposals, there is no documented process at the formulation stage to provide new proposals or to comment on proposals that the political authority has initiated, adding if that was there the new proposals could be finetuned but lack of information still remained a serious issue.

Wickramaratne highlighted the crucial need of having a Ministry of Planning and Planning Implementation, which could have been established 35 years ago. 

“There was a proposal to construct a highway to Kandy and they brought a paper on that plan when I was the Deputy Minister of Finance. The project was not evaluated and it was driven by a political agenda. If project evaluation was there, the then Government would know the cost of it and when the returns will come, etc. Since it was not feasible I rejected purely on economics and returns. But they went ahead with it,” he said, adding that was just one example where scientific basis was not followed.

Limited capabilities of Budget formulation

Asian Development Bank (ADB) Country Director Takafumi Kadono emphasised that limited capabilities of those who were formulating the Budget was also a concern.

While highlighting the requirement of bringing reforms to the public sector, he said the Finance Ministry had reached out to ADB seeking support to strengthen capacities building.

Kadono explained about new approaches in budgeting like green budgeting, SDG budgeting and general budgeting and said it was a good opportunity to bring in those approaches so the Budget could be formulated to achieve objectives and goals of the Government and the demands of the people.

Stressing to bring changes to the culture and traditions on budgeting Dr. de Mel said the Finance Ministry had capable human resources and if they were given a different culture or a process to work, he was confident that they would perform effectively to get better outcomes.

“It is not an issue of competence. When pointed out they fix them well. A lot of things are based on will – political and bureaucratic will – but not mainly capabilities. Pouring money to fix capabilities, where there is no will has been a waste of foreign funding in Sri Lanka,” he stressed. 

Presenting a Budget is no easy task

Former Minister of Highways, Higher Education and Investment Promotion and an economist Kabir Hashim said that presenting a Budget for any Government was not easy, especially when there were restrictions imposed by the IMF in terms of revenue, expenditure and there were limits that the Government had to work. 

Asking the panel if the National People’s Power (NPP) Government had to show its policy direction to the country since it’s their first Budget, he said President Anura Kumara Dissanayake had said the Government was bringing the Budget for an equitable distribution to move from urban to the rural sector.

“He thinks that it is going to be State sector salary increases, move to recruit graduates but putting all these together in a process where Sri Lanka is in a very vulnerable state, in this Budget would it reflect that the Government would actually going take right moves to get the country on the right track?” he questioned.

Dr. de Mel said it would be an interim Budget and typically proposals didn’t have numbers and did not have high expectations in interim Budgets. 

“The real Budget will come in eight months later. There is a law passed by the previous Government that primary expenditure has to be 13%. It is unlikely that the Government will violate that law at its early stage. Therefore, it is likely to overperform rather than underperform on their targets,” he explained. 

At another panel discussion titled ‘Revenue reforms creating a more inclusive and equitable tax system – moderated by Transparency International Sri Lanka former Executive Director Nadeeshani Perera, Advocata Institute Chair Murtaza Jafferjee stressed on not allowing tax concessions for foreign investments.

Ability to make profit 

“Tax holidays are fundamental. And it is not tax concessions or tax holidays or any kind of depreciation that matter. What matters is the ability to make profit. After the new administration has come in, there are new regulations that have come. The next problem is you should never give tax concessions depending on the size of the investment because in most cases 99% spending goes out of the country. The only reason that you should give tax concessions is if you want more from that product. Secondly if you want to get knowledge that does not exist in Sri Lanka but it lies with foreign investments, then you can give tax concessions,” he explained.

Verite Research lead economist Raj Prabu Rajakulendran spoke about taxation in the tobacco industry. Answering the question what were the key principles when developing revenue proposals and how the current Government could best leverage indirect taxation to achieve its socio economic outcomes, he said one proposal was a rational way to tax tobacco. 

“With taxing cigarettes, there are two goals to achieve. One is at least to make it affordable and secondly you want to achieve some revenue targets,” he said.

Low tax rates for property 

Executive Director Arutha Yolani Fernando explaining about the role of property tax in Sri Lanka said that there was no one way to tax wealth. 

“There are a few European countries that have net worth of tax. There were two problems; one is that any country that has had moderate net worth tax is far more sophisticated than even we can imagine in this country. The second problem is that it doesn’t generate revenue that kind of you think it would generate,” she explained, adding, “In Sri Lanka the top 10% own 64% of the country’s and bottom 50% own the 4% of the wealth and wealth disparity was a problem and what we do about it. 

She further said that what we didn’t do about it was we didn’t have a conversation about net worth taxes and it was not possible due to our current tax administration. 

“Then we have to look into what kind of wealth that we can actually tax. It is property. The rate pay for property is low as it is a cost recovery mechanism. They can not generate more than the costs of those services,” Fernando explained. 

In the next panel discussion CEPA Executive Director Prof. Sirimal Abeyratne, CEPA Team Leader Livelihood and Employment Dr. Gayathri Lokuge, Verite Research junior research analyst Shalomi Liyanage, and Verite Research research analyst Chathumi Pabasara expressed their views and suggestions on addressing inclusion and equity gaps in expenditure.

Closing remarks were made by CII Director and CPA Executive Director Dr. P. Saravanamuttu.

- Pix by Lasantha Kumara