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Finance and Planning Secretary Dr. P.B. Jayasundera
Thank you very much Daily FT, Colombo University Alumni Association. I first thank you for organising this important event on the post-Budget discussion. I remember in this hotel we had the pre-Budget dialogue and I have all the notes with me and I think all of them are in the Budget so it has to be a popular Budget in that sense.
When I came here, I looked at the initials of SBs and DBs and PBs and all. I gave some thought to that and thought to those and I thought DB stands for Doing Business and that’s what this Budget is all about. SB is Surplus Budget and this budget is a journey towards surplus budget. EB stands for Easing Barriers. PB stands not for P.B. Jayasundera but the country moving towards a Programming Budget, and that’s what the 2015 Budget is.
I was wondering how to speak on this Budget because Savithri (compere) said some say it is a sunshine budget, some say it is a populist budget, some say it is an election budget. In my view, a budget should be all of these things. Who is the budget maker who would want to present a budget which does not have sunshine in it? Who is the political leader of a government who doesn’t want to present a budget which attracts people? What is the government which wants to make the budget meaningless? Son in that context, Savithri’s description is in a way how a non-economist would describe the Budget. Even the British Prime Minister recently when he addressed the Conservative convention which was a very controversial one was not sure whether his popularity will allow him to consolidate but announced that in 2017 when he comes to election, the UK will have a lower tax regime and he went with a rousing reception. This is the leader you want. That’s how budgets are made in a democracy.
Here, I myself in the last few days, reading a few comments, in Parliament from my colleagues I get what those guys are talking about, I read national chamber and exporters’ comments, I had a note that the Central Bank submitted to the Monetary Board and I also had a note from the IMF Resident Representative who has put her thoughts and apparently spoken on the Budget. So there are various views which should be the case and it should be the perspective from which each person is looking at it. But as I said in our pre-Budget discussion, for me it’s the country’s national balance sheet. The balance sheet should shine. There are winners, there are losers, some gain, some lose, some benefit in future, some sacrifice now and that’s what it is. That is budgeting. So I though I will try to articulate some of my own thoughts.
While listening to many views, we travelled all over the country; the President himself took us to many places; we ourselves went to nine provincial councils and met each one of you in different clusters to get ideas, concerns, issues and how you look at things, and I realised everybody was looking at their own individual budgets. Every individual, every company, every business, every chamber looks at their budget. But I look at the national budget. So when all of this is put into one budget, and yet if everybody thinks this is a populist budget, a sunshine budget, an election budget, I have done my job well and the President has given the right leadership to the country to get something relevant to contemporary society.
Consolidating decade long gains
Let’s see what first task we have. This is to consolidate what we have achieved so carefully over the last 10 years. One fundamental thing is inflation. The reality is unless prices are stable no country can grow. That’s why every country, regardless of politics, is preoccupied with inflation and price stability. This is very crucial to monetary authorities, fiscal authorities, everybody. The question is ‘how much inflation?’ but essentially you need low inflation price stability.
We have got there. We have mid-single digit inflation now running less than 5%. I would basically argue that we should never let a country’s inflation get out of control. Monetary and fiscal authorities must work together to consolidate and preserve this hard-won achievement. This is as important as getting the country free from terrorism. Inflation is very bad. It requires monetary policy sensitivity, it requires fiscal responsibility, it requires structural issues from the structural side, it requires efficiency, all of this.
The second point is, we need external stability. This is fundamental. External stability is our reserves, you need reserves to face any contingency. That’s why countries are building reserves; balance sheets are recognised when reserves are good, not good results. Tangible results. Some of you have empty reserves. That’s for accounting. But you need reserves. So we have 10 billion dollars, but we have moved to a new target, where we want our reserves to be as big as our exports in future. That requires addressing the trade account, exporting goods, services, FDIs, remittances, foreign exchange management, etc. You have a foreign exchange rate but not an unmanageable exchange rate. And that’s another issue which we want to keep.
Third, the country is today having very low unemployment. Though people grumble, today 96% are employed. Whether they are fully employed I don’t know, but they are employed. We need to now think of a full employment economy here and that is something where people will have skills and adaptability to engage themselves. The ideas came in the pre-Budget discussion on human resource development and this Budget is moving on a value chain from child birth to a fairly senior level of skill development, good education, quality education, productivity, technology and science for the population all round because we have a small population. Then we specifically speak of youth employment because employing me is of no use; you need to get the young workforce; a young and energetic workforce, not the guys yawning, sitting on desks and wasting time. They must be very active.
Then we need good fiscal deficit. The President says his legacy should be nothing but leaving for the future a much stronger budget never probably had in the post-Independent era. That’s why when you say SB, first Minister S.B. Dissanayake came to my mind, but it stands for Surplus Budget. This Budget speaks of a surplus in the revenue account and our mission by 2017 is to generate surplus in revenue, surplus in primary account, so everyone has to be taxed. Everybody needs to pay tax. Why? A stronger nation means people who participate. As Franklin D. Roosevelt said, no nation can have democracy and widely distributed benefits unless they become shareholders by paying taxes. You can question only if you pay tax; if you don’t pay tax, you have no right to ask questions about what kind a Budget this is. You have to pay something, even a small amount. Even in a temple in our culture, you become a shareholder to build all those monuments. So we are looking for that.
Why do we need such a low deficit? We want to get rid of this debt beyond what the country can afford. We are targeting below 65% debt, much lower maturity, investment grade country so we can go anywhere and tap money when we need it, and you all will benefit.
Then we still have residual poverty in this country; 6% in terms of head count. Below $ 2 criteria, below $ 3 criteria, you can adopt any criteria, poverty has come down but there is residual poverty. Nature is quite complex, some are related to non-communicable diseases. You at least can get to a medical examination and test it. But there are many people with cancer, stroke, diabetes, kidney problems; we need to look at this to protect our population, human resources, and keep them free from such vulnerabilities.
Still Colombo is having good weather, good rain, but many districts are still not experiencing rain and there is a drought. In drought-stricken areas, post-Budget makes no sense. Those areas need to have access to water and that aspect has to be addressed because the rural farmer is very vulnerable to poverty when the drought comes and these things come without notice. And then we also have our environment. Fortunately we have preserved it, but not enough. We need a clean and green environment and biodiversity has to be protected.
Governance
In the last 10 years governance has improved in this country. We have referred in the Budget speech to the Doing Business index, which is better. In absolute terms, in relative terms, you can do business in this country much better than in any country in South Asia. The Rule of Law index has improved. This is not what I am saying; former President Jimmy Carter is on that council. Then the Infrastructure Index – much better. Then the Human Development Index – the best in Asia. Economic Freedom Index.
Now these are indexes reflecting many, many variables. They are looking at a whole range of variables and I don’t know how they collect it, but in each of those indices we have become better and our vision is not only getting inflation, unemployment and fiscal deficit and debt down but also moving these indices up, up to the top 10 in the Asia Pacific region. That’s governance. For those aspects, there is a financial sector reform underlining this Budget. Unfortunately many people have not spoken about it and at least universities must speak on these matters. There is focus on system stability, systems governance and systems capacity to manage a middle income country.
We are thinking of a single development bank because both banks are too small. We can’t have small mushrooming finance companies and banks. We need big banks, strong banks, so someone can have confidence to put their money. We are looking at that. We have legal reforms. In this Budget there are massive reforms – an international arbitration centre here; why should we go to Singapore? Let’s build it here. Let’s build confidence. We are setting up dedicated courts, which has already started, on financial dispute, contract management, banking issues, tax.
Public service delivery reforms – Postal Department, Railway Department, Income Tax Department, Customs, all these need to be geared to deliver emerging needs. One-stop-shop at Customs; you don’t have to waste time while listening to me, get your phone and open your transactions. Do this. That’s the journey the country is looking for. I will come to public service wage structure.
Public investment and public sector
While we are consolidating these hard-won achievements, we never thought we will speak of this. Three Deputy Governors are here, much junior to me, and several central bankers are here. Those days were fun for us to live, with 10% inflation, 12% inflation, 10% budget deficit, and if it comes right low, fun. Now it is not so. Very different. We need growth. What is the growth? We are looking at eight plus. For this, we need all sectors to come in. We need to keep core public investment. Private sector cannot do business unless an enabling environment is in place. An enabling environment comes with infrastructure. Therefore we do public investment; we have projected in the Budget at 6%, the only Asian country other than the Philippines keeping this level of public investment. They can’t because they have other problems. Then public enterprises. Privatisation is one way of getting such big enterprises to contribute to capital formation. The ‘Mahinda Chinthana’ policy strategy does not believe in privatisation. They believe State assets can on their own generate capital formation, improve the balance sheet, get the right pricing policy, get right people. We can run like you. We all went to the same school. Some are working in the private sector, some are working in Government, and of course we do better than you – that’s the difference.
Our Electricity Board, our Water Board, our Ports Authority, our Airport Authority, our Petroleum Corporation are now on their own. We are as strong as LIOC. In water we don’t have a competitor but I can tell you, I went to Manila Water Company but our Water Board is far superior; our Electricity Board is far superior to any such scale electricity board; and our banks are of course better than all of your banks. Bank of Ceylon is only second to the Central Bank and sometimes even superior to the Central Bank. That’s enterprise.
So we have moved out from the Budget. You do your capital formation; get a rating, because rating companies also need business. They give ratings; some young fellow comes and says ‘B-,’ that’s it! Some guy who has not even gone through two years of serious work comes and interviews the 60-year-old Treasury Secretary, but that’s the world. So these enterprises will, instead of getting money direct from us, now look for money.
Role of private sector
The private sector – you guys now invest, don’t grumble. Roads are there, no road blocks, no security risks, no risk premium, no worries; all these were part of your life. I have worked with you all. No power cuts; in fact it is 15% cheaper. That’s the populist Budget. Don’t distribute dividends, invest it and be competitive with who you invest. Tax has been simplified. 12% tax is no tax; if anybody is grumbling, my simple advice is: wind up business and join the Government, there are vacancies still. Schools need English teachers, mathematics, IT. Don’t ask for tax holidays. Then FDIs; now come and invest. What’s the problem? So this is what we have done. Then we also look at production sectors – Agriculture, from the small non-plantation agriculture to plantation agriculture; we have looked at production side, not tax holidays anymore. There are remarkable structural changes in this Budget. We didn’t give tax holidays; all that is past. Now work within tax. Your dividend is accepted if you invest; don’t go and drink in clubs in the evenings. If you want to go to clubs in the evenings, there is a tax also now. Hundred dollars, send it here; we can set up Nenasalas from that money. Industrialisation – even industries are subjected to 28% tax, you can get your half tax holiday system which is 14% if you put your money on expansion. Accelerated depreciation is there. These things have been systematically done.
I also want to talk a little bit about the Budget. We are looking for consistency. I have repeatedly gone on – and Nisthar has carried headlines – about consistency, continuity and clarity. The three Cs. In the last several years, not a single new tax has been imposed; give the credit. The tax system has been simplified. The IMF country representative has misread some; she says we have 25 taxes. I don’t know, I am not familiar with 25 taxes; we have only seven taxes, they are very simplified. We have VAT, NBT at retail level. I know retailers are not happy but they have to pass it to the producer or to the consumer.
I studied economics here in Colombo University and then went to the United States; the good thing about the United States is that they teach the right thing. ‘Who pays tax?’ that’s the first question they ask. Then we try to understand and ultimately they prove that it’s the consumer or the producer in first year economics, not phD. That’s how it works. Tax has to be paid. Thought Savithri likes to describe this as a populist budget, there are taxes here. We have expanded the base, with retail level taxes. India is struggling on how to go there. That’s why the Prime Minister has first started cleaning because the Prime Minister probably thinks that when Indians see clean India, they will start paying taxes. We are already clean; you don’t see garbage, you don’t see floods, you only see traffic, which is a sign of growth, a growth of demand. You are giving a signal, demanding more roads, more public transport. Elevated roads will come. It will happen.
We need this demand so we have expanded retail level. Anyone with over Rs. 100 billion quarter threshold is now liable to VAT and NBT. People must pay. What is 12%? It is 11%. I am telling you, let the country go to a single rate VAT sooner rather than later. How? You all pay VAT. Don’t have two books. I know, I also go to shops. Some are on cash, no VAT, no NBT, no receipt either. Some are on that computer machine. Tourist hotels are doing this. They must stop it now. The country has a tax system; we need money. ‘We’ means not for me, the country needs money. See how the United States is asking even any US citizen living in any other country to pay tax; their banks are obliged to disclose it to the United States. Why? That country needs tax. So this culture must come in. Tax must come from the rich, the people who can afford it; those who spend Rs. 4,000 per cake at the Hilton, 12% of that! That’s how it comes. So don’t feel greedy about 12%. Feel greedy about that Rs. 4,000. Those who have a nice haircut, pay 12%. Those who go to Food City, pay 12%. Those who drink a quality glass of whiskey, pay. That’s the price. If you want kasippu, don’t pay VAT. That’s how it works.
I remember when I addressed last year’s budget seminar immediately after the Budget, Prema Cooray sent me a SMS saying ‘Doctor, you now look very matured, like old wine’. Of course now I hate wine because I am old. So wine means VAT. This is how the system works. Then we have also gone for a single tax on many items. We will also go for single payment tax soon, maybe in a year or two. Then you pay one, you don’t have a problem and we don’t have a problem.
What are the single VATs? Instead of a whole range of taxes at the point of Customs, the Special Commodity Levy covers 30 taxes one-off. Then from this year’s Budget, liquor, cigarettes and motor vehicles, otherwise a whole lot of problems. Some say it is brand new car, some say zero mileage car, some say it is brand but old car. What kind of a system is this? Now it is a single tax. Some say this is CIF, this is handling charges. Then the poor Director General Customs comes, then the Exchange Controller comes and asks how this money went out. We must have a clean system; that’s governance.
We have also raised one tax, on gaming. We see a lot of people gaming. Good, but pay. 10% on turnover plus $ 100 at the entry. Now we have to get some people to go there. We are waiting till the second reading approval has come for the Budget. On the 24th, the third reading comes. On the 25th, people will be there.
Then we have also tried to help you’ll to come to the system. This is what is happening in Hong Kong and some countries. They tax in a way where you have to even borrow and pay. In our country also we have arrears, some are even from before 2010. From 2010 onwards, the tax system is simpler, the rates are lower and any ethical person can comply with it and you must comply. You have to think that this is a middle income country and therefore we have introduced a refinance facility. Interest rates are also low and banks can give money. Now you can go there and come to settlements; penalties will be waived off. Even recent assessments can be rationalised, but pay it once and for all. Five-year loan is also available.
Then you have a clean balance sheet and then hopefully by 2015, the national balance sheet is clean, your balance sheet is clean, tax consultants will have much more decent work rather than manipulating taxes and the country will prosper. That is how we are planning to raise our revenue. We are not in a mighty hurry; we are doing it on a gradual basis.
In the meantime, we are not only looking at revenue. We are looking at expenditure. By the 24th, we will table our new financial regulations, a landmark piece of reform. For that financial regulation, we had benefits from many experts; the Fiscal Affairs Department itself has commented on it. These reforms are taking place, so it is a sunshine budget. It has to be.
Then we are also looking at the medium term. You are all talking about the 2015 Budget. Please don’t. That era is over. Now we are talking three-year medium term. Because of the legal requirement, the Appropriation Bill is presented to Parliament and annual authorisation is obtained for spending subject to those limits, those borrowing limits and regulations and managing and going back to Parliament and reporting it again. That is a continuous process of accountability and fiscal responsibility.
Three year framework
But in the meantime, the Budget is presented in a three-year framework. You can’t start on 1 January and finish everything on 31 December. There is procurement, project planning, preparation, progress payment. In order to consolidate this process, we are also strengthening commitment controls. That’s why we have done slightly better this year. There weren’t too many arrears this year. Now the Treasury releases money on time. Everybody got their salaries on time and contractual payments on time provided they complied with the delivery. Only some are yet to pay their taxes and I will make sure they pay their taxes. Because this is how we improve our system. Treasury operations are better; debt management is reasonably coordinated; at Deputy Governor level I myself get involved now; and there is greater fiscal-monetary coordination not only for conducting macroeconomic policy but also to manage the day-to-day liquidity in the system. That’s why we didn’t see erratic movements in interest rates. We also brought stability into our wage structure. We had a very distorted wage structure in Sri Lanka prior to 2005. There were 270-odd salary scales in the Government. We rationalised this to 20 odd salary scales and brought a new ratio. Within that we lined them up depending on the occupational classification. There is still more to be done. As a result you must appreciate as much as this country did not have any terrorist incidents in the last five years, we didn’t have strikes or work stoppage. There are some habitual guys who anyway do some demonstrations, that has to be there – even in Hong Kong there is something. Imagine a country maintaining sustained stability among the workforce for 10 years? How much growth has been contributed? That’s who we should look at it.
We have introduced a new 10-year wage structure, maintaining the required characteristics among professionals – our doctors, our professors, our engineers, etc. We didn’t do unmanageable things with the new wage structure. We have, within our limits, through consultative processes introduced a new wage structure – the President fortunately speaks to people from every trade union – to their satisfaction and to our satisfaction; ultimately we have a balance sheet to manage.
Along with that, we have also addressed middle income country private sector wage structure. We can’t now have a workforce earning less than a dollar salary. It’s not proper. In 1970, it was ok. We had a huge labour surplus and we were a poor country. But now everything has improved; our work standards are good, our workforce is high quality, we don’t have child labour, we don’t have discrimination – a decent workforce. Therefore we have also addressed minimum wages. Although here I see more young and middle-aged people, a few people like me are getting old and you will also get old. Then we all drink wine. But for us to have wine, we must have a provident fund. Therefore we are raising the contribution. Singapore provident contribution is so high, that’s why they are saving. It is affordable because electricity cost is coming down, taxes are coming down, infrastructure is getting favourable, the lowest interest rate in my lifetime has come, the capital market is getting attractive – it’s no longer equity market and is now raising good debt. Therefore it’s time to have a comfortable adjustment.
Now we have a stable exchange rate regime and a stable interest rate regime. We need to consolidate. Some people are not happy with 6-7% interest because they live on savings, so for elderly retirees we have created as 12% interest rate for them. Now our country development model is not the Indian development model, not the Singapore model. This is our own model. We are a caring society; we are sensitive to poor people, we are sensitive to women, children, disabled people, the elderly. Therefore the social security aspect of the Budget has been protected. That’s another important aspect. We have also addressed massive-scale of ambitious targets. Our idea is not only surpassing $ 7,000 per capita income, generating the lowest fiscal deficit and getting into below 65% debt, but also to make sure we have the best Human Development Index and a nation in South Asia for the first time and probably in entire Asia except for Japan free from maternal and child mortality. This is what we discussed with our medical profession and they felt these things should be our vision and we have addressed it. So we need to bring the technology, we need to bring access to proper health, bring these things across the country.
Education is very vital. Total reforms – Educational infrastructure, quality of education, subject material, teacher capabilities. These are long-term; you can’t quickly get these things organised. Therefore, we are transforming the entire national education infrastructure and the teachers, the material and everything will be modern in the next three years.
Many informal sector activities have also been recognised because economic activity must be generated. We need to create turnover and much more business here and through that create a much more advance economy.
With those remarks, I once again thank Daily FT and the Colombo University Alumni Association and everybody else who invited me to speak to your before the Budget and also after the Budget and to explain the future and the thrust of this Budget beyond what revenue expenditure and various incidents plus or minuses and costs or benefits that may happen in the immediate future for a much more longer journey.
