Another budget has come and gone

The focus of President Mahinda Rajapaksa's fourth budget presented to Parliament on Thursday is on the development of local industries. Among the measures it proposes to achieve that objective are an increase in import duties on a number of selected items and incentives to local producers.

Boosting local production to ease the country's dependence on imports is a step in the right direction. However, the baby must not be thrown out with the bathwater. In restricting imports, a balance is called for, especially as regards essential food items.

It has been proposed that the existing Cess on all imports of fruits and vegetables be increased. This may work well on paper; an increase in the imported apple prices should lead to an increase in demand for, say, the locally produced mangoes. But, reality may be different. We may end up unable to eat either cheap imported apples or Sri Lankan mangoes whose prices are exorbitant. The same goes for vegetables such as potatoes and onions.

Imports have, no doubt, taken a heavy toll on the local production but they help regulate prices and compel local producers to improve the quality of their goods due to competition. The biggest threat to local farmers comes not from imports but from the middleman who exploits both the producer and the consumer with impunity. Lack of storage facilities, too, has adversely affected the local producers. Most of their produce perishes unless it is disposed of for a song soon after harvesting.

Regulation of imports should be done carefully. The United Front government (1970-77) bungled by banning them and the UNP government which came to power in 1977 blundered by liberalising imports at the expense of local industries. Today, the country has become a dump for cheap and even useless imports including kites! The proposed strategy to control imports seems to make some economic sense but regulations must not be overdone. It needs to be reviewed from time to time and adjustments made.

The world economic crisis has jolted the government into granting concessions to the local industries such as garments and tourism directly affected by the currency depreciation and liquidity problems in the developed countries. Among the measures adopted to help them is the deferment of loan repayments by six months for the enterprises earning foreign income and maintaining the current level of employment, a reduction in the CEB fuel adjustment levy and provision of furnace oil at concessionary rates. The tea industry, too, has got concessions in terms of subsidised fertiliser and tax reductions. It is hoped that the proposed State venture to make interventions in the Colombo tea auction will stand the local tea growers in good stead.

However, the budget does not propose a meaningful programme to look after the interests of the Sri Lankan expatriate workers who contribute over $ 2,500 million to the state coffers annually. There is only a proposal to appoint local agents of the State banks in the countries where they work to facilitate the inflow of remittances. Their money is tiding the country over in these hard times and they therefore deserve a better deal. It behoves the government to consult their representatives and provide them with maximum possible relief for the services rendered. They are defending the country on the economic front as the troops on the battlefront.

The armed forces personnel deployed in the conflict zone also deserve much more than a 5000-rupee allowance. Their commitment and sacrifices are priceless.

The budget is not without some relief. The State sector employees' CoL allowance has been increased by Rs. 1,000 and the middle income earners in the public sector have stood to gain from the revision of the tax slabs, though the amount exempted from tax remains Rs. 300,000. The government claims about 400,000 PAYE tax payers will benefit from the revision.

However, those who are living on interest income from their savings have got a substantial concession in that their income will be exempted from taxes up to Rs. 1,000,000. Pensioners have got only a paltry sum by way of a CoL allowance increase.

The reduction of VAT from 15 per cent to 12 per cent––except on motor vehicles, luxury goods and liquor––will grant benefits across the board. Technically, this should bring down Cost of Living, albeit marginally, if benefits are passed on to the consumer.

However, the proposed increases in Economic Service Charge and Port and Airport Levy are bound to trigger a process of price increases. What their actual impact would be has yet to be determined.

It is a matter for happiness that the government has at last realised the country's tax system is seriously flawed and lacks transparency. Tax concessions are being showered on various people haphazardly for want of proper coordination among institutions such as the Inland Revenue Department, the Customs and the Board of Investment.

The poor tax administration has led to scams amounting to billions of rupees and the proposal to appoint a Presidential Task Force to prepare a national tax policy and implement it by 2010 is certainly welcome. Similarly, the government ought to concentrate on raising its revenue through direct taxes by rationalising tax collection without depending on increases in indirect taxes in a highly inflationary situation. Reducing indirect taxes is the way to bring relief to the entire populace.

The Nation Building Tax to raise funds for welfare of security forces and rebuilding purposes, however salutary it may be, will complicate the existing tax structure and render its administration extremely difficult.

As for development, the government is without mega projects to boast of in the preset budget except the Weerawila airport which has so far failed to get off the ground. Another big investment is going to be made in the grounded Mihin Air. And care should be taken to ensure that funds so allocated will be properly utilised. Now that SriLankan, which under a foreign management did not cooperate with the fledgling budget airline, is under State control, Mihin Air stands a better chance of making a comeback and offering an affordable service to the public.

The piece de resistance of the budget is the reduction of fuel prices at long last––diesel by Rs. 30 per litre, kerosene oil by Rs. 20 per litre and petrol by Rs. 15 per litre. This cannot be considered a budget relief in that petroleum prices should have been brought down much earlier and announcement to that effect made by either the CPC Chairman or the Minister of Petroleum Resources exactly the way the prices were jacked up.

The President obviously sought to gain some political mileage by making that announcement himself. Above all, the government must ensure that transport costs including bus and train fares will be revised accordingly.

The government has, to its credit, managed to keep the budget deficit at 6.5 of the GDP or at Rs. 337 billion. The economic growth which stands at 6.5% looks impressive, given the country’s effective military campaign against terrorism and the chill wind of recession blowing from the Occident, though there is certainly much room for improvement.

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