Reforms, relief rule 2015 Budget

■Three broking firms share initial take on Govt.’s latest fiscal program and policies


The 2015 Budget presented by President and Finance Minister Mahinda Rajapaksa on Friday appears to have won praise as well as raised some concerns from the stock broking community.
Initial commentary released on Friday by three stock broking firms – First Capital Equities, NDB Securities and Softlogic Stockbrokers – welcomed reforms and consistency whilst noting 2015 Budget has brought about relief to the lower income segments via populist measures.
They also noted some fiscal management proposals were optimistic whilst many of the measures would help private sector economic activity.
First Capital Equities said the 2015 Budget focused on continuity of the Government’s existing policy framework to further improve its fiscal performance while concentrating on providing considerable relief to lower income segment, Government employees and simplifying the tax system. “The Government plans to historically lower the budget deficit to 4.4% during 2015 while the expected debt to GDP ratio is expected to improve to 75%. The Government expects to record a revenue surplus of 1.7% in 2015,” it said.
“The Budget has put considerable effort to provide relief to the lower income segment and Government employees, providing increased grants, salary and allowance increases and settling anomalies that existed among them,” First Capital said. It also said the Government has made significant progress in further simplifying the tax system while making continuous efforts to broad-base the tax system, including lowering income tax to 16%, introducing a special tax for vehicles, extending NBT to financial institutions and lowering withholding tax rate.
In relation to the capital market, First Capital Equities said the electricity tariff reduction will be a positive sign for the overall market while strong infrastructure development may assist the construction related companies. Certain concessions to the plantation sector may be beneficial as well.
On the fiscal strategy side, the broking firm said the Government expects to continue its prime objective to support the country’s growth prospects in the medium to long run via further strengthening its fiscal position.
“The fiscal position is expected to be improved through higher Government revenue and a controlled expenditure management. Government Revenue is expected reach a surplus of 1.7% of GDP in 2015. Budget deficit is anticipated to be reduced to 4.4% with Debt to GDP ratio expected to fall to 75.0%,” First Capital Equities said.
The Government plans to grow revenue to 14.9% of GDP to Rs. 1,689 b for 2015 with 84% of the revenue expected through taxes, with VAT projecting to take the top slot contributing 5.5% of tax revenue. Non-tax revenue is forecasted to be 10.3% of the total expected Government revenue.
The total planned expenditure for 2015 is Rs. 2,210 b maintained at 19.3% of GDP, which is slightly low compared to 2014’s estimated reach of 19.4% of GDP. Recurrent expenditure is forecasted to be controlled at 69% of total expenditure constituting 12.9% of GDP, significantly lower from the 2014 planned figure of 13.8% of GDP mainly driven by the support of the declining interest payments. Salaries and interest payments are expected to be the largest components of recurrent expenditure, amounting to 37% and 28% of recurrent expenditure respectively.
“The Government plans to grow public investments to 6.5% of GDP with the largest investment continuing to be for highways where 2.0% of GDP (32% of public investments) is expected to be spent,” First Capital Equities said.
NDB Securities said the Government presented the Budget focusing on a medium-term budgetary framework from 2015-2017, targeting a gradual reduction in the budget deficit to 4.6%, 3.8% and 3.0% by 2015, 2016 and 2017 respectively.
The budget deficit expected for 2014 is 5.0% of GDP (Gross Domestic Product), in comparison to the recorded deficit of 4.9% by September 2014.
“The reforms presented in Budget 2015 encourage certain local industries through import substitution whilst increased focus was towards elevating the healthcare and education sectors and its work force,” NDB Securities said.
“Furthermore, proposals targeted the low income segment of the country, while several concessions were granted to small-scale businesses. The infrastructure development drive is expected to continue through the proposed investments for 2015, focusing on the provincial and rural roads and the rail network,” the broking firm added.
Softlogic Stockbrokers said the progress thus far made on the fiscal front has been in line with the targets set and fiscal deficit target had been bettered.
“However, with the general belief that presidential elections would be called for in early 2015, the Budget presented had incorporated most populist measures whilst also maintaining the Government’s investment focus witnessed during the last few years,” it said.
Softlogic said benefits to the public in terms of reduced electricity, water tariffs and guaranteed higher rates to senior citizens for their bank deposits were amended. The micro industry sector had been provided benefits, with the SMEs also being favoured. However, by promoting micro and small industry sectors, certain limitations have arrived for large-scale private sector operators.
Further, protectionist measures have been introduced to safeguard the dairy and rubber industries. Renewed focus has also been directed at the agricultural and aqua resources, which incidentally are the sectors in which the largest percentage of population is engaged, despite its shrinking contribution to overall GDP.
“Despite a reduction in defence expenditure as 5% of GDP, overall Government expenditure is likely to grow to 19.5% of GDP, largely due to the infrastructure increments and continuation of agricultural subsidies. The chief incremental mechanism for revenue enhancement has been identified as netting the tax evaders with the capability of confiscating of their assets,” Softlogic Stockbrokers said.

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