Budget 2016 and Credibility

Credibility of a budget and the minister in charge
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The chaos taking place in Parliament and outside on Budget 2016 reminds one of an old quotation by a distinguished US President.Abraham Lincoln said: “You can fool all the people some of the time, and some of the people all the time, but you cannot fool all the people all the time”.
The many ad hoc changes being made in the budget is also reminiscent of the pithy Sri Lankan saying “Koheda Yanne Malle Pol”.Another comment– next year’s budget is like that ages-old song “Hole in the bucket” – whatever the budget comes up (revenue-wise) is drained out in the changes!

The government, completing a year in office, is realizing the hard way that it is not easy to push through tough reforms or present a tough budget if they want to pander to the masses.More than 10 key budget proposals, all intended to curb costs and increase revenue for the government, have been changed. A serious credibility issue is emerging as to whether this budget, even after it is passed in parliament with all the amendments, will be enforced next year or subject to many, more changes. Questions are being raised as to who is in charge (budget-wise): Finance Minister Ravi Karunanayake, Prime Minister Ranil Wickremesinghe or President Maithripala Sirisena (who has also said he was discussing with various stakeholders who have expressed unhappiness with the proposals).

Old hands in budget-making recall that this is not the only time changes have been made in a budget after it was presented to parliament. It happened during the time when the finance ministers were N.M. Perera (in mid-1970), Ronnie de Mel (1980-1990s) and Mahinda Rajapaksa (2015 budget) and probably earlier. However those changes were miniscule compared to what is happening today. N.M. Perera or Ronnie de Mel wouldn’t have bowed to the wishes of all and sundry like what is happening now. Even economists of the calibre of Singapore-based, Sri Lankan-origin Prof. Razeen Sally is questioning the budget proposals, its changes and the credibility of the finance minister.

An additional issue raised by Treasury watchers is that since the new zero budgeting process has no carry-forward of surplus funds, any shortfall in tax revenue has to be met by new revenue measures. For example, the shortfall of Rs. 70-80 billion in estimated tax revenue in Budget 2016 owing to post-presentation changes could have been (at least) partly met under the previous budget accounting practice of using surplus funds from the earlier year. Under the zero budget process this is not possible.The chaos that is taking place in and outside parliament (protests, demonstrations and agreeing to most demands) is reflected in many stories and comments in this week’s the Business Times edition.
The drop in tax revenue due to demands from some sectors which many see as absurd – doctors and parliamentarians (vehicle permits) – puts more pressure on revenue streams. According to analysts, a further 6.4 per cent drop in income tax collection (in addition to earlier drops) was expected in 2016 as per original Budget 2016. But that situation would worsen with the multitude of tax revenue proposals being changed and more to come!

Some changes are in total contrast to the budget presented in parliament by the minister. For example, in support of depositors, the finance minister said in his November 20 speech: “Item 277 -The Central Bank will be entrusted to undertake strict supervision on this restructured finance companies. However, as a prelude to the above proposal in order to provide the depositors with a sense of comfort and security, the Central Bank of Sri Lanka will give a 100 percent guarantee on ALL deposits of all the registered finance companies by end January 2016”. (Note: Read the word ‘ALL’)In a November 29 story, the Business Times reported that this was the first time ever “the Central Bank (CB) has been directed to provide a 100 per cent guarantee on all deposits of registered finance companies”. There was no denial or clarification of that story from the Finance Ministry or CB.

However in another newspaper report this week, the CB Governor is quoted as saying that this guarantee doesn’t apply to all depositors. “”What Finance Minister Ravi Karunanayake told me is that he was unaware of such a 100 per cent guarantee for finance companies’ deposits. He said that he only mentioned a 100 per cent guarantee for senior citizens deposits,” Arjuna Mahendran was quoted as saying. In the absence of a clarification (so far) of this comment, one can only assume that the Finance Minister cannot remember what he ‘read’ in parliament or was it a case of amnesia?The bigger issue however is misleading all depositors, many of whom are considering whether to pull out their deposits in safer havens like banks and transfer it to finance companies. Even banks don’t have a CB or state guarantee on deposits except in the case of the National Savings Bank.

Another case of clear deception (there are many more) is the budget proposal for private companies to manage export processing zones. The Finance Minister’s speech said: “Item 200 – The existing Export Processing Zones (EPZs) are badly in need of a facelift if we are to retain and attract more investments. I therefore propose to entrust the management of these zones to private sector Management Companies with the necessary skills. The BOI will also actively engage in setting up of new EPZs and once they are in operation, the management of new zones will also be vested with the private sector Management Companies”. However at a meeting with trade unions on Tuesday, the Prime Minister said there is no change in the status of the Board of Investment managing the zones and there was no such change stated in the budget!

Interestingly all the budget amendments are being announced by the Prime Minister and not the Finance Minister, another example of the chaos taking place. What suggested changes the President will come up after his meetings with stakeholders remains to be seen.
Former President Mahinda Rajapaksa’s budgets executed through the then Treasury Secretary P.B. Jayasundera (rather it was the latter who proposed and executed) were lavish in spending for personal gain. Nevertheless the budget was never changed to this extent. As one wag said, “There was (at least) a method in the (Rajapaksa/PBJ budget process) madness. Now there is no method at all in the

Thanks DG.

(Time for NATO boys to prove themselves or get out).

In my experience, I have noticed that how you perform as a leader and perform your job depends on your subordinates to a great extent.

You are as good as your subordinates.

This applies here!