Friday, May 21, 2010

“Deficits” lets not get too frightened by them, instead manipulate them wisely

Deficits are the words used to frighten governments to get their house in order and order harsh cuts in public expenditure in order to get in line, so international funds and borrowings with strings attached can be obtained to live another day!!

The US is running a wildly extravagant budget deficit, which was US$1.42trillion for year ended 30th Sept.2009 and expected to top US$1.6trillion the following year. So ours at US$7B pales in comparison as the US figure is 230 times ours and their population is just 15 times ours. The UK is also in crisis with painful cuts planned with increases in taxation and reduction in public expenditure. In the UK they are planning to increase the rates of Capital Gains tax so that there is no difference in rates from Income Tax. In Sri Lanka there is no Capital Gains Tax.

I am not advocating printing of money to buy consumer goods. I mean if the deficit funds long term development that results in a growth in productivity, it is well worth expending. While economists differ on the optimal level of deficits, that a country can sustain without hyper-inflation setting in, it is moot that in Sri Lanka of today, any of the rules of economics apply due to the special circumstances of a country recovering from a long war, where new vistas to economic development are opening up, which will clearly all result in direct increases to GDP.

This is why deficit financing of Northern Development should be undertaken, if it can provide employment to the resettled people, as it is better than just providing them a living allowance, when in fact they are making a direct contribution to the growth in infrastructure with little pressure on the Southern resources. Further the use of the security forces in the Northern development effort, will mean that their otherwise inflationary wages bill, is actually now being put to productive use in the economy as a whole, whilst they are also learning a construction trade into which they can eventually find productive employment once the skills are developed.

It is sad that the opposition is out of touch on the practical aspects of managing deficits, and are parroting textbook theories that somehow have no place in 2010 Sri Lanka. We have a unique set of circumstances which include massive foreign remittances recorded and not that form a huge portion of National Income, which has allowed Sri Lanka to defy all doomsday predictions and come out with an overvalued currency, with no balance of payments deficits permitting a lotus eating lifestyle that only makes work optional. A pragmatic finance team in Sri Lanka with the amiable Dr Amunugama having his input can wave the wand, if the rogues in power can be stopped from stealing the goose that lays the golden egg.


Anonymous said...

There are many productive assets waiting to be developed, but alas they have been allocated to friends and family, no one knows when they will be developed.

please identify all assets and advertise them to be auctioned for the best price.

Look at the Elephant Pass salterns I will develop them in 6 months so that in 12 months we will be a net exporter of salt. Who is sitting on it? Ask the question in Parliament.

Come back to this page in 12 months and you will see the salterns still a waste land. That in a nutshell is how greedy the powers are.

The old adage still holds true, develop it of if you cant, give it to someone who can, don't just sit on it, no golden eggs are hatched by doing so.

You don't need deficit financing when there are people willing to invest and develop. Just give them the chance and cut through the red tape and corruption.

Anonymous said...

IMF must have read your blog!! they have just released the third tranche with a projection of 6.5%GDP growth for 2010

Anonymous said...

Deficit spending was first made popular in the modern age by Keynesian economists (earlier Romans tried Deficit spending; printing substandard coins with disastrous results) and this lead to the eventual abandonment of the gold standard in the 1960s. Today, most countries in the world have negative net assets as a result (when total value of the assets of the country is less than the total debt). Moreover, in terms of the value of gold the purchasing power of every country has declined (except for a handful exceptions) since the early 1960s. These are just some of the fruits of deficit spending. The worst is yet to come. Greece is just the beginning of the iceberg!

Stephen Jones said...

The country's been running on deficit spending since 2004. When they start to have to pay off the Chinese loans, then the bubble will burst.