Tuesday, September 13, 2016

The Preamble to a Budget if NOT understood, the preparation of the Budget is a waste of time!

Before the Treasury sets out to present the Budget for the forthcoming year, there are basic tasks that must be in place, with all those involved in the process fully aware of them, as every proposal therein MUST be congruent with the goals set.


1       Whatever is proposed MUST enhance the strength of the Sri Lankan Economy with evidence.
2       It must give confidence to the International Community to whom we sadly still have to go cap in hand both for investment and for borrowing.
3       It must be aimed at improving the credit rating of the Country, in order to reduce the borrowing costs. Especially the refinancing of external debt.
4       Map out a practical strategy for the repayment of 80% of the external borrowings falling due in 2018 and 2019, along with agreements in place to reduce the interest rates on refinancing, in a negative interest rate world.
5       This will IMMEDIATELY divert the “market angst” of the repayment of this debt, which is “A sword of Damocles” over the Sri Lankan economy. There is NO harm in making a political statement on the reason, but in line with the PM’s statement of ridding this Country from the Rajapakse debt trap, this could be the first indication of congruence of statements of STATE


1                   It must be clear that the domestic Fiscal and Monetary Policy Management is on track, with a hybrid system of placements and market based auctions, to ensure that there is a mechanism in place, so the SL Govt. borrows both domestically and internationally at the lowest possible rates of interest.
2                   Beefing up the quality of the team in the Monetary Policy Committee, so they understand their role, and perform their duty without fear or favor in the interests of the Country. This will be a game changer in confidence building.
3                   The historic high spread of the Banking System has over the years resulted in the SL economy at a GDP level of less than half its true potential. This MUST be reversed without delay. The Treasury and CBSL have not been in a hurry to do this, which has cost the economy dear, as they have merely looked at the short-term taxation of the Banks huge profits, and not the long term benefits to the exchequer and the economy of Companies making profits and investments. I can personally attest that even today, the high spread has deterred our investment decision of purchasing highly productive capital goods to improve our productivity in manufacture, which when extrapolated has a huge impact on the growth of the economy. If borrowing rates were 200 basis points less, we would have invested Rs150M in machinery, to double our current output in volume terms. I don’t expect anyone in the treasury to understand this simple concept that every small business owner does!
4                   In order to counter this enforced drag, I recommend that every company with turnover less than Rs1B be allowed to borrow at 300 basis points lower than present, except for purchases of ANY FORM OF VEHICLE.

The above policy will result in an immediate surge in credit. Many companies facing severe labor shortages, can only survive, without going overseas, if they are able to substitute with latest technology in digital form. Mechanization will become more practical, and hitherto, the high borrowing rates have been the reason for lack of investment.


Sri Lanka is at full employment and until the treasury realizes it all policy decisions will be flawed. Yes there is massive underemployment, but to get a person out of underemployment to work productively full time, requires a gargantuan mental shift of work ethic, and remuneration shift, that needs a change in the mental state of the Public.

The worst offenders are the Three Wheeler drivers, 500,000 who can be re-trained in more productive and remunerative work, 2 million stay at home mothers, and 1 million youth who would rather stay at home and wait for a job of THEIR choice to fall on their lap (many from political connections to get Govt. jobs). THEY ARE CURRENTLY NOT JOB SEEKERS!


All employment incentives must take cognizance of three above, and be aimed at MAKING people WANT to take the employment opportunities in the private sector, currently over 500,000 which are going a begging. Politicians are inundated by time wasters looking for plum jobs in the Public Sector, and all of these people must be directed to a job bank agency to counsel them in what is treachery and what is civic duty! The definition of a prized job must change from one that pays a lot, in Govt. for doing little, and the ability to make money on the side, to that of one in the private sector that values skills and rewards work and effort.


Set the budget proposals cast iron NOT leaving room for ambiguity, where the legal draughtsman is responsible for wording, format and procedure to ensure there is NO room for doubt, on who is covered, how it is calculated, how the  taxes and levies are collected, what the exemptions if any are and the effective date of change.

Above all this must be in line with the overall goals of equity and reasonableness. There should be practicality in enactment and collection and non-regressive.


All regressive taxes especially hitting the poor must be identified and SUGAR COATED, where the reason for tax is more health benefit like on high sugar content drinks (like Coca Cola) These taxes must be frozen as a percentage of selling price, no matter what the international prices are.

They may apply to Kerosene, Sugar, Flour, Milk Powder, Dhal, and first 50 units of electricity for a household. Stamp duty on transactional values of less than Rs500K reduced to zero. In this way all small land transactions will be recorded in the appropriate State Department.


All products with Price controls, subsidies, conveniences and concessions must be available at the State owned Sathosa outlets. Many private traders have STOPPED stocking these items, which then inconvenience the public.

Life enhancing products MUST be introduced. Night buses in all cities to operate from 6pm to 6am @twice the current rates, on routes of less than 50Km must be forced on those seeking licenses. It is too much to ask the state bus service to work at night when its staff cannot turn up to work on the day shift! This will allow night shift to grow, reduce costs of running a night shift, and hugely increase labor productivity and result in much higher wages with overtime.


If the above are followed, the political expectations of the budget will automatically get fulfilled, and no one can contradict its intent as that of being to BENEFIT THE COUNTRY, not place more burden on long suffering citizens.

People expect relief, businesses expect breaks, however the past year has seen a huge rise in costs of items people buy, and despite the reduction in the price of fuel, in retrospect it was a hugely foolish move. People just used more of it, so not benefitting the balance of payments, travelling more meant clogging the roads, moving out of public transport into private vehicles meant more traffic jams, making commutes even longer, and so the vicious cycle of a reduction of the quality of life of our people, with the lower tax revenue to the Govt. resulted. THIS WAS A LOSE LOSE FOR ALL despite political arguments to the contrary!

Worse, neither did the cost of public transport fall, nor did any of the costs of the products that should have fallen thereon! Surely we could have learned from other Countries which did not make such a foolish move when world oil prices fell.


ALL This indicates the need for simplification of revenue raised, not a whole series of new taxes that complicate the tax structure even more. Granted the Govt. needs to raise revenue to plug the deficits. It should be done from increasing the tax yield from direct taxation from 10% back to the 20% if was in the late 90s. 500,000 wealthy people were created during this period, and none received a taxation file. Why not first find them and get them on the taxation train they have so craftily avoided so far. Stop hassling the people who are tax payers to squeeze a few more pennies from them.

The raids of the EPF inspectors to companies to check if deductions are made to all employees are legendary. This is bad for businesses who are finding it very hard to retain staff, and have very high turnover, and need at least 6 months before determining if a person will actually stay and contribute to the Company, let alone EPF. It simply does not make sense to put them on payroll on day one. It adds unnecessarily to the administrative burden of companies who already pay taxes. Find new ones for God’s Sake not go after tax payers! What kind of beast work’s for the Govt. certainly no one with a brain.

So how about a simplified tax structure, one that was tried and dropped, this time make it a goal to be achieved in the near term to the giveaway budget at the end of the term of parliament before the next election.

It would be good to have a flat rate so there will be no distortions. All taxes including VAT can move to the 15% mark adding capital gains taxes too but doing away with stamp duty at a flat Rs25,000 per transaction, so it will NOT distort property mobility, as capital gains tax will take care of capital appreciation!

Apart from the standard zero rated items, all establishments with Rs1M a month or more turnover must be vatable, as it is one means of increasing the catchment of direct tax payers that have escaped. Education can be zero rated, so the tuition master can be included in the taxation net. Of course a renewable energy policy would give concessions for imports of capital equipment and electric cars, set at 5%. It will gradually reduce our dependence on imported fossil fuels to negligible amounts in 25yrs.

This can be State Policy incorporated in the Constitution, to stress Environmental restoration, and a guaranteed human right to drink clean water, eat clean food, and breathe clean air, all else will immediately fall into place, automatically.

Of course tax breaks for recycling, elimination of plastic bags, and plastic bottles even for water, should form part of the taxation structure. Along with tax breaks for small enterprises providing clean water using reusable containers eliminating the need for disposable plastic bottles, that now even litter the ocean around us.


The people are waiting with bated breath in anticipation of a budget to beat all other budgets, especially in light of the previous disaster. DO NOT Disappoint it is a once off chance to make amends. It must offer relief to the less well off 80% whilst incentivizing the better off 20%, to work to the full, the latter being the most productive, risk taking, visionary and valuable members who will run small businesses and employ the less well off. The previous BUDGET failed both these sectors.

Remember the Budget’s immediate aim MUST be first and foremost be able to find suitable candidates to fill the 500,000 vacancies in the economy. This will reduce the dependency on the state whilst at the same time adding to the taxation of the economy, mainly in sales taxes from their earnings as well as the EPF!

It is a win win situation for all with the Private and Public Sector working together to achieve this not against each other as in the last budget where incomes were forced up, with companies losing money as a result.

Have courage, make Customs, IRS and other Revenue collecting agencies efficient professional and incorruptible. If the 500,000 new tax payers starting with the obvious 50,000 that can be harnessed within a week of effort which can yield Rs200B  instantly, a total of additional Rs500B can be collected. To balance this for fairness, any parliamentarian that has sold their vehicle permit must be taxed as Income Tax rates on that income.  

The need to raise the quality and efficiency of the public sector has already been covered earlier, as without it no budget can be administered effectively.

Let us get back to basics. The essence of budgeting is to show in a snap shot, how much revenue the Govt. aims to raise in the coming year, and how it is to be done through different modes of changes to the taxation and related revenue raising targets including borrowing.

That is then countered by the way it will be spent in the coming year. Last year both were way lower. The recurrent expenditure, mainly comprising the payroll of public servants, and pensions, Public Investment of the Capital Account is how it is divided. The latter will provide a social return to the economy in future years, aimed at obviously improving the quality of life of those who live in Sri Lanka.

 It is the responsibility of the Govt. that the above tasks are carried out in the most efficient manner. WE MUST PUNISH all those who make this task difficult, including the public servants taking bribes, and public servants not performing the tasks laid out for them. Acts of omission and commission!

All that is needed is just one budget that can change the mindset of the people to stop being crooked. If we begin at the top in the Finance Ministry, to show magnanimity and desist in the proclivity to steal from the public, and remove the crooked technicolored dreamcoat, we will be well on the way to prosperity.

This is an example of one person and his treachery that can take down a whole country with 20 million people. That is why true leadership matters and statesmanship which in Sri Lanka has been non-existent for so long is the need of the hour. Just one STATESMAN is all that is needed to change a whole nation!


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