Monday, January 21, 2008

The economics of Fighting the war

This is another comment on the same post by VIC (see my post below for context).

VIC replied to one of my comments by saying:

"But I'm ready fund this campaign with my tax money, if it's going to end in next 2 years. Otherwise, I will have to keep on funding this same war for another 20 years."

What I've been trying to argue is that we simply cannot afford to fight on for any length of time - there is no money. Very little room left to tax and still less to borrow.

In a nutshell, This is what Sri Lanka's government's income and expenditure looks like (estimates for 2007 taken from the budget):

Tax & non tax revenue Rs.580bn
Pensions & Salaries of govt servants: Rs.240bn
Defence : Rs.140bn budgeted
Interest payments : 169bn
subsidies & transfers (to loss making govt businesses) 127bn

theres' other stuff as well but these are the main things

You can see there is a huge deficit. All the revenue is basically spent on salaries/pensions (no growth will come from this), interest (same as above) and defence (same story)

What about development - roads, schools, transport, health etc? Goevt says they will spend and this ges to make huge Budget deficit of Rs.235bn.

Where do they get the money from?

Money printing & borrowing.

The effects of money printing of last year can be seen in the inflation of today. For a lesson in what happens if this is taken too far read:

The rest is financed by borrowing locally and from foreign sources plus a smalll component of aid (abt 24bn) Debt is now close to 100% of GDP (anything over 50% is considered high)

And what happens when we borrow? The interest bill keeps shooting up. Remember that as per the original budget, we spend more on interest than on defence.

The collapse of 2000-2001 was triggered under the CBK administartion when things got to this stage (Rupee went from 70 to the $ to 100, interest rates went to 20% and we had negative growth)

The UNP set things right in 2002-3 by cutting govt expenses, reducing borrowings, and thus reducing interest rates. This set a platform for private investment & job creation. (government has no money to invets in projects - becasue all of it is being eaten up by running expenses and borrowing and spending only digs the hole deeper.

Now we are going back into the same hole and very few people understand the implications.

Basically, in a year or two the government is going to run out of money to fight a war. If they continue, we go bankrupt. Zimbabwe's collapse where 80% of the population is unemployed is the result of about 10-15 years of rampant money printing, which is what governments do when they can no longer borrow.

There is some double counting of figures above. (the way the info is classified makes it hard to reconcile ) The gross deficit 235bn is taken straight from the budget though so that is OK

Read the last page of the budget speech here for the summary, if you go through in detail you can get the breakups.

No comments: