Tuesday, July 06, 2010

Budget blues

The opposition is attacking the 'policy budget' presented by the Government for all the wrong reasons. In an attempt to cater to the average man, the budget is being condemned as an "IMF budget", a cunning plot to stimulate exports of countries that fund the IMF or a market fundamentalist budget.

In terms of policy, what has been unveiled is prudent and necessary. The biggest problem was the fiscal deficit and serious attempts to contain this at 8% is commendable. The problem in practice is slippage: revenues tend to be overestimated and expenditure underestimated, so we need to see how things actually turn out, but there is no problem with the targets themselves.

The measures aimed at reducing the deficit: consumption based taxes, on dry rations, milk, gas, wheat and the like are also positive as further taxes on industry are likely to be counterproductive, leading to a further contraction in growth. The reduction of duties on vehicles and consumer durables is a revenue generating measure (demand grows as the taxes are reduced and the government will collect a greater absolute amount of duties, although the duty percentage has fallen) For example government revenue from vehicle duties had fallen from Rs.18bn to Rs.3bn over the last three years. The duty reduction will also stimulate trade and finance as people start buying more of these and use a certain amount of debt (more affordable due to lower interest rates) to finance these.

What then, is the problem? Fundamentally, nothing; except the size of the government expenditure. I am a believer in a minimal or 'Nightwatchman' state, the current state apparatus is huge and shows every sign of growing larger.

The deficit can equally well be controlled by reducing state expenditure which in turn may be achieved by scaling back the size of the state (privatisations for instance), efficiency improvements or administrative restructuring (simple measures such as moving the clocks forward by an hour is a painless method of achieving significant savings in power consumption; combining the ETF and ETF into one body (under the ETF, the smaller of the two)will immediately eliminate the cost of running the EPF). The lack of transparency ensures that a lot of waste and inefficiency goes unnoticed. Publishing monthly statistics on the CEB: the units of power generated, the units billed, the debts outstanding by sectors, the cost of generation by the various types of (power hydro, oil etc) will put the management of the CEB under a lot of pressure as people will begin to ask why they need to pay so much. The other problem is corruption, something that is again helped by the lack of transparency, the cost of which is ultimately visited upon the people in the form of taxes.

Therefore, there is no problem per se with the policy targets, the only problem lies in the expenditure. The people must remember that there is no such thing as a free lunch. If they clamour for state sector jobs (and 300,000 new staff have been recruited to the state in the last five years) the bill needs to be paid; if they do not support greater transparency in public affairs, then waste and corruption will thrive.


Dulan said...

I'm with you on the need for a smaller state apparatus. The whole point of transparency and accountability is very valid, but who will bell the cat?

It's interesting that private sector organisations will spend so long on budget preparation and then on monitoring performance against it. What if the same thing were to apply for the ministries? Does it? - I don't know.

Then again, having performance related pay for essentially overstaffed and quite possibly corrupt organisations just might be counterproductive.

As you say, the policy seems to be in the right direction. Let's see how the implementation goes.

Jack Point said...

Ministries should be accountable to parliament. Day to day administrative control will be exercised by the treasury which will release fund periodically to each ministry, in accordance with the sums voted.

This is my understanding of the process.

Jack Point said...

I believe ministries are answerable to parliament. Administratively, their budgets are controlled by the treasury which will release funds periodically in accordance with the amounts voted in parliament.