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Sri Lank budget 2011: Have we forgotten consistency and simplicity?
A simple and long term consistent fiscal policy is far more important than keeping the special interest groups happy
LBR,Wednesday 25 January 2012

By Chanuka Wattegama

A business writer just cannot avoid a post budget piece. So here is mine. While leaving the broader budget impact debate to experts, I will use this space to share a concern, which expands beyond the 2011 budget proposals.

Let’s look back. Budget 2010 was a tour de force. It earned respect of almost everyone including a section of the opposition. It was not entirely unexpected. For the first time in over three decades, the government could focus fully on the economy. Conflict was no more a hurdle. Inflation, once sky high, was back to a single digit. The country, with a per capita GDP of USD 2,400, has advanced to middle income category.

Liberal economic policies of the post-77 era have finally started showing a visible outcome. Optimism was in the air. Trade chambers were eager to get some historical mistakes corrected. The government obliged.

Simplified tax structure was the Budget 2010 trademark. On the recommendations of the Presidential Taxation Commission, and trade chambers, the treasury cleared its Augean stables. It let many petty taxes go. PAYE tax ceiling was reduced from 37% to 24%. Indirect taxes were confined to VAT and NBT, which was harmonized with the provincial turnover tax.

Telecom taxes were reduced from 31% to 20% by consolidating four tax components into one. Perhaps for the first time after independence, we have had a tax structure that could be written on the back of an envelope.

Why don’t we get the same comfort feeling with Budget 2011? What happened to the simplicity? BMW is a luxury car. An importer may now have to pay higher registration fees. It is also an international brand, so VAT and import duty are waived. Use it in the tourism industry to get a 50% tax cut. Which is applicable and which is not? Why should a mobile phone user pay additional Rs. 2 per minute, on top of telecom levy, when she takes an international but not a local call? Why not CEB, the state monopoly that provides electricity increase its tariffs in place of an additional 8% tax?

This is natural, one might say. It typically happens at every budget. Special interest groups seek tax reliefs. Changes elsewhere should offset the losses. Percentages move up and down, sometimes without an apparent rationale.

The point is this was not supposed to be a typical budget. The ground has been cleared. Laying the foundation would have been the next logical step. If government were truly ambitious of establishing the hubs it keeps talking about (‘Legal’ has been added to the existing five: Naval, Aviation, Commercial, Energy and Knowledge) this is the right moment to take some concrete action. We should win the investor confidence.

Consistency and simplicity is essential for that. A half normal tax rate for the tourist industry is good, if that is long term sustainable. Open a Rolex shop, taking the advantage of tax concessions, to be in a soup when they are removed in Budget 2014. Why should motor vehicle importers live in eternal fear waiting for a change in taxes? Our economy is mature enough to specify standard and long term tax policies. They do not have to perpetually change.

Ditto for depreciation. Consistency of policy is as important as the decision to peg LKR to USD or not. Other countries, notably China, achieved their export competitiveness by following long term exchange rate policies. We send mixed signals by lowing LKR overnight, having let it appreciate, though slightly, for a long period. Just before A few months ago government has ruled out the possibility of depreciation. Now the 3% depreciation can be seen as a reluctant policy decision enforced by the donors. It wouldn’t bring the anticipated outcome.

I wish the government use the annual budget to manifest its long term economic vision. This is the moment to show our commitment to development. A simple and long term consistent fiscal policy is far more important than keeping the special interest groups happy.

The writer is an independent policy analyst.

Comments in Chronological Order. Total 2 Comment(s)
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dirk
2012-01-25 7:20 PM

Overnight depreciation was a horrendous decision! If you notice from that day onwards the economical system started seeing some imbalances. Government should think twice before making any dreadful decisions.
Shaik Ahamath
2012-01-26 4:21 PM

Depreciation is a dreadful exercise at any time. However it is worse when nobody else is doing it. We missed our chance in 2009 when currencies across the world were being depreciated, our Central Bank stood firm, rendering our exports uncompetitive, but imports cheaper. For a while we stood tall with the strongest currency in the world and that was all. Our imports exploded out of all proportions and our tea and rubber exports lost out to Kenya, India, Malaysia etc.
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