What Is Fundamentally Wrong With The 2014 Budget?

by Laksiri Fernando ( No ember 2!" 201#" $ydney" $ri Lanka %uardian& The economic fundamentals overtly appear strong in the 2014 budget with the objectives of reducing the debt rate, budgetary deficit and sustaining a reasonable growth rate. That is when we look at the budget from a conventional economic point of view or a bourgeoisie! stand point, to be more precise. "ut what is the point of a budget in a developing country like #ri $anka if it doesn!t address the key challenges in the socio%political system, not to speak of any socialist or progressive objectives& This article focuses on the budget!s implications on the provincial council system or the country!s fiscal devolution. Lost 'ire(tion

$et me begin with some general points. 't is unfortunate that a ()*+ budget which is e,pected to be progressive in its social content has almost completely lost its social direction % neglecting social e-uity, fair distribution of income and upliftment of the poor and the needy. The ()*+ talked about a caring society! in the last budget and it has now been completely dropped. +ll in all, if the )resident!s speech, as the .inister of *inance, at the last budget kept some semblance of traditional #$*)%$eft policies or his almost bygone pro%poor! orientation, the speech this time is a mark contrast and it contains only glorified financial notes and figures perhaps from the /epartment of 0ational "udget of the Treasury without any sense of direction for the people or the country e,cept casino%type growth.

There are many vantage points from which the current budget could be criti-ued, including major flaws in economic 1miss2management or fiscal policies. There is no doubt that #ri $anka is in a favourable position, particularly after the end of the war, to utili3e the advantages accruing from the +sian growth, being ne,t to 'ndia, and linked to 4hina!s economic resurgence. 5owever, it is doubtful whether the present regime is utili3ing the full potential of this undisputable advantage, given the self%interests of the ruling elite and the increasingly disdainful attitude towards the general masses and the provincial6regional development. +s many have already pointed out, the present budget is ineffective in attracting enough *oreign /irect 'nvestment 1*/'2, as it could have been, or reforming the ta, structure to utili3e the full potential of the domestic capital formation, not from the poor! but from the rich. .ost of the present ta,es are indirect ta,es burdening the poor. "e as it may, the present article focusses, however, its attention on seemingly untouched area of complete abandonment of fiscal devolution which could have been a cornerstone of a developmental budget at this stage of social development in the country both addressing the spatial ine-uity in general and the -uestion of ethnic and social reconciliation in particular. Fis(al 'e olution )or *+s 't is possible that fiscal devolution is largely an unfamiliar concept in #ri $anka. 't is more possible that financial mandarins at the .inistry of *inance are averse to the concept. "ut it has been there in practice since the 17th +mendment 1189:2 and even it took e,pression at least in some form at the last budget and its speech. 't is completely absent from the present budget speech or in any tangible form in the budgetary planning documents e,cept crude figures given for the allocations under the .inistry of $ocal ;overnment and )rovincial 4ouncils. $et me first -uote what it said in the last budget by the )resident himself. Hon. Speaker, Rs. 130 billion has been allocated in this Budget for development activities in the education, health, social service and provincial economic activities that are devolved on Provincial ouncils. !o broaden the sources of income of the Provincial ouncils, it is e"pected to allocate Rs. 3# billion from the income derived through $ation Building !a", Stamp %ut& and 'otor (ehicle Registration. )s such, it has been ensured that the Provincial ouncils could spend around Rs. 1*# billion in #013. The above is not the only statement on fiscal devolution for the )rovincial 4ouncils in the last budget. There was a complete section on the subject titled <)rovincial 4ouncil +ctivities.= "ut the above statement is -uite sufficient to understand what was there until the present budget in terms of fiscal devolution, at least in circumscribed manner. >hile the )resident promised budgetary allocation of ?s. 170 billion from the government income at the national level, another 72 billion was allowed through sharing ta,es at the provincial level. These included 0"T, #tamp /uty and .@?. +ll these seemed to be scrapped. >hy ' say <in circumscribed manner= is that even by the last budget, arrangements had been made to collect the ta,es through the central agencies and then allocate the estimated amounts to the )4s. This is not the fiscal devolution intended under the 17th +mendment. *iscal

devolution proper incorporates both e,penditure and income within the devolved units as much as possible. This is what is in practice in 'ndia, #outh +frica or 4hina, not to speak of 4anada, (#+ or +ustralia. *iscal devolution or decentrali3ation has nothing much to do with federalism or unitary state under contemporary circumstances. 't is sine -ua non in any country with major regional disparities or under development. 't is of paramount importance when power and governing functions are devolved. 'f one argues that fiscal devolution is applicable only in large countries, then the counter e,amples are from #wit3erland or "elgium. 'n countries or socio%political systems, like among living beings, human or animal, the anatomy is the same whether the country is big or small. 't should also be noted that although the last budget talked about 1A2 billion for the )rovincial 4ouncils, the present revised estimate is 149 billion for the current year 120172 and by the end of the year, it would prove to be much less. There must have been a drastic cut somewhere, most probably in the ta, revenue sharing. +nd for the coming year 120142 what can be seen is purely an allocation for the .inistry of $ocal ;overnment and )rovincial 4ouncils and through which, of course as in the past, funds would be transferred to the respective )rovincial 4ouncils as an appendage of the central .inistry and controlled by the Treasury. This appears to be the dominant thinking of financial centrali3ation at present, instead of what intended as financial devolution under the 17th +mendment mediated through the *inance 4ommission. Budgetary ,llo(ation (nder the .inistry of $ocal ;overnment and )rovincial 4ouncils, 149 billion is allocated for the 8 )rovinces for the year 2014 without any policy reference in the budget speech. ' believe the omission is by purpose and indicative of how the government is going to treat the provincial councils in the future. This is e,actly the reduced amount for the current year, from the promised 1A2 billion, even after the 1re2constitution of the 0orthern )rovincial 4ouncil in #eptember this year. There is clear callousness in the budget estimates for the provincial councils, or otherwise the two figures could not have come that close as if the figures are largely duplicated or even manipulated. This allocation also contrasts -uite significantly with what is allocated to the .inistry of /efence and (rban /evelopment which amounts to over 2:0 billion. 'nstead of reconciliation through devolution, the big stick of military might has taken priority and instead of provincial6regional development, urban development in the >estern )rovince and provincial cities of particularly the #outh has taken priority. But of the allocated amount of 149 billion, 111 billion is for recurrent e,penditure and only 7: billion is for much needed capital and development e,penditure. Cven out of the recurrent e,penditure, the major bulk of 84 billion is for personal costs 1i.e. salaries2 and the rest, 1: billion is limited for operational costs. There is obviously something fundamentally wrong in these estimates and allocations, making the principles of devolution a mere mockery. 5owever, in theory, there are 7D functions assigned to the provincial councils even after taking away the police and land functions. +mong them, education, health, social services and provincial economic activities are of paramount importance and they will all suffer as a result.

.ost of the capital6development e,penditure, yet meagre, which could be considered the backbone of any devolutionary system geared for rectifying regional disparities is allocated largely for politically induced projects that are called the #pecial /evelopment 'nitiatives such as )ura 0eguma etc. and are funded mainly by foreign sources with the goodwill of seeing some progress of devolution in the country. *or e,ample, Eapan, +ustralia, +/" and >" are the main funders of these projects. The following table gives overall budgetary allocations for the provincial councils for 2014 in contrast to 2017. ,llo(ation o) Funding )or *ro in(ial +oun(ils (201#-2014& ?s. 000 2014 11,:DD,000 18,D2:,000 1D,98D,000 1:,771,000 1:,4:0, 000 12,787,000 14,9:7,000 19,D90,000 1A,04A,000 149,948,A8: #ourceF /epartment of 0ational "udget >hat the above table signifies is that there is no tangible overall increase for the )rovincial 4ouncils from the last year and the difference is only A74,DA: million which is not even sufficient to counter the inflation. +fter its constitution, the 0orthern )rovincial 4ouncil is allocated an additional amount of 2.4 billion perhaps at the e,pense of the Castern and other )rovincial 4ouncils. There are reductions for the Castern, 4entral and (va and sharp increases for the #outhern and #abaragamuwa whatever the reasons. The cut! for the Castern )rovincial 4ouncil is a staggering 1nearly2 4 billion. .a/or Fla0s The very second sentence of the "udget #peech of the )resident has highlighted the importance of the end of the war and the establishment of provincial councils in the 0orth and the Cast in

*ro in(e >estern 4entral #outhern 0orthern 0orth >estern 0orth 4entral (va #abaragamuwa Castern Total

201# (re ised& 11,829,:DD 18,972,072 1D,DAD,2:7 14,809, 0D4 1:,077,10D 11,:90,121 1D,711,209 1:,180,4A7 18,811,7D4 149,21D,170

the following words. There cannot be many -ualms about that. +ur nation is proud toda& that our ,overnment has converted the once mined lands of the $orth and -ast into lands that harvest the dividend of peace and prosperit&. !he consolidation of the democrati.ation process of the 30 &ear terrorist trapped $orth, having institutionali.ed a Provincial ouncil and /ocal )uthorities in the province through free and fair elections, has further enriched the pride of our nation. 5owever, the words have not been translated into deeds particularly in financial allocations to the )rovincial 4ouncils. The importance of )rovincial 4ouncils and fiscal devolution are multifaceted. +n effective system of financial devolution is necessary in the country for sustainable development with environmental care, minimi3e regional6provincial disparities and to bring redress to the people while enhancing the principles of ethnic6social reconciliation and democracy.! ' am almost -uoting from a >orld "ank sponsored ?eport to the *inance 4ommission and the )resident submitted in +ugust 2011. The provincial disparities are a key dilemma in #ri $anka!s development challenge. These disparities have been the breeding grounds for insurgencies both in the 0orth and in the #outh in socio%economic terms in the past. (neven development in any country could create social upheavals in both ethnic and social terms. These upheavals cannot only be contained through military means. >hile the per capita income in the >estern )rovince has gone apace during the last decade or so, it has been lagging tragically behind in other provinces. This is what is called kolambata kiri apata kakiri 1milk and honey to 4olombo and just forage to us2. The temporary revival of economic activities in the 0orth and the Cast cannot be reasons for complacence. 'f there has been any improvement in bridging the gaps in provincial disparities, as highlighted by some 4entral "ank reports recently, those are due to the devolution and provincial council system. The paragraph 7 of +rticle 1D4? of the 4onstitution or the 17th +mendment says <The ;overnment shall, on the recommendation of, and in consultation with, the G*inanceH 4ommission, allocate from the +nnual "udget, such funds as are ade-uate for the purpose of meeting the needs of the )rovinces.= This is the constitutional provision which is in fact violated by the 2014 "udget. 'n all countries where there is political devolution, or where there is fiscal devolution, there are targeted amounts of allocation to the provinces and these allocations as percentages of government revenue are progressively increased. 4hina is a very good e,ample. #ri $anka is the only country that these allocations are now circumscribed and even decreased. "etween 2000 and 2010, the government progressively increased the transfer of funds to the provinces from 72 billion to 10: billion according to the 4entral "ank statistics. Carlier, the percentage of transfer was lagging behind and was around 10 percent in 2009, but in 2010 it increased to almost 17 percent of the government revenue. The >orld "ank sponsored study report in 2011 recommended an increase, and the following was what it stated on the subject in essence. 0n #010, central government transfers to provinces amounted to Rs. 101.03 billion 2hich 2as

onl& 133 of the total revenue of the central government in that &ear. 0n vie2 of the importance of promoting regional development b& allocating more resources for productive investment in the provinces, this proportion needs to be accelerated graduall& to reach the level of at least #43. >hat has happened instead is the reduction of overall allocation from 1A2 billion last year to 149 billion this year, and transfer of 170 billion from government revenue, which is mere 9.4 percent of the annual government revenue estimated to be around 1,100 billion in 2014.