Budget 2006: Is it achievable?

The 2006 budget expects revenue to go up by 1.1 percent of GDP to 17.5 percent of GDP and the overall budget deficit to remain at 7.1 percent of GDP. The 2006 budget expects revenue to go up by 1.1 percent of GDP to 17.5 percent of GDP and the overall budget deficit to remain at 7.1 percent of GDP. In 2005, the treasury hoped to increase revenue by 1.8 percent of GDP (from 15.3 to 17.1 percent) which most analysts dismissed as ‘ambitious’.

In the end the treasury managed to increase revenue by 1.1 percent of GDP, and to keep the deficit down to 7.1 percent of GDP, which is the lowest seen in the country in recent times.

% of
GDP

2004
actual

2005
Est

2006
Prov

2006
Est

Revenue

15.3

17.1

16.4

17.5

Current Expenditure

19.2

18.4

18.5

18.5


Current account deficit

(3.9)

(1.3)

(2.2)

(1.0)

Public Investment/GDP (%)

6.3

5.0

6.3

6.3

Total Expenditure

23.5

24.6

23.5

24.7


Budget Deficit

(8.2)

(7.5)

(7.1)

(7.1)

 

 

In rupee terms, the provisional numbers say revenue in 2005 would be just five billion short of target at Rs. 385 billion.

High inflation explains why nominal collections are on target even if the tax take (in real terms), did not reach the target.

In 2006 the government is hoping to push revenue to 17.5 percent of GDP, which is less ambitious than last year.

The current account deficit (the gap between revenues and recurrent expenditure), also fell to 2.2 percent of GDP from the also ‘ambitious’ 1.3 percent proposed in the 2005 budget.

Any responsibly run country should run a current account surplus, but Sri Lanka has had a chronic current account deficit since 1988. 2004 was a particularly bad year with a current account deficit of 3.9 percent of GDP.

The tsunami debt relief (of about 1 percent of GDP) and a cut in capital expenditure by 1.3 percent of GDP helped the government exceed the original deficit target of 7.5 percent of GDP.

The 2006 budget expects to increase revenue by another 1.1 percent of GDP, which is a less incredible target than last year.

But the government will also not get debt relief next year.

On the plus side, the government has put capital spending again at 6.3 percent of GDP, which gives room to balance the numbers, again, by pruning capital expenditure, if there is a revenue shortfall.

The budget also had less scary rhetoric to put off potential serious investors than earlier.

The return to the automatic price formula would also help the country avoid a self induced ‘oil shock’ in the future.

-LBO Newsdesk: LBOEmail@vanguardlk.com