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Thu, 31 July 2014 08:16:16
March of the left brigade
20 Nov, 2005 00:00:00
Sri Lanka will start a march towards big government under a new left leaning president soon.
Sri Lanka will start a march towards big government under a new left leaning president soon.
More state jobs and higher investment to undercapitalised business ventures will add to fiscal pressure.

Similar circumstances forced the government to print money last year driving up inflation at the sametime.

Throwing good tax payer money behind bad policy can be disastrous for any government, especially one as badly cash strapped as Sri Lanka.

Sri Lanka's budget, is tight by any standard.

It has averaged over nine percent deficits in the last five years, a level that is not sustainable for any country even a very rich one.

Fresh estimates show this year's deficit will surpass eight percent from an original estimate of seven and a half percent or exactly one percent more than budget.

Much of the increased spending was donor financed and related to repairing tsunami damage and helping affected people.

Budget deficit excluding tsunami related spending for instance was lower than the original target.

All tsunami aid was in grant form.

So government has achieved something significant in keeping the deficit below target?

Not really.

The downside is illustrated in the government's public investment budget which was one point three percent of GDP or Rs. 26 billion below target.

The Rs. 26 billion would have been enough to build two Colombo- Katunayake expressways.

Budget constraints have stumped government efforts to build the road for almost a decade despite a few false starts.

The cost of government underinvestment is particularly hurting the poor who have most to gain from better infrastructure like roads, improved transport and healthcare.

It is normal for elected governments here to miss investment targets: most of the time by a large margin.

So every year, underinvestment costs people access to a highway or two, better health facilities or more ports and airports.

If these were available they would greatly improve access to especially rural areas where the incidence of poverty is highest.

High inflation also eats in to government investment.

Firstly it lessens the impact of the money actually spent because every thing is more expensive than in the previous year.

It can also put a premature halt to government investment like it did last year.

Although the government appears to have kept the deficit below target, if tsunami funding is not included, it was not able to raise cash for investment.

That is because interest rates also rose in step with inflation, making long term borrowing expensive.

Printing money to finance some of the investment is also not wise since it had already pumped in Rs. 65 billion in currency which fueled the inflation in the first place.

Big government will further tighten fiscal space.

Current and capital transfers to public, for day to day running and investment, are expected to cost Rs. 68 billion this year.

Even with these massive transfers of taxpayer funds some institutions like the utilities and transport sector will make losses.

Their demands are also increasing at a faster rate than the general rise in prices.

Add subsidies and the figure goes over Rs. 115 billion to five percent of GDP the same as the government's investment budget for the year.

Yet this figure doesn't include some of the losses in government institutions like the utilities that sell below cost-again subsidising user.

Like this big government is already denying money for investment in to infrastructure that generate growth in the long term.

Big government will deny money to key investments, because resources are limited so choosing one option is at the cost of the other.

Sri Lankan governments are famous for throwing money at bad policy.

Ultimately the poor people who they profess to protect pay the price.

-LBR Newsdesk: LBOEmail@vanguardlk.com

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