Courtesy Island

The first budget of the new government has run into stiff opposition from trade unions, farmers’ organisations and the like – a situation that was hardly unexpected given the provisions in the budget. This is probably the first time in living memory that a budget has encountered such resistance and all the signs are that this will exacerbate in the coming days and weeks instead of abating. One may say that never has the first fully- fledged budget of a new government come in for flak like this. Usually, the first two or three years of a government, is a honeymoon period when the public more or less goes along with the government in power. This time however things are working out differently. One may say that the government has brought this situation upon itself by creating impossible expectations among the general public.

In the past one year, the whole country regressed to the 1960s and 70s, when the government was supposed to give and the people were supposed to receive. It was the ethic of the Rodiya community which in feudal Sri Lanka was consigned by custom to begging. The Rodiya was obliged to beg and the non-Rodiyas were obliged to give when importuned and it was believed that both the giver and the receiver were exalted by the transaction. This welfare dependency was more pronounced among the Sinhalese than either the Tamils or Muslims. It is J.R.Jayewardene who has to take the credit for rescuing the Sinhalese from the Rodiya mentality by boldly doing away with welfare measures such as the rice ration.

There was a dangerous regression into welfarism under the Premadasa government with the importance given to the Janasaviya programme where once again, President Premadasa’s political rhetoric seemed to suggest that the poor were exalted by the act of receiving and the government was exalted by the act of giving. However after Premadasa’s assassination, this welfarism disappeared and it has to be said to Chandrika Kumaratunga’s credit that she too did not place emphasis on welfarism though the country experienced an economic downturn during the first seven years of her rule from 1994 to 2001. This is one of the things for which CBK can be praised, though of course a detractor would say that she did not place any emphasis on welfare simply out of sloth and indifference and not because of any considerations of economic policy.

Be that as it may, for over two decades, from 1993 to 2014 welfarism was in headlong retreat until it suddenly came to the fore once again with the presidential election campaign at the end of 2014. Once again, the people were led to believe that it was the duty of the government to give concessions to the people without imposing any taxes on them. The yahapalana platform which included the UNP, a segment of the SLFP, the JVP, TNA, SLMC, ACMC and innumerable NGOs all told the people in one voice that taxes could be reduced and salaries increased by Rs. 10,000 while at the same time giving guaranteed prices for paddy, tea, rubber and bringing down the prices of fuel and essential foodstuffs. Since the presidential election was followed by a parliamentary election, the extravagant promises made at the presidential election had to be implemented if the yahapalana coalition was to have any hope of winning the parliamentary election.

The parliamentary election was won thanks to the handouts that were given but now the chickens have come home to roost. The budget for 2016 can be described as an attempt to roll back the welfarism that took centre stage after the change of government in January. The welfarism took two forms; one had the effect of reducing government revenue through the reduction of taxes on fuel and certain foodstuffs. The other had the effect of increasing government expenditure through salary and pension increases and guaranteed prices for paddy, tea rubber etc. The scheme was unviable from the beginning – but the system was maintained between elections by printing money and borrowing.

IMF recommends austerity measures for SL

In September this year, the IMF team that visited Sri Lanka issued several warnings and made several recommendations to get the Sri Lankan economy back on track. Among the warnings that they issued was that the sharp rise in public sector salaries had contributed to an increase in imports of consumption goods eating up all the savings from lower world crude oil prices. They also warned of an increase in inflation. Among the recommendations made by the IMF was that the Central Bank should take a step back and stop intervening in the foreign exchange market and allow the rupee to depreciate to its real value so that imports would cool off and reduce pressure on foreign reserves.

They also recommended upping the interest rates to reduce private credit and to control inflation. The IMF also stressed the need to effect durable increases in government revenue and to reduce the budget deficit, to implement market based pricing for fuel and electricity and to put State owned enterprises on a commercial footing. They also wanted land ownership liberalized.

Many Sri Lankans have heard the term ‘austerity measures’ but many would never have thought the term would have any relevance for Sri Lanka. But it can clearly be seen that this budget seeks to impose austerity measures on the country – some of which go parallel to the recommendations made by the IMF. Last week for the first time, the prime minister himself announced that the government was looking at an IMF package. Austerity measures usually involve reductions in government spending or increases in tax revenues or a combination of both. Hence the following measures taken by the government can be described as classic austerity measures.

In most Western countries, there would be cuts in unemployment benefits and the like. We do not have unemployment benefits as such but spending cuts have taken place in other ways. For example the decentralized budget that every MP used to get has been administratively done away with in 2015. Not a single MP got his DCB funds and it does not seem likely that any MP will get DCB funds in the coming year as well. Another way austerity measures are imposed is through cuts in retirement and health care benefits. The government now plans to do away with the government pension for new recruits to the government service from 2016 onwards and to replace it with a contributory pension scheme. Another classic austerity measure is to reduce government employees’ wages. The government has not reduced wages, but the once in five years duty free vehicle permits that were given to senior government servants has been slashed to a permit once every ten years subject to a maximum of two permits. Then of course there are cuts in welfare measures. The government is to phase out the fertilizer subsidy and school uniforms.

Austerity measures also include certain tax reforms. Typically the VAT would be increased and indeed the upper limit for VAT was raised from 11% to 12.5% and the Nation Building Tax was doubled from 2% to 4% through the 2016 budget. Tax fraud and tax evasion would be targeted as a revenue enhancing measure. Targeting tax evasion has been going on since the present government came into power especially by the Customs Department. Privatization of state owned enterprises is another classic austerity measure and this looms large in the Budget for 2016 which has the most ambitious privatization programme ever mooted in this country. The plan is to sell off everything that the government has, even public utilities like water supply, power generation, petroleum refining and distribution etc.

What happened in Greece?

The crisis in Greece began in 2009 with the Greek government admitting publicly that it had been understating its deficit figures for years. When the Greek government made this announcement, financial markets panicked and refused to lend to Greece except at very high rates of interest to offset the risk that lenders thought they were taking. Then Greece was forced to look to friendly countries or institutional lenders like the IMF for bailouts which imposed stringent conditions. The conditions involved increases in taxes and cuts in government spending and were not popular among the people. This gave rise to riots, the rise of radical political parties, unstable governments and the whole intractable mess that we now see as the Greek crisis. The Greek economy shrank by 25% in just five years and unemployment increased to 25%.

This is the fate that we too are now staring at. As in the case of Greece, the present Sri Lankan government also says at every available opportunity that key economic data has been falsified by the Rajapaksa government. The prime minister himself said recently that they don’t have any idea of how indebted Sri Lanka actually is and that all kinds of loans had been taken by the Rajapaksa government and that nearly a year later they are still trying to figure out what the actual extent of indebtedness is! Similar ideas have been expressed even in parliament. The present government obviously has no inkling as to how dangerous such statements are, coming as they do from the very people running the country. If the people ruling the country have no idea as to how much the country owes to its creditors, who would want to invest in Sri Lanka?

Leaders of the present government in their anxiety to deny that there was an economic boom during the Rajapaksa era kept saying that the figures were all falsified. They made a big hue and cry about it when they were in the opposition. Now with the economy collapsing around their ears, they continue to say it while in government. Opposition parliamentarian Bandula Gunawardene told The Island that when Finance Minister Ravi Karunanayake submitted fiscal data to parliament recently under the Fiscal Responsibility Act, even that data was challenged by members of the government on the grounds that all the figures were falsified during the Rajapaksa regime! So long as the figures indicate that the Rajapaksa government was doing well in economic terms and the yahapalana government is presiding over an economic downturn, leaders of this government are going to claim that the figures have all been tweaked!

(In actual fact the best evidence there is to prove beyond any doubt that the Rajapaksa government was indeed presiding over an economic boom is that the IMF gave the Rajapaksa government a huge 2.5 billion USD standby facility in 2009 and the implementation of this was completed in 2012 to the fullest satisfaction of the IMF. Furthermore, in order to give this facility to Sri Lanka, the IMF did not impose the kind of conditions mentioned in their September 18, 2015 statement which was referred to above. That alone shows that the Rajapaksa government had greater credibility in the eyes of the IMF than the present government.)

In order to satisfy lenders, Greece was forced to agree to a raft of reforms which included raising the retirement age, cutting pensions, liberalizing the energy market, increasing the property tax, privatizing state assets, increasing the value-added tax and reforming its labour market to make hiring and firing easier. There were also certain specific measures that the Greek government had to take, such as reducing government employment by 150,000, lowering public wages by 17%, cutting pension benefits above €1,200 a month by 20 – 40%, raising property taxes and eliminating the heating fuel subsidy. This should give us a rough idea of what to expect in this country as well in the coming year. In Sri Lanka, many of the cuts may come on the sly – the way the decentralized budget of the parliamentarians was taken away. The reforms imposed by the international creditors of Greece included making the Greek Statistics Authority legally independent so that no government to force them to falsify economic data! Given the way that leaders of this government have been insisting that the Rajapaksa government falsified economic data, we need not be surprised if this too becomes a condition that Sri Lanka has to fulfill to satisfy potential lenders.

Austerity measures opposed

Dr Nirmal Ranjith Dewasiri was an activist who played a prominent role in the Yahapalana platform as the Spokesman for Ven Maduluwawe Sobitha’s Movement for Social Justice and earlier as the President of FUTA – the university teachers’ trade union. The Sunday Island spoke to Dewasiri to get his views on certain aspects of the budget.

Q. Obviously this budget was not what many yahapalana activists expected. We saw over the TV news bulletins that you have dismissed the increase of Rs. 121 billion that the government has shown as expenditure on education by calculating the current value of land and buildings used for educational purposes. It may be said that the government was compelled to make such attempts to show increased spending on education because of the FUTA demand that spending on education be increased to 6% of GDP. Even countries like Australia, Britain and the USA which have huge education industries do not have expenditure on education equaling 6% of the GDP. So you were in effect asking for the impossible and the government may have tried to ‘fluff up’ education spending in this manner out of sheer desperation.

A. We just wanted to convey the message that there was an issue relating to expenditure on education – that more investment was needed. The 6% was not a figure given by us. We got it from a UNESCO document. The 6% was just used as a benchmark. We never said anywhere that spending on education has to be increased to 6% in the very next budget. The memorandum that FUTA submitted before the budget just asked for a 30% increase in spending over the 2014 amount. We also wanted the government to do a proper assessment as to where these allocations were most needed. The allocation for education in the 2014 budget was 1.9% of the GDP. This time it is 2.7%. There has been a year on year increase of 31%. (That is without this so called capital carrying cost that has come in for much discussion.) However, there are questions over the purposes for which the allocations have been made. The proposed Mahapola University for example, is not a matter of priority.

Q. The duty free vehicle permit that was given to senior government servants has been removed and the proposal now is to issue duty free permits only once every ten years with a maximum of two per individual. What this means is that senior government servants have lost what they already had. University dons who were getting vehicle permits once every five years carried out a three month long strike to get even more privileges. Now they have ended up losing what they already had. Furthermore what has been lost is a very important privilege which makes a huge difference to the lives of senior government servants. How is the university community reacting to this?

A. There has to be a reaction to this. We can’t accept some of the arguments that the government has been making such as that there are too many vehicles on the roads. The actual fact is that most government servants don’t purchase new vehicles once every five years. They sell the permits they get. I also sold the second permit that I got. This supplements the income that the university lecturers get. Losing this vehicle permit is a serious issue. If there was no vehicle permit I could never have bought a car.

Q. So what do you intend doing about it?

A. FUTA will have to decide on a course of action.

Q. You contributed to the regime change that has taken place at two levels firstly through FUTA and then through Ven. Sobitha’s Movement for Social Justice. Now all those who participated in this project have lost even what they had.

A. FUTA was not involved in any regime change project. If destabilization of the government occurred as a matter of course due to actions that FUTA took, that is a different matter. We were not fighting for individual gains. As far as I was concerned, there was a need to remove those who were in power. If we are going to lose something under the new dispensation, we have to fight to retain it. If we stop to worry about whether the government that comes in will be better or worse than the one that was being ousted, we will never be able to change any government.

Q. There was a change of government, the main purpose of which was to abolish the executive presidency. The executive presidency was not abolished, senior government servants have lost the car permits they were getting without any problems, the cultivators have lost their fertilizer subsidy, school children have lost their free uniforms. So very little has been gained, much has been lost.

A. If these things are deemed necessary, people have to fight for them.

Q. The fact is that people now have to fight to retain what they already had, not to get anything new! Obviously, these cuts are being made because the government is no longer able to provide these facilities. Haven’t you stopped to wonder from where the government is supposed to find the money to provide these facilities?

A. There is nothing to think. In any case a serious economic crisis was on the way. P.B.Jayasundara had warned that an early election should be held because of the looming crisis. It was not on the advice of astrologers but that of P.B.Jayasundera that an early election as called for.

Q. I wish to make the informed assertion that when 2014 ended, the economy was on a very solid footing. The Rajapaksa government was not expecting to lose and there was no reckless expenditure. The economy was humming along, the budget deficit was contracting year by year.

A. The Rajapaksa government was not voted out for economic reasons. The change of government took place over political reasons. An authoritarian tendency was developing in the country. Extremist forces were dominating the government. In any case, I don’t accept the picture you paint about the economy – it was based on debt.

Q. By the time the Rajapaksa government was voted out of office, the national debt to GDP ratio was the lowest in 35 years!

A. There are different opinions about those matters even among economists. I am not an economist, and economic merits and demerits of the previous government will have to be discussed separately. What I am saying is that if people’s aspirations are not being met by the government in power, the people have to fight for it. On this car permit issue, the government will have to reverse their decision.

Q. You have seen how the yahapalana government functioned for the past one year. Are you satisfied with the economic management of the government?

A. No, I am not.