Budgets and inflation Unseen realities
By Ananda Ariyarathne-2018-01-04
As a declaration of taxation
As it is, a Budget is ideally the official declaration of the 'Arrangements to be Effective' in collecting the share of Revenue. It is actually the plan for the 'Exchange of value' between 'Services Rendered' by the Government and 'Received by the People'.
Although this is the ideal picture, now it is proved beyond doubt, that the 'values' exchanged are not balanced at all.
Taxation is unavoidable, as Governments have to maintain and develop ways and means of serving the people better. In a simple economic society it could have been possible to strike a balance but now in the face of sophistication, that inter-relationship between taxation and well-being of the people have drawn apart. They are now on two parallel paths and has now become more a justification of the revenue needed by the Government than what the people need from the government.
State Budgets have become the annual feature where 'Sources and volumes' are decided for taxation. In Sri Lanka, traces of real budgeting can be tracked down to the Dutch Period where resources were exploited in a more organized manner. The British took it further with the expansion of Commercial Agriculture. By the time this land evolved into an Independent State, the budgetary practices of the British System had got established and till now we follow the same system and principles.
Although an affluent power like the British Empire could afford certain measures then, however, post war developments changed the economic scene of the whole world, affecting even the British economy. For a country such as ours, with the newly gained Independence, trends changed. It is quite evident by now, that our governments did not understand the nature of our needs as well as the ways and means to approach the inevitable goals, regarding the futuristic approach that was necessary. Therefore, it became more or less a continuation of the taxation that was already in use. But, the fact was that as an independent country, solutions were not found outside the country. Naturally, the need for expanded taxation became quite unavoidable.
That has led to the automatic adherence to Budgetary Practices inherited from the British and matters related to real economic development had been taken for granted. The export trade was completely controlled by British Banks. It became clear that the country started inching towards more hardship with expanding needs on one hand and on the other, the constraints in finding solutions.
As a 'New Nation' that was aspiring for internal development naturally had an increasing trend to have positive developments in foreign exchange earnings. But the 'Sterling Companies' had complete control over export earnings. That explains why the Sri Lankan government had to resort to more drastic measure like the nationalization of the Plantation Industry, that way opening the avenues for direct involvement of Foreign Exchange Control. This can be seen relevant to all the other 'economic activity centres' where the conservation of foreign exchange became a priority. Nationalization of Sea Ports and the Petroleum Trade also had to be brought under control. At the same time, it became unavoidable that resources had to be identified and exploited locally.
Evolution of taxation
The Global evolution of taxation and Principles involved shows us how we have inherited the systems and practices we have now.
No nation can survive without taxation and it evolved from the need to sustain rulers in ancient times. The wealth of a nation belonged to the ruler and the people made use of the resources for their survival. Naturally, the 'rulers', who did not do any production-oriented activities, were sustained by the people and they provided protection for the people from invaders who tried to grab the wealth of the regions. In the process, rulers became an unavoidable cost and the system that was directly linked to the rulers became the 'Administration' which evolved to be known as the 'Government'. Other than the comforts enjoyed by rulers , the linked sectors which helped rulers also had to be sustained. That meant cost and it had to be collected from somewhere.
That was how 'taxation' came into being.
Subsequently, the responsibility of looking after the people fell on the government and the taxation was applied through the regions that came into the scene through Regional Rulers who represented the main ruler and the government. Regional rulers found ways to develop their regions so that the people who started growing in numbers also could be sustained. Tax became the share of wealth of citizens as their share towards 'governance'.
Over the years, history saw forms of governments coming into existence. Tribes grew into more complex societies and leaders consented to have systems of leadership, changing from tribal chiefs, war lords, Kings and Emperors to end in democratic forms of governance.
With the unavoidable development of societies the forms of governments varied but taxation was there to stay. It was in kind initially, as taxes were collected as grain, animal products, animals and utensils and equipment made up of material found and developed from natural resources. Handling taxes in material forms faded away with the introduction of 'Money'. That in turn simplified the process. Both Goods and Services could be assessed using Monetary Units.
In the meantime, regional development resulted in Inter-Regional Exchanges which came to be known as 'Trading'. It was such wealth that was exchanged. All those became sources of revenue for governments. From all the gains, a certain share had to be paid to the governments and in return those governments provided facilities to citizens. It has now become a natural arrangement between the people and governance to have a 'symbiotic' system.
Sri Lankan budgets and taxation
In order not to complicate and confuse matters with high sounding economic terms supported by statistics, let us settle for simple logic and experiences gone through and therefore simpler to understand.
One of the major aspects that had to be accommodated in Annual Budgeting immediately after Independence was the welfare measures which continued from World War II, when the country was on a war-footing, the strong co-operative system that was in place ensured the consumer, protection to a great extent. Essentials such as rice and other dry rations reached consumers at very reasonable rates and the low taxation on imported foodstuff allowed consumer markets to be fairly well stuffed and they in turn conveniently offered these items at comfortable prices. However, with the population increase, the burden on the Government remained fairly light as it was only subsidies that had to be provided. It was also a limited burden as local rice production was on the increase with the newly activated irrigation rehabilitation projects which had begun to pay back.
Open economy and inflation
With the opening of the economy, the pricing mechanism escaped from the grip of the Government, thus exposing consumers to the results generated by freely operating profit-oriented enterprises and the impact is further complicated by privatization of state sector industries and service providers.
This has resulted in a self-destructive process that results in escalation of prices. Let us take rice cultivation as an example. The Guaranteed Prices offered to encourage rice farmers results in a higher market prices for rice and the benefit goes only to a maximum of 30% of the population that is directly linked. How about the 70 % of the population consisting of people who are compelled to pay more for their rice? Then, the Government 'Imports' rice from other countries committing valuable foreign exchange, just to bring down Market Prices. Now summarize the process, Cost in Guaranteed Prices + Cost of Imported Rice nullifies the effect of the Guaranteed Price. The most significant aspect is the recognition of the price of rice. Logically, the Government spending on the Guaranteed Price of rice ends up rewarding the rice farmer in another country.
Can we call such absurd strategies as development oriented? Such measures actually would cause escalation of prices locally. The Funding for such assistance by the Government is based on state revenue which in turn depends on taxation which shall be direct or indirect.
The whole confusion is created by the Government by misinterpreting the principles of Free Economic Practices. Where does the Government encourage production positively and then collect taxes. On the contrary, productivity and production are retarded by taxation, although it is said that the Free Economic Activities are promoted and protected.
The competitive approach has destroyed the rural economy. While open market policies have caused the annihilation of small scale operators, it is a negative development in place of a positive one.
Chain reaction
When the Budget introduces new rates, they affect the cost directly and prices also accordingly. The fact that the Cost of Living has been increasing is a fact and proof of that can be found by listing all the items that come in as unavoidable expenses. Annual increases are obvious and the only possible chance we had, had been the Annual Budgets which could have been development oriented starting at micro level, so that cost efficiency is achieved there. That would initiate a trend to keep costs low. If budgetary measures are more specific and objective-oriented than providing blanket scenarios, avenues for inflation can be minimized.
About the writer
A graduate from the University of Ceylon, Peradeniya and read for the MBA at PIM, is a Management Consultant, specialized in 'sick unit rehabilitation' has four books to his credit and three more are ready for publication, serves as a visiting lecturer and examiner at SLIDA.
