When Finance Minister Ravi Karunanayaka entered Parliament last Thursday to present his second Budget, television showed him brandishing his new black ‘Budget briefcase’ as if there was little inside it. As the nation heard out his Budget speech, the usual mixed bag of higher taxes in some sectors, lower taxes in others and, slightly lower prices of some basic food items were only half the story.
Even if there will be some grumbling at popular level that more was not done to reduce living costs, what has to be appreciated is the larger framework of forward-thinking measures to not just push economic development but also boost the market economy overall. Again, a few sectors may complain of a lack of incentives and some discouraging levies. But overall, the strong business-friendly proposals are aimed at laying the foundation for rapid investment across some key sectors of the national economy.
This is that other half: a carefully crafted investment and business activity boosting framework that is looking at the medium term future economy. ‘Development’ is not simply a list of State-initiated ‘projects’ – although, in a country that is only yet halfway to fuller development, such State interventions are still relevant. Rather, on the one hand, Budget 2017 seeks to encourage greater private sector investment and market activity in selected areas that will add value to the economy.
Clearly, the Government is taking the country’s new ‘middle income’ status seriously and, unlike the previous regime, not merely flaunting this status as an ‘achievement’. After all the Per Capita GDP ratio that indicates a country’s income status is but a measure of progress towards a more affluent and comfortable society and not some goal that had to be attained once and for all. ‘Middle Income’ status must be seen as just the entry of a nation into a higher level of income that is above ‘Low Income’ developing country status in which this country has languished since it was freed of the colonial straitjacket not too long ago.
Budget 2017 is clearly a quick move to systematically exploit the new economic and social dimensions that open up with entry into Middle Income status. One important socio-economic dimension is the significant broadening of the country’s middle class.
The Budget includes many measures that will, while taxing some things that are very much a middle and upper class activity, such as telecommunications, also encourage more consumption by these social layers. This will immediately boost market activity overall, itself, a vital ladder for private sector success.
But the above middle class-targetted measures are only the tip of the iceberg. At the heart of the ‘development’ dimension of Budget 2017 is a swathe of fiscal measures and tax incentives targeting some key major sectors of the economy. Banks are given a push both in terms of incentives and also minimum performance criteria for expansion. Agriculture and agri-business has also been favoured with schemes and incentives as has been the tourism industry and such economic infrastructure sectors as telecommunications and road construction.
While the attempt to further boost the banking sector clearly aims at long term modernising of the way money is used in the country, in the short term, the Central Bank will have to keep an even sharper eye on inflationary trends that are, already, rising slightly. The intended expansion of the construction and telecommunications sectors will be vital as infrastructure for overall private sector expansion across the range of sectors from industry and agriculture to transport to trade and tourism. At the same time these two sectors will also provide more employment.
Agri-business expansion is critical in view of the gradual fading in importance of the traditional colonial export industries of coconut and rubber. While the country has already gone beyond the traditional ‘big three’ (tea, rubber and coconut) of the colonial economy, major new sectors, especially in the rural and semi-rural areas need to emerge in order to enable more economic expansion in these areas. Rural poverty is yet a long term challenge and governments have fallen due to their failure to look after these segments of the population. The measures encouraging tourism are most sensible since that is a major foreign exchange earner and employer, especially in some rural areas. Unlike some other export industries like apparel, tourism is a sector that brings high value addition to the country.
The encouragement of middle class consumption will certainly help boost retail markets further and, thereby, help expand small businesses. But micro-enterprises cannot be the only way to absorb the labour force. The labour market needs large infusions of young people ready to enter various forms of wage employment in the economy - especially in the private sector. The country needs greater regularising of the labour market itself in order that, on the one hand, business itself can more systematically deploy labour, while, on the other, greater wage labour results in greater consumption.
However, an ‘Achilles Heel’ of Budget 2017 is its lower emphasis on social infrastructure as opposed to hard economics. Both the education and health sectors, especially the State-supported ‘universal’ health and education systems that have been the bedrock of this country’s, relatively phenomenal, social development, seem to have lost out in Finance Minister Karunanayake’s proposals for 2017. Neither the State health nor education systems have received any boost. Rather, the budgeted State investment in these two sectors is even lower than that of 2016.
This is something that the Government will need to be alert because both these sectors, having contributed so greatly to the current social wellbeing, are naturally very sensitive sectors.
In the first place, the expansion of some of the other sectors, such as construction and telecommunications, as well as tourism, can only take place if there is an expanded skilled labour force available. And this can only be made available quickly via the State-supported education system which, thanks to its founding fathers, already has much of the necessary basic infrastructure for vocational training but needs modernisation and equipping. The private education sector cannot be expected to deliver this skilled labour requirement in the short or medium term. In the first place, private education is yet to be properly regulated and provided with the necessary standard-setting for its development. And when VAT now affects the private health services, the need for the State health system is even greater. It is imperative that the Government gives some indication of its thinking with regard to these two sectors and indicate that at least in the long term, there will be greater attention paid to education and health.
At the same time, another area that should have been given more attention is the need for rebuilding the war-battered Northern region. Any failure in development in the worse hit region is fraught with dangers given that this was once insurgency-ridden area and society. Further, a gap in funding from Colombo will only add to the sense of marginalisation felt by the Northern society and goes against the need to further integrate that society into the national mainstream.
Overall, it is a genuinely development-oriented Budget done creatively and, in the light of public sensitivities, bravely. It is now up to the business sector to take up the challenge and respond with vigour. After all, the war and instability cannot be excuses any more. Just as the Government is taking political risks, the business community must now live up to its vocation of ‘entrepreneurship’.