On the fast-track to disaster?

by Sumanasiri Liyanage

(May 02, Kandy, Sri Lanka Guardian) Sometime back I had a brief chat with a UPFA MP who was made a minister in the last cabinet reshuffle about the economic policies of the UPFA government. Although he claims to be a Marxist, the question he had posed to me was about the issue of how to reduce the budget deficit by increasing government revenue. Although political economists recognise the adverse consequences of persistent budget deficit, they do not, as neo-liberal economists do, analyse economic issues solely from the prism of budgetary management especially in an underdeveloped country. A recent IMF report on Sri Lankan economy gives the impression that the fundamentals of the Sri Lankan economy are sound and the only worry has been the inability of the government to maintain fiscal deficit at a reasonable level.

Let me paraphrase my answer to the question posed by the UPFA MP. I told him that although the broad contours of the economic policies underlined in Mahinda Chinthanaya were appropriate for post-war economic development, the UPFA government has no strategic plan to operationalize those policies. In the absence of such a strategic plan, I told him, the talks on the budget and how to increase revenue would be a futile discussion and broad ideas expressed in MC would eventually be reduced to mere rhetoric. He responded that there was a plan but it was known only to Dr. P. B. Jayasundara, Secretary to the Treasury. As I emphasised and reemphasized in my previous notes, the UPFA government runs the economy with the assumption that the day-to-day management of the economy would eventually produce economic development. I call this version of neo-liberal economics as it is expressed in Sri Lanka PBJconomics. Dr P B Jayasundara, the Secretary to the Treasury and to the Ministry of Economic Development may be a good fiscal manager, but definitely a bad development economist. Let me elaborate on my argument.

There are two motives behind this new tax structure.

First is, of course, the pressure of imports on the trade balance.

It has been forced to reverse its decision one year later.

 Second explanation is the linkage between commercial capital,

bureaucrats and politicians of the ruling coalition.

A good example for incorrect economic policies of the UPFA government is its recent announcement of tax on motor vehicle. The Island reported: "Taxes on certain imported vehicles have been raised less than a year since they were significantly slashed as the government comes to terms with an extremely challenging fiscal position and traders’ view that imports had ‘gone out of hand’" (April 26, 2011). When the tax on vehicle imports was slashed soon after the parliamentary election, I wrote that it was not only a reflection of the absence of an economic plan but also the susceptibility of the government to the pressure of second-hand vehicle importers. In that article, I also projected that the government would increase import tax on motor vehicle after importers of motor vehicles stockpile a substantial number of cars, vans and other vehicles in their yards. So, one may wonder whether the recent decision of the Treasury to increase duty is aimed at giving some windfall profit to the importers of motor vehicles. The Island notes: "An executive of a top vehicle importing firm, not wanting to be named, said vehicle imports had gone out of hand since taxes were slashed last June."There are too many vehicles coming in and our roads cannot absorb them all. After taxes were reduced last year, vehicle imports soared and kind of got out of hand and I think by increasing taxes the government is trying to attempt to apply the brakes. With prices increasing, middle-income groups maybe discouraged from purchasing vehicles," he said." So it was clear that the recent decision was taken with tacit consent on the vehicle importers.

What does this signify? In underdeveloped economies, one of the principal reasons why the economy remains underdeveloped is that in these countries the economies have been continuously dominated by commercial capital. As a result, both the political elites and bureaucrats entangle in series of networks and linkages with the class of commercial capitalists. The commercial capital and bureaucratic capital are intermingled and dominate the sphere of economy and society. The hegemony of commercial capital shows the short-term day-to-day character of the economic policies formulated by Dr. Jayasundara. And these policies focus not on economic development but on the condition of the budget office.

There is another significant difference as regards the new tax structure this time. Oftentimes, taxes are increased for all categories of vehicles. However, this time, tax was increased only on vehicles used by the middle class, professionals etc. "Petrol cars with engine capacities below 1,000cc would see total taxes increase from 95 percent to 120 percent while vehicles from 1000 to 1,600 cc will see total taxes increase from 119 to 128 percent, a statement from the Ministry of Finance and Planning said" (The Island). Moreover, import taxes on three wheelers were also increased. "Petrol three wheelers will see taxes increase from 38 percent to 50 percent while diesel three wheelers will see taxes increase to 60 percent." Politicians oftentimes talk about greener Sri Lanka. However, when the new vehicle tax structure was prepared, no concern was given to the environmental aspect of the issue. Hence, taxes on hybrid cars were significantly moved upward. "According to the Ministry of Finance and Planning, hybrid cars with engine capacities below 2,000cc will see total duties go up from 38 per cent to almost 50 per cent. Hybrids between 2,000 to 3000 cc will see total duties reach nearly 75 per cent and vehicles above 3,000 cc to100 per cent." The bias against middle class would adversely affect the electoral base of the UPFA government.

There are two motives behind this new tax structure. First is, of course, the pressure of imports on the trade balance. This, in fact, had to be taken into consideration when the Treasury decided to slash import taxes on vehicles. It has been forced to reverse its decision one year later. Second explanation is the linkage between commercial capital, bureaucrats and politicians of the ruling coalition. Of course, new space has been created in Sri Lanka for economic growth. However, to make that space available to economic development in proper sense, new policy formulation is imperative.

(Dr. Liyanage teaches political economy at the University of Peradeniya. He can be reached sumane_l@yahoo.com )