Replicating Asian miracle: 
Taming the ‘budget monster’

In the previous two parts, we focused on the direction of Sri Lanka’s overall economic strategy and the need for creating a macroeconomic framework conducive for faster economic growth in the country’s hard journey towards replicating ‘Asian Miracle’. Attention was drawn to Singapore’s dual strategy of establishing economic relations with the rich West ‘leapfrogging’ its poor neighbours and creating a ‘developed country oasis’ within Singapore to attract foreign investments on a sustainable and permanent basis. The folly of Sri Lanka’s over-reliance on budget deficits year after year to stimulate economic growth and its consequential pernicious outcome of high inflation, low economic growth and continuous depreciation of the value of Sri Lanka Rupee were also pointed out. This is an example which Sri Lanka should follow with regard to state activities that result in wastage and state enterprises that make losses. Any state activity that does not generate a fair benefit to the people should not be undertaken; state enterprises that make losses should be closed down
In this part, we focus on how the government should tame the ever growing ‘budget monster’ and create the required macroeconomic environment for the private sector and the civil society to participate in the development process with confidence side by side with the government. 
Budget is also a Monster
A previous Finance Minister was bold enough to openly name four loss making public enterprises as ‘monsters’ that had continued to feed on the limited resource base of the government. The Minister was genuinely concerned about the vast amount of tax payers’ money which he had to dole out to these public enterprises to keep them from sinking and thereby unwittingly helping them to grow into ‘bigger monsters’. But, when one looks at the emerging budgetary scenario of the country, the budget itself has become a ‘one big monster’ that has a voracious appetite for consuming public’s money without the slightest consideration for the productive uses for which such money would have been alternatively spent.
Emerging Budgetary Situation: Need Immediate Fixing
The budgetary performance during the first two months of 2010 indicates that it is fast growing out of alignment from the targets set for the year. According to the pre-election fiscal report, the country aspired to improve its budgetary performance by reducing the overall deficit of the budget from 10.3 % of GDP (excluding grants) in 2009 to 8 % of GDP in 2010. However, the actual realisation during the first two months has been far from these targets. Government’s revenue in these two months amounted to Rs 109 billion which is annualised to a total revenue of Rs 654 billion for the whole year. This level of revenue is only 79 % of the total revenue of Rs 825 billion targeted for the year. The current expenditure, on the other hand, amounted to Rs 181 billion during the first two months. If expenditure is allowed to grow at the same rate, it will end up with a total expenditure of Rs 1086 billion or 16 % higher than the targeted current expenditure of Rs 932 billion for 2010. The overall deficit, including the capital expenditure, has been as high as Rs 109 billion in the first two months. If no action is taken to tame the budget, it will generate an overall deficit of Rs 653 billion or 50 % higher than the targeted deficit of Rs 437 billion. Thus, the deficit is expected to balloon to 12 % of GDP as against a target of 8 %. 
Hence, the country’s intractable budget monster appears to be the biggest obstacle for its journey towards prosperity.
How Kautilya Saw It
In Kautilyan economics, it was always surplus budgets, because Kautilya emphasised the need for maintaining a strong treasury. Such a feat was possible only if the king spent less than what he has earned. He said in Part V of The Arthashastra that ‘all state activities depend on the Treasury and, therefore, a king shall devote his best attention to it’. A king will disregard this advice and allow a treasury to be depleted to his own peril. This is because, according to Kautilya, ‘a king with a depleted Treasury eats into the very vitality of the citizens and the country’. In today’s parlance, this means that a poor budgetary performance is the main source of poverty and loss of power and wealth. He said that, ‘from wealth comes the power of the government and the treasury is the ornament of that power’. Hence, his advice to the king was that the treasury should be kept under his own control. If any action by a minister or a state official resulted in a loss to the treasury, Kautilya advocated that the severest punishment should be meted out to such miscreants. Those who are responsible for the losses should not only be required to reimburse the loss, but also a monetary fine should be imposed. That is the importance which a king should give to treasury operations or in today’s parlance, prudential budgetary operations. 
Kautilya’s Advice on improving the Treasury 
Since building a strong treasury is important to a king, he proposed several ways of enhancing its wealth. These measures are perfectly valid even for today.
• Ensuring the profitability of state activities and state enterprises
• Continuing well tried and proven policies
• Eliminating theft in the state sector
• Keeping strict control over ministers and government employees
• Increasing agricultural production. (In today’s parlance, increasing the total output or GDP)
• Promoting trade both within the country and with the outside world
• Avoiding calamities and troubles
• Reducing tax exemptions and tax remissions
• Increasing the king’s cash income Hence, as the first step of improving budgetary performance, the Sri Lankan government should stop all its wasteful state activities and reform its loss making state enterprises with strict instructions not to eat up ‘the wealth of the Treasury and the labour of their workers’
Kautilya further advised that the obstruction to work, misuse of government property and false accounting by officials lead to a reduction of the wealth in the treasury. Hence, the king should at all costs eliminate them. He said that if there are no distractions, people will work hard and create wealth for the country. When the wealth of the country is increased, the king’s treasury will also be automatically strengthened. 
In the current context, distractions are due to uncertainties arising from civil conflicts, wars, fear of inflation, instability of the exchange rate and shortage of foods and other essential commodities. The duty of a government today is, therefore, to establish peace, law and order and macroeconomic stability to facilitate people to work hard and create wealth.

Taming the ‘Budget Monster’
The Kautilyan advice given above will help Sri Lanka tame the ‘budget monster’. It essentially requires the government to make a three-pronged attack on the monster.
This is similar to the advice given by the change agents to poor people when the latter are prepared for receiving financing facilities under poverty reduction projects. The change agent will draw the picture of a big pot into which water flows and from which water is taken out too. In addition, there are holes in the pot through which water is also leaking out. The change agents will help the poor to put more water into the pot, advise ways of taking less water from it and seal the holes through which water leaks out. Thereby, the poor could build a strong water pot that enables them to create more water and protect them in times of calamities.
Obviously, the choices before a government facing a budget monster are the same.
First, enhance the water flow into the pot or raise the revenue of the government.
Second, repair the leaks of the pot or eliminate losses, thefts, misuses or other revenue leakages.
Third, reduce the volume of water to be taken out or bring down the expenditure of the government.
Loss Making State Enterprises
In Kautilya’s ranking, ensuring profitability of state activities and state enterprises tops the list of measures which a king can take to build a strong treasury. Today, given the enormity and vastness of the losses involved in state activities and losses made by state enterprises, there is no other measure which ranks more prominently than eliminating losses of state enterprises in Sri Lanka government’s battle against the ‘budget monster’. These are the holes which the poor people are advised to seal properly in order to construct a strong water pot for them. According to the Central Bank Annual Report 2009, six public enterprises have made thundering operating losses amounting to Rs 49 billion in that year. Since these losses are before taking into account the depreciation of capital assets and providing for bad debt, the net losses or the net reduction of the value of the wealth of the society will be much larger than this figure. The audited annual reports of these enterprises are not published on time and therefore the Treasury cannot make a correct assessment of its liability towards them. The belated publication of accounts is, as Kautilya emphasised, as bad as filing ‘false accounts’ or looting by enemies. He has, therefore, advocated the strictest punishment for such officials which takes the form of imposing a fine of several multiples of the amounts so distorted.
Singapore’s Experience
As Lee Kuan Yew has said in his autobiography, From Third World to First, an important requirement by all public enterprises in Singapore was that they should make profits. When Singapore Airlines was created after severing its link with the former Malaysia – Singapore Airlines, Lee made it a point to inform the staff, management and the board of the new company that the new airline should be competitive and self –supporting. At a dinner with all the stakeholders before its formation, he very clearly spelt out that the Singapore Airlines will be closed down if it incurred losses. He further emphasised that Singapore could not afford to run an airline and just show the Singapore’s flag like other countries; hence, right from the beginning, ‘management and union clearly understood that their survival depended on being profitable’. 
This is an example which Sri Lanka should follow with regard to state activities that result in wastage and state enterprises that make losses. Any state activity that does not generate a fair benefit to the people should not be undertaken; state enterprises that make losses should be closed down.
Kautilyan Advice is same as Singapore’s Policy
Kautilya says that it is the duty of the Superintendent of Treasury or Treasurer to ensure that the king’s revenue is properly collected into the Treasury. If he causes loss to the Treasury due to ignorance, he should be censured. If it is deliberate, he should be whipped and those who have abetted him should be given half that punishment. 
Kautilya has advised the king to take a strict stand against the loss making public officials or in today’s parlance, loss making state enterprises. He compares such officials to those who eat up king’s wealth and the labour of the workmen. Hence, they should not be allowed to continue in office. According to him, only those who increase the wealth of the treasury by fair means should be made permanent.
Hence, as the first step of improving budgetary performance, the Sri Lankan government should stop all its wasteful state activities and reform its loss making state enterprises with strict instructions not to eat up ‘the wealth of the Treasury and the labour of their workers’.
If they fail, they should not be made a liability of tax payers, but promptly closed down to prevent further losses.
In the next part, we discuss the desirable revenue improvement and expenditure cutting measures.
(W.A. Wijewardena can be reached on waw1949@gmail.com)