Ranil’s Economic Policies The Good, The Bad, The Ugly
4 September 2024 07:34 am
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Amending tax rates has no justification. Providing tax-free incentives to professionals undermines the integrity of the tax system. Professionals are respected pillars of society; they must lead by example and not ask for tax concessions
The size of the public service is around 1.2 million people. A Rs 10,000 monthly increase that was made this year cost the treasury Rs 144,000 billion a year (0.5% of GDP). This also drives up future pension liabilities. RW’s manifesto states his intention to increase salaries by a minimum of 24%. It is not possible to cost this due to the lack of detailed information. Nevertheless, if the quantum is the same as this year it will cost another 0.5% GDP that will have to be paid with more tax increases
Providing a glass of fresh milk to all schoolchildren in the country free of charge is a commendable goal, but it may not be feasible. With 4.2 million students attending school approximately 180 days a year, and assuming each receives a 250 ml glass of milk, the annual requirement would be around 189 million liters. Given that the retail price of a liter of milk is about Rs 500, the total cost of the program would amount to Rs 94.5 billion. This raises significant questions about funding
Relief loans granted to MSME will be capped at an interest rate of 5% up to Rs 2.5 mn. As previously mentioned, rewarding bad borrowers creates significant moral hazard concerns
By MURTAZA JAFFERJEE
Ranil Wickremesinghe’s (RW) manifesto in English spans 13,496 words. While it is primarily aspirational, like most manifestos, it also uniquely outlines his efforts over the past two years to stabilize the economy. He highlights the enactment of 100 new laws, with notable achievements in legislation related to the Central Bank, Economic Transformation, Anti-Corruption, Public Debt Management, Electricity, and Public Finance Management.
In contrast, The Online Safety Act enacted under him is a terrible piece of legislation, it must be rescinded by the next government.
The Good
- His economic ideology is based on Theravada Trade Economy. He states that it was the system based on the concept of Theravada that was practiced during the Kingdom of Rajarata in ancient Sri Lanka (600 BC to 1,300 AD). The key characteristic of the system was trade where Sri Lanka was considered an economic center of the Indian Ocean. For all practical purposes, the emphasis on trade, along with other aspects of this manifesto, draws on the Social Market Economy ideology that Ranil Wickremesinghe strongly promoted during the Yahapalana government.
- He restates that the following commitments that have been made with the IMF will be adhered to – Treasury will clear arrears within 3 months, no Central Bank money printing, cost reflective energy prices, noncommercial obligations by SOEs will be funded through Treasury transfers and a minimum floor on spending on social transfers.
- Reducing corruption vulnerabilities by implementing many of the priority recommendations of the IMF governance diagnostic.
- Devolution of power and resources to the regions. This permits decision-making closer to the people leading to more responsive and effective governance. It also leads to competition between regions to attract investment and permits experimentation.
- The Urumaya program plans to transfer land ownership to 2 million people, including those living in government-owned low-income housing in Colombo. Many of these occupants have resided in these properties for years, if not decades, making the transfer of ownership justifiable. Hernando de Soto, a renowned Peruvian economist, argues that formal property rights are essential for economic growth. By granting legal ownership, assets can be used as collateral, investments are facilitated, and people are integrated into the formal economy, unlocking significant economic potential.
- Revitalising cooperatives by adopting the successful model followed in Scandinavia. Well-managed cooperatives enable the pooling of resources and benefit from economies of scale in both procurement and marketing. Notable examples of highly successful cooperatives include Sunkist in Florida and Fonterra in New Zealand.
- Provision of 300,000 acres of underutilized state land for export-oriented commercial crop cultivation. One reason our agriculture is unproductive is that fragmentation of land prevents commercial scale operations.
- Subsidies for farmers and fishermen will be provided through cash transfers rather than by manipulating the prices of agricultural inputs, which can lead to market distortions.
- Revitalizing and expanding the system of irrigation tanks and reservoirs. Many studies have shown that well designed irrigation projects have some of the highest social returns. A major part of our land area lies in the dry zone, irrigation will enable a second harvest.
- Enabling the setting up of economic zones for industry, technology and tourism, presuming through PPPs (it is the state that has the land). Economic zones address the government’s coordination challenges by securing many of the necessary approvals in advance. The concentration of activities within these zones makes infrastructure like roads, public transport, power, and water more viable and efficient. This concentration also allows for better planning, which enhances productivity and improves the overall aesthetics of the area. While site selection should be based on suitability, it’s likely that electoral considerations have also influenced the choice of locations.
- Planning for a megapolis from Kalutara to Negombo with the assistance of Surbana Jurong from Singapore. A large urban conurbation already exists, but with better planning—especially in transport links—the area’s productivity can be significantly enhanced. Planned urbanization offers numerous positive spillovers, including reduced transaction costs due to the concentration of resources and economies of scale. It also fosters greater innovation and entrepreneurship by bringing together diverse skill sets, enabling the production of complex products. Additionally, skills development becomes more viable thanks to the proximity to knowledge centers and educational institutions.
- Establishment of school boards with representatives from School Development Societies and Past Pupil Associations. Accelerate “English for all” through the schools in the next decade. University education to start at age 17.
- Encouraging the establishment of private hospitals and a wider health insurance scheme.
The Bad
- Enhancing governance in the management of the EPF and ETF by including representatives from trade unions and the Chamber of Commerce. It is worth noting that stakeholder representation already exists within the ETF. However, more so than governance our superannuation system has a more fundamental design flaw: both the EPF and ETF operate as monopolies, offering a single product that fails to accommodate diverse preferences related to risk and faith, such as Islamic finance. The necessary reform is to open the sector to competition by first establishing a competent regulatory authority, allowing for member account portability, and licensing private players to provide fund management services.
- Enhancing the productivity of dairy cows by providing improved services to 200,000 dairy farmers, focusing on genetics, feed, and artificial insemination. The goal is to boost local milk production from 380 million liters to 820 million liters. The primary factors driving higher milk yields include high-quality feed (which constitutes 70% of production costs), adequate shelter to keep them cool, and minimizing non-lactating intervals. Currently, water allocation for irrigating fodder crops is deprioritized, and limited access to large tracts of land hampers large-scale commercial farming. Feed costs are twice as high as in neighbouring countries, making our milk among the most expensive globally. To reduce feed costs, policy must focus on increasing fodder crop production and lowering cost through better seeds, irrigation and commercial farming.
- Providing a glass of fresh milk to all schoolchildren in the country free of charge is a commendable goal, but it may not be feasible. With 4.2 million students attending school approximately 180 days a year, and assuming each receives a 250 ml glass of milk, the annual requirement would be around 189 million liters. Given that the retail price of a liter of milk is about Rs 500, the total cost of the program would amount to Rs 94.5 billion. This raises significant questions about funding. For context, Margaret Thatcher discontinued a similar free milk program for children over the age of 7 during her tenure as Education Secretary in 1971 due to its high cost.
- Establishing 18 universities, either by creating new institutions or by converting existing vocational and technical colleges. Providing further opportunities for higher education is praiseworthy but it also raises concerns about funding and effectiveness. Expanding the current dysfunctional system that we have today is without merit. The issue is not just inadequate funding, but also misaligned incentives and market failure. While students are the intended beneficiaries of government support, funding is channelled directly to the universities. This disrupts the accountability expected in a market system, where students should act as clients and universities as service providers. Additionally, students are often locked into limited options, with little ability to seek alternatives.
- The solution is to introduce higher education vouchers that students can redeem with their chosen education provider. Those who can afford to do so may supplement the voucher to access more expensive courses or institutions, thereby increasing their options and enhancing competition among providers.
- Primary and secondary education should remain free for those in need. However, we must reconsider free tertiary education, as it significantly enhances the earning potential of recipients. Like in many other countries, funding for higher education should be structured as a loan, repayable once the graduate is employed. This approach would expand the resource pool, allowing more people to access higher education without relying solely on budgetary allocations.
The Ugly
Tax policy
Since the dawn of civilization, rulers have imposed taxes for various reasons: often to enrich themselves, which is unjust, or to fund the essential functions of a capable state and support the needs of the vulnerable, which is justified. It is NOT unreasonable for professionals such as doctors, engineers, and university academics to pay taxes, as highlighted in the manifesto; like all citizens within the tax net, they too should contribute their fair share.
Personal Income Taxes – RW is indicating an intention to widen the tax brackets, currently set at Rs 500,000, and to revise the tax rates. While the manifesto does not provide specifics on the proposed widening of brackets, an earlier statement suggested an increase to Rs 720,000, representing a 40% growth. Simplicity is a cornerstone of effective tax policy, so the optimal design of tax brackets must consider both the distribution of income and the ease of calculating tax liabilities. Tax brackets must also be adjusted for inflation to prevent bracket creep. Without these adjustments, real wages may decline due to inflation, but taxpayers could still face higher tax liabilities as they are pushed into higher marginal tax rates. Therefore, raising tax bracket thresholds is justifiable, but significantly widening them is not, as it disproportionately reduces the tax liability for certain income groups. The fiscal impact of such changes should be transparently disclosed, along with strategies to offset any potential revenue shortfall.
Amending tax rates has no justification. Providing tax-free incentives to professionals undermines the integrity of the tax system. Professionals are respected pillars of society; they must lead by example and not ask for tax concessions.
Abolish indirect taxes systematically over time. I believe there may be an error in this statement, possibly lost in translation from the Sinhala version. Indirect taxation currently accounts for 80% of total tax revenue, and even though successive governments have expressed an intention to reduce this share, it remains the largest contributor to our tax system. There is a compelling case for eliminating para tariffs like CESS and PAL, as well as the cascading Social Security Levy. However, the VAT, currently set at a rate of 18%, must remain a cornerstone of our tax system, particularly with the potential for further base widening.
Interfering in credit markets
Provision of subsidised credit to female headed households up to Rs 1 mn loans at an interest rate of 3% to liberate them from micro-finance. It is not possible to assess the fiscal cost of this for the number of borrowers are not mentioned. One is also not sure as to how this will be administered. The necessity of government intervention to provide a substitute for microfinance is questionable, as this sector does not suffer from market failure. High interest rates are driven by the high operational costs associated with small loan sizes and the nature of clean lending, which involves no collateral. Additionally, the industry is sufficiently competitive, with no single player holding a dominant position.
Relief loans granted to MSME will be capped at an interest rate of 5% up to Rs 2.5 mn. As previously mentioned, rewarding bad borrowers creates significant moral hazard concerns.
Providing concessional loans to middle-class families for home construction is not the intervention that’s truly needed. A two-year study by the Advocata Institute found that protective policies on construction inputs are the primary drivers of these costs. This issue could be resolved swiftly by eliminating the excessive CESS, a para-tariff on construction materials, with a simple policy change.
Offering relief to three-wheeler drivers in default by restructuring their loans with state banks. The tuk-tuk taxi market does not suffer from a lack of demand, as it remains the most affordable form of personal transportation. Drivers using taxi-hailing platforms enjoy high utilization rates. The challenges faced by some drivers are not due to a lack of demand but rather poor personal financial management.
Public Sector Salary Revisions
The size of the public service is around 1.2 million people. A Rs 10,000 monthly increase that was made this year cost the treasury Rs 144,000 billion a year (0.5% of GDP). This also drives up future pension liabilities. RW’s manifesto states his intention to increase salaries by a minimum of 24%. It is not possible to cost this due to the lack of detailed information. Nevertheless, if the quantum is the same as this year it will cost another 0.5% GDP that will have to be paid with more tax increases.