New Year and deepening crisis

With Govt revenues overestimated the Treasury may cut expenditure in the months ahead

In reality, the second wave of the Covid-19 virus is now spreading faster than the previous wave and the economy is in free fall

• The second wave of the Covid-19 virus spreading faster sending the economy in a free fall
• The Govt does e little to boost the economy or direct relief

As 2021 awakens, we like to hope it is a new beginning and that the gruelling days of the Covid-19 pandemic that hit us ten months ago as well as the crippling economic crisis, would somehow fade away. 
In reality, the second wave of the Covid-19 virus is now spreading faster than the previous wave and the economy is in free fall.

What would Sri Lanka’s economy look like this year? What challenges will progressive forces have to face? This is a historic moment, where developments this year are going to shape our future over the next decade if not longer. In this column, I look at the Sri Lankan state’s role in the economy for 2021. The Budget Estimates for 2021 recently published by the Finance Ministry provide the material necessary for such analysis.

Flawed analysis

Analysing the economy is always contentious. 
People are discouraged to even discuss and debate economic policies, as they are told that it is an expert-domain. Who else will have access to the sophisticated mathematical models and accurate data for analysis we are told? 
However, it is those very economic experts that have failed miserably, whether they cannot understand and analyse the global economic crisis of 2008 or for that matter the unfolding of the economic depression last year. 
The reasons for such failure of analysis by Neoclassical Economists who occupy the mainstream have to do with their assumptions that underlie their models. 

For example, Neoclassical economics assumes individual choices and preferences are rational and determine the workings of markets at the macro level, and that markets clear leading to optimal growth of economies. 
There is little room in their models to analyse market failures, Capitalist crisis and for that matter a significant and corrective role by the State.
In this context, alternative economic traditions begin with very different assumptions about the economy. 
Marxist political economists to Keynesian economists have long fought for alternative economic analysis, even as they were intentionally excluded by the Western academy.

The poverty of economic analysis over the last four decades was not accidental, but rather the conscious project of Capitalist interests that sought tremendous profits at the cost of working peoples incomes and welfare. 
I draw below from the heterodox tradition of economic analysis to look at stylised facts about the economy, particularly the role of the state and its continuing failures. 
In other words, some key facts about the role of the state in the economy, as evident from the projected revenues and allocations of expenditure by the state, are sufficient to understand one dynamic trajectory of the economy. 

Insipid priorities

The delayed public release Budget Estimates 2021, illustrate the priorities of the Government. In 2021, out of the projected tax revenue of Rs 1,724 billion, government salaries, including allowances are going to be Rs 635 billion and welfare plus retirement benefits are Rs 403 billion. 
In other words, close to 60% of tax revenue is going to be used for government commitments such as salaries, pensions, Samurdhi transfers. 

It may look bad enough that only 40% of revenues remain to run State institutions and development programmes, but in reality, tax revenues will be much lower with the economic depression where people’s expenditure will reduce, and the incomes of the wealthy and profits of companies decline. 
The data for 2020 is instructive. Estimated tax revenues in 2019 of Rs 1,735 billion declined in 2020 to an estimated Rs 1,358 billion. Thus last year, salaries, pensions and welfare payments of Rs 1,042 were 77% tax revenue. The cursory data that I provide here do not include many other transfers that the Government cannot cut, including through the Provincial Councils and some Ministries, and media reports suggest such expenditure at 85% of State revenue. 

Indeed, without robust property and wealth taxes – which Budget 2021 failed to consider – the State cannot provide any meaningful relief and investment this year.
Closing the budget debates last month, the Finance Minister announced that in 2020 about Rs 90 billion was used for Covid-19 crisis relief and stimulus. Sadly, that is just 0.56% of the estimated GDP in 2020. 
In other words, with the economy having shrunk by anywhere from 5% to 10% last year (2nd Quarter 2020 GDP growth only released in December shows a contraction of 16.3%), if we leave out State employees, the incomes of working people, and particularly the mass of our population dependent on the informal sector, have drastically fallen. 

However, the Government has done little to boost the economy and for that matter direct relief.
With government revenues overestimated for 2021, the Treasury may cut expenditure as revenue targets are not met in the months ahead. Furthermore, the investment priorities of the Government are worrying. Instead of increasing welfare programmes with estimated expenditure in 2020 of Rs 186 billion, the allocation for 2021 has been reduced to Rs 151 billion. The Government’s major capital investment allocations are for the Ministry of Highways worth Rs 350 billion and Ministry of Water Supply worth Rs 100 billion. And for such investment, government financing is Rs 219 billion and Rs 44 billion for highways and water supply respectively, with the rest coming from foreign loan financing. 

Economic quagmire

While such infrastructure projects do contribute to some incomes, aren’t these priorities misplaced? Did the Government assume that the economic depression will disappear with the dawn of the New Year, or is it blindly regurgitating the infrastructure-led growth policies after the civil war in 2010? From the revenue side as well as from the development needs, the policy priorities and budget allocations are both problematic and unsustainable. I would put my bets on a drastic reversal of these policies, if not an interim budget, by mid-year. However, this gross mismanagement of the economy by the Government will have far-reaching social consequences. 
We are looking at tremendous suffering of the people, including the rapid rise of poverty and related problems such as malnutrition. 

In that environment, chauvinist forces are going to blame and target minority communities, as evident from the ongoing ideological attack on the Muslim community. Where will the people turn to amidst a hopeless future and the State abdicating its economic responsibilities? 
Fascist forces will attempt to capture the limelight. 
In these difficult times, progressives must demand a change in policy direction and seek ways of building inter-ethnic and inter-religious coexistence to withstand divisive chauvinistic forces.