Call for greater fiscal profligacy in Sri Lanka; expansion of state services

ECONOMYNEXT – A group of pro-state activists have called for greater spending in Sri Lanka, giving moral support for Sri Lanka’s high spending rulers, and warned against attempts to shrink an already bloated state.

A group calling itself the Alliance for Economic Democracy (AED) has warned against any state ‘austerity’ in Sri Lanka’s 2017 budget expected this week and any attempt to shrink state ‘services’.

Spending Call

"The actual spending of the state is going to decrease," Ahilan Kadirgamar, an activist, was quoted as saying in Sri Lanka’s Daily FT newspaper.

"State services are going to be shrunk. The Appropriations Bill makes it very clear that there is going to be across-the-board cuts for almost all the ministries," he is reported to have said.

Well-intentioned people believe that taking money from the people, reducing the freedom of citizens to make their own decisions, and giving them to politicians bureaucrats to spend as they wish will bring greater benefits.

Analysts say this can happen if the bureaucrats are omniscience and have more knowledge than the individuals who actually earn the money.

Expansion of state spending (non-austerity of the state) is eventually financed by austerity of the community, who will have to pay higher taxes curbing their own consumption if politicians are honest enough to hike taxes.

If borrowings go up, people will pay through higher interests for home loans.

In Sri Lanka, more often than not, rulers do not tax to finance higher spending but instead print money, generating inflation and currency depreciation, destroying the purchasing power of worker salaries and their bank savings.

The central bank printed over 200 billion rupees to finance the 2015 deficit and the excess demand from the monetarily accommodated budget triggered a balance of payments crisis leading to the collapse of the currency from 131 to 146 to the US dollar.

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Inflation and currency depreciation hurts the non-asset owning classes and wage earners most.

Analysts say it is not clear whether there will be real spending cuts in 2017, as there is uncertainty over comparison data. The actual spending in 2016 was less than the amounts outlined in the original budget presented to parliament.

The original 2016 budget contained ‘unreal’ imputed rent numbers (some say deceptive) especially related to education and health spending as well as revenue, which was neither collected nor spent.

Non-austerity budget

The rupee stabilized in 2016 due to a slightly tighter budget than the excessively profligate ‘non-austerity’ budget in 2015 and better monetary policy, analysts say. Low inflation and currency stability is the best protection for the poor, they say.

Kadirgamar’s comments come as the economic mayhem wrought by the 2015 revised ‘non-austerity’ budget which ratcheted up state spending became evident. In the February 2015 non-austerity budget, current spending was increased from 1,322 billion rupees to 1,701 billion rupee with subsidies and salaries hiked, and the deficit rocketed from 591 billion rupees to 829 billion rupees.

Currency depreciation and inflation came with a vengeance barely six months later, trimming the benefits of handouts of the ‘non-austerity’ budget.

The budget is a tool to restrain the spending habits of elected rulers whose political and financial fortunes depending on spending, not fiscal prudence.

A restrained budget will and keep their profligacy within a pre-agreed limit, so that people will have enough headroom to carry on their lives and have some predictability.

To expand the economic freedoms of the poor and allow them to raise their heads, the dead weight of the state, must be shrunk and made more effective, not expanded, pro-citizen analysts have said.

In Sri Lanka large volumes of savings of the people are not used to finance houses and other needs of their fellow citizens but goes finance current spending of the state, through a revenue deficit in the budget.

Most long term spending on infrastructure, which benefit the people, is financed through foreign loans.

Sri Lanka’s interest rates and inflation are high compared to countries in East Asia, where ruler spending is more restrained.

Since the establishment of the central bank in 1951 Sri Lanka’s rupee collapses from time to time due to spikes in spending through ‘non-austerity’ profligate budgets like in 2015.

Instead of shrinking the state in 2016, Sri Lanka’s rulers have hiked value added tax including for healthcare (taxation of even the poor is better than money printing), to maintain the increased spending.

State worker salaries and pensions already consume over 50 cents of each tax rupee collected from the people. In the eight months of August 2016, 52.3 cents of every tax rupee extracted from the people, went to pay the salaries and pensions of state workers, official data show.

Free Trade

The Alliance of Economic Democracy also seemingly criticized trade liberalization.

Prime Minister Ranil Wickremesinghe is "talking about further liberalisation, including trade pacts like ETCA (Economic and Technology Co-operation Agreement (with India)," the newspaper quoted Kadirgamar as saying in apparent criticism.

Trade controls on consumers provide a leg up to an unscrupulous, Mercantilist domestic producer lobby that is seeking to stand behind a wall of protectionism, avoiding competition and exploiting helpless consumers with high priced goods.

Trade liberalization boosts consumer sovereignty through competition and force producers and businessmen to kneel before the poorest consumer, freedom advocates say.

Mercantilist businesses depend on state privileges to make profits, instead of competing and kneeling before the consumer like ‘true-capitalist’ ones. Living standards are high in Western countries due to the inability of businesses to exploit consumers in amid free trade.

Even Karl Marx supported trade liberalization through he was reluctant to accept any ideas coming from Western Europe, understanding that free trade liberated the working class from the grip of Mercantilist businessmen, who wanted to avoid competition with support of the existing ruling class.

" [Free Trade] breaks up old nationalities and carries antagonism of proletariat and bourgeoisie to the uttermost point," Marx said in 1848, after corn laws were abolished in Britain, freeing the working class and the poor from the grip of the farming lobby.

"In a word, the Free Trade system hastens the Social Revolution. In this revolutionary sense alone, gentlemen, I am in favor of Free Trade."

Foreigners, Minorities and Free Trade

The most deadly effect of trade protection however is not lower living standard of the general population through high prices, but the widespread acceptance of economic nationalism (hate against foreigners) in society which had automatically turned to hate against minorities in most countries in the past.

In Germany and key Eastern European state, economic nationalism and autarky eventually led to National Socialism, political and economic philosophes have pointed out.

"In a world in which people have grasped the meaning of a market society, and therefore advocate a consumer’s policy, there is no legal discrimination against Jews," explains Economist Ludwig von Mises.

"Whoever dislikes the Jews may in such a world avoid patronizing Jewish shopkeepers, doctors, and lawyers.

"On the other hand, in a world of interventionism only a miracle can in the long run hinder legal discrimination against Jews.

"The policy of protecting the less efficient domestic producer against the more efficient foreign producer, the artisan against the manufacturer, and the small shop against the department store and the chain stores would be incomplete if it did not protect the “Aryan” against the Jew."

True to form, in the US now, Donald Trump, a white nationalist, is also slamming free trade.

However at least in once instance, Kadirgamar batted on the side of fiscal prudence, according to the report on Daily FT.

He slammed tax holidays given to large corporations and especially a 25 year tax holiday to a Chinese state firm, which is reclaiming the sea near Colombo.

The International Monetary Fund has also asked the government to limit tax holidays, and suspend the almost unlimited powers of the Board of Investment to give tax exemptions, so that all firms will pay their fair share of taxes.

Some analysts say the IMF had made a mistake in not pushing the rulers to restrain spending, and instead backed tax increases to boost ruler revenues to allow them to continue to spend.

They say what is needed to re-direct spending to the most productive areas. Health is widely accepted to be a key area. (Colombo/Nov08/2016)

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