Sri Lanka finance minister in hot water over alleged creative budget

ECONOMYNEXT – Some of Sri Lanka’s opposition legislators are planning to move a motion of no confidence on Finance Minister Ravi Karunanayake for allegedly inflating spending in education with imputed costs.

Bandula Gunewardene, a former Deputy Finance Minister now in the opposition, dropped a bombshell in parliament Monday complaining that recurrent spending in education had been falsely boosted to show a high figure.

The new administration had allocated capital spending to education at 18 billion rupees, up 5.8 percent from a year earlier, which Gunewardene said he accepted was the highest in the history.

"But there is also a statistical game that has not been played in Sri Lanka’s fiscal history," Gunewardene told parliament Monday.

"Recurrent spending had been raised suddenly from 44 billion rupees to 147 billion rupees," he said. "This is a 278 percent increase."

Recurrent spending in the Health Ministry was also up 26 percent, Gunewardene said but in Defence it was only 0.7 percent.

He said a mystery 121 billion rupees had been given in the education budget estimate in a heading under ‘services’.

Accounting System

Finance Minister Ravi Karunanayake said capital assets of education and health sector had been ‘apportioned’ to the ministries.

"This is not only apply to education but also to health," Karunanayake said in reply to Gunewardene.

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"For example if there is a building that has not been estimated in accounts. We have brought in a realistic apportionment of that in education and health.

"Let me explain. The Finance Ministry has a building. If we pay a rent it comes to the estimate. If we do not pay anything it is not take into account. Like that there are 11,000 schools.

"This has not been used for a ‘cent’ (thamba sathayaka) capital spending (sic). The value this land and building has been apportioned."

The Finance Minister did not say whether any the apportioned amounts were revalued or ‘fair value’ gains taken as ‘capital spending’.

Speaker Karu Jayasuriya said the issue can be taken up in detail when the Education Ministry votes are taken up for debate.

The construction costs of government buildings however have already been included in budget in prior years as ‘capital spending,’ analysts say.

The current cost of interest of any unsettled loans taken to construct government buildings is already in the budget. In Sri Lanka, where the government does not run a surplus in the current account, a large portion of the debt is rolled over permanently.

Critics say taking into accounts rents that are not actually paid in cash (imputed costs) is a method increasingly used by government statisticians in some Western nations to distort data and create a bloated statistical picture that is not real. That practice is now filtering to developing countries.

Imputed Numbers

If non-existent ‘rent costs’ are imputed, then rent income also have to be imputed in an agency that owns the building as a non-tax revenue, bloating both spending and non-tax revenues. Imputed rents, if accounted for as revenue can sharply boost revenue-to-GDP in a country.

Imputed costs are increasingly used by some government statisticians in the West to artificially boost gross domestic product.

When a person does not spend money on rent it cannot be accounted for in GDP as an imputed number because a house owner has a disposable income higher than a person in rented accommodation.

When he buys other goods with that money, (or saves it in a bank) GDP is generated elsewhere. But the practice is adopted anyway in many countries to boost GDP now.

Sri Lanka’s budgets are now done on a cash basis which accurately show real cash burden of the deficit on the credit system as soon as it is incurred.

Accrual Accounting

There is a push by the accounting profession to bring accrual costing to government budgets.

However accrual accounting can distort the ongoing fiscal picture by assuming tax revenues that are not collected (and will perhaps never be collected) and capex that has not been paid for, but are actually temporarily financed by the private sector firms such as contractors.

This will make analysing budgets even more difficult, worsen fiscal transparency and force those who make economic forecasts studying budget numbers to juggle with a second cash flow statement (if it is provided) to find the impact of state spending.

When inflation started to soar after World War II under the Bretton Woods arrangement of soft-pegs and bubbles worsened after its collapse in 1973 under fully paper fiat money, the accounting profession came up with inflation accounting.

Under the gold standard historical cost convention was the bedrock of the accounting. During the ‘Great Moderation’ period of 1980s and 1990s, inflation accounting standards went into dis-use.

Later fair value accounting came as the US Fed fired another bubble with low interest rates, undermining the historical cost convention that was followed under the gold standard for centuries. (Colombo/Nov25/2015)

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