The newly-elected Government presented its maiden Budget in Parliament on Monday. The Budget is significant due to a few factors.
First, it was the first-ever Budget of a left-oriented political party having a majority in Parliament. Second, the Budget was presented after a presidential and a parliamentary election where political parties gave numerous promises.
In such a backdrop, it is natural that people expect the Government to deliver at least some of the promises made during the election campaign. Third, the Budget is in keeping with the IMF program regardless of who presents it to Parliament.
Finally, the Budget was presented at a time when global uncertainties alarmingly rose to new levels. How did the newly elected Government meet public expectations and address existing and emerging challenges? This article aims to discuss some of the key strengths and limitations in the Budget through the lens of overall macro-perspective.
Key principles
During the Budget speech, President, Anura Kumara Dissanayake as the Minister of Finance articulated that the Budget 2025 is based on few principles, namely (a) competitive market where supply, demand and prices determined through the forces of competition (b) Government must regulate and monitor the market through regulatory bodies and (c) Active engagement and participation of people in production and the benefits and gains from production must be equitably shared across society.
Social market economy
These principles, among others are important elements of a social market economy where an economy aims to employ the market mechanism in efficient resources allocation while addressing market failures in the area of production and consumption activities.
It is abundantly clear that market failures are rampant in developing countries and as a result, a segment of consumers as well as small and medium scale producers are subject to various disadvantages in the market.
Medium-term macroeconomic environment
Hence, it is of paramount importance that the Government intervenes in guaranteeing the quality of products and promotes competition in the economy to make sure small producers and consumers are not subject to various uncompetitive practices.
The President emphasised the challenges that the Government faces in presenting the Budget 2025. In particular, he referred to various benchmarks that the 2025 Budget must comply with to stay with the IMF programs. These included a primary expenditure target of 13 percent of GDP, revenue target of 15 percent of GDP, and primary surplus of 2.3 percent of GDP.
It was mentioned that the Government aims at achieving and maintaining a growth rate of a minimum of 5 percent in 2025 and afterwards while achieving a manageable current account deficit in the Balance of Payment. It was mentioned that the Government aims to maintain a low and stable interest rate and inflation rate while looking for an exchange rate which is moving with less fluctuations. Putting these numbers in perspective, simply, the Government aims at achieving a stable and predictable macroeconomic environment which is a must in promoting investment and production activities.
Simultaneous micro and macro-approaches
It appears that the Government is pursuing a two-pronged strategy, (a) creating a conducive environment for promoting investment and exports through reforms, and (b) looking at vulnerable groups who are either marginalised at present or will be marginalised in the future.
Under the first strategy, macro-approach, the Government has introduced several reforms in key areas such as tourism, investment, public transport, digitalisation and restructuring the public sector which are critical in untapping growth and export potentials in the economy. On the other hand, the Government is aiming at looking after key vulnerable groups including public sector workers whose real income has drastically declined during the crisis. This two-pronged strategy is a right move given the fact that the Government needs to secure public support to carry out essential reforms for the benefit of future economic growth and development. Most of the critical reforms are painful in the short-term and quite difficult to maintain the momentum of the reform process unless there is a mechanism through which negatively affected parties are compensated. In particular, it is paramount to garner political sustainability of the economic policy of the Government.
Policy continuity
It is commendable that the Budget 2025, broadly speaking, does comply with the overall policy directions given in key Bills approved in recent years by Parliament. In particular, the Government has shown interest in pursuing policy targets/objectives laid in the Economic Transformation Act and Public Finance Management Act. This is a positive sign that contributes positively to improving the business environment in the economy.
Development plan
The President, in his Budget speech unveiled his export targets while informing that the Government is in the process of drafting an export development plan (2025-2029). While it is commendable to come up with an export development plan, it would be worth drawing up a National Development Policy Framework and a national development plan urgently. It was expected that the Government would present a national development plan alongside the Budget.
Such a plan is paramount in directing future growth and development directions. Several Asian and other developing countries have, in recent years, come up with national development plans covering 20–30-year periods. Sri Lanka abandoned development planning in the late 1970s, though her South Asian neighbours continue this tradition given its strategic functions in guiding different agents in an economy.
