How can public employees be given a higher wage increase?
Politicians and other do-gooders criticise the budget saying that it does not provide sufficient benefits to the people.
But they do not say how any increased give-aways would be funded.
Their arguments are not reasoned economic arguments but political tomfoolery.
Those who say that inadequate benefits have been provided should say how to find the money to do so, without causing higher inflation and hardship to the mass of other people who outnumber them several fold.
Dr Jayasundera has said, “We could have just for popularity given 2,500 or 10,000. Who cares! Print and give! Print and give this money”.
To budget for a deficit target which is in keeping with the agreement reached with the IMF, the government cannot afford to grant the wage demands of the public employees whose trade unions are demanding a wage increase of Rs9,000.
The government has allowed a five per cent increase with a minimum of Rs3,250.
The trade unions should answer the question how an increase of Rs9,000 could be funded.
It is true that much waste and unnecessary expenditure can be cut down but they by no means would be sufficient to pay the higher wages of 1.3 million public employees.
How can higher wage demands of public employees be funded? It would mean an immediate increase in the total recurrent expenditure which is budgeted at Rs1017 billion with a current account or revenue account deficit of Rs53bn.
This is already unsatisfactory for there should be no deficit at all in this account of the budget.
So to cover the increase in expenditure the government must increase taxes.
But 80 per cent of the tax revenue is collected from indirect taxes which fall on everyone.
So it will have to be a tax or fiscal levy increase on goods and services.
To generate sufficient tax revenue, it will have to be on goods widely consumed by the people and not on goods with a narrow demand base like cars, refrigerators or air-conditioners which will not generate sufficient revenue.
But it is the poor who consume goods of mass consumption and who will find it most difficult to pay such taxes.
Their living standards will be reduced since any such indirect taxes will put up the prices of a variety of goods consumed by the less well off and the poor.
There have been several complaints by the Opposition that the government had heaped burdens on the poor by levying indirect taxes and fiscal levies which add to the cost of goods.
In this budget, the Government has reduced several such taxes and fiscal levies.
To pay higher wages it would not be fair to the poor and the middle classes to keep these levies unchanged.
Politically, it will displease the mass of the populace.
So this course of action to fund a wage increase has to be ruled out for the generality of people should not have to pay the cost of an increase in wages for only a section of the people - the public employees who have secure employment and pensions at retirement as well as other benefits.
It would be most unfair to tax the poor and the less affluent through higher indirect taxes.
As for direct taxes the scope is limited owing to widespread tax evasion.
High corporate tax rates prevent companies from ploughing back profits for investment.
So, paying for higher wages through higher taxes is at the expense of private sector growth and hence is not a desirable course of action.
What about domestic borrowings. This means putting the burden of debt servicing on our children and grand children. That would not only be unfair but also likely to reduce the funds available for the government to provide services to the people in the future.
The government is today unable to provide sufficient funds for education and health because interest takes up too much of the tax revenue, absorbing 35-40%.
It is also necessary to keep interest rates low to reduce the debt servicing charge in the budget.
But, the interest rates must be kept down not by borrowing from the banking system which is tantamount to creating new money which is inflationary, but through borrowings from the public.
But, a greater demand for borrowed funds from the public means interest rates will have to rise. Already the Central Bank is forced to create a lot of new money when it buys dollars from the market to prevent an appreciation of the rupee and to keep the interest rates artificially low.
Inflation expectations are rising with every increase in the inflation index.
So additional domestic borrowings have to be ruled out because it will push up interest rates and because the current account or revenue account in the budget is already in deficit and borrowing for consumption is not desirable.
What about borrowing from foreigners? Foreigners watch the fiscal scene to see where the moneys lent to the government by them, are going.
They will demand higher interest rates and in future lend only for short periods if they think their money is not being used for investment but for consumption like paying higher wages.
We need to roll over the substantial foreign debt if we are not to dishonor our foreign debts.
We couldn’t do so earlier.
But, recently we managed for the first time to borrow for ten years and also paid a lower premium for our Sovereign bond issue.
To roll over foreign debt as they mature, we must preserve the confidence of the foreign portfolio investors which means that the borrowed funds must be used only for sound investments.
So the government has no way to raise the wages of public employees without imposing additional burdens on the mass of people who are worse off than the public employees who have secure jobs, pensions and perks.