THE SRI LANKA STORY
A PERENNIAL WELFARE STATE
Tharindra Gooneratne charts a national path to self-sustenance
On 22 May 1972, Ceylon officially became the Democratic Socialist Republic of Sri Lanka in a colourful ceremony where, according to The New York Times, “musicians blew conch shells, yellow robed Buddhist monks chanted and guns were fired in salute.”
The ’70s were defined by the continuous tug-of-war between capitalism and socialism from the Vietnam War to the Cold War. By including the term ‘Socialist’ in the official name of the country, it seems that Sri Lanka’s leaders picked a side in this debate – despite all the rhetoric of believing in nonalignment.
This is not surprising considering the abundance of left-wing politicians of that era such as Dr. N. M. Perera, Colvin R. de Silva and Philip Gunawardena all of whom were members of the Trotskyist Lanka Sama Samaja Party (LSSP).
Given that the world has changed drastically over the past 50 years however, should we be proud of our status as a Democratic ‘Socialist’ Republic?
To be fair, there are several examples of thriving welfare states, the most notable being the Nordic countries where three (Norway, Denmark and Iceland) of the five were ranked in the top 10 in the Human Development Index published by the UNDP in 2015. All three countries have comprehensive social safety nets and remain committed to ideals such as free education and universal healthcare.
However, there is a major difference between these three welfare states and Sri Lanka.
Last year, both Norway and Iceland achieved budget surpluses while Denmark ran a very small budget deficit of 0.6 percent of GDP. In contrast, Sri Lanka’s budget deficit in 2017 was estimated at 4.8 percent of GDP. We cannot rely on debt fuelled growth forever; we’re already in a debt trap that has culminated in Sri Lanka sharing the same sovereign credit rating as Rwanda and Uganda.
It can be argued that the present regime is attempting to solve this problem. Yet, whilst a strategy is in place to cut the budget deficit to 3.5 percent of GDP by 2020, the inconvenient truth is that the fiscal deficit (which reflects the actual financial status of the government compared to the budget deficit – a forecast) in 2017 was 5.5 percent of GDP and not far from the 5.7 percent deficit in 2014.
In terms of government expenditure, the major constraint imposed by debt servicing obligations is often discussed. However, another area of concern is Sri Lanka’s bloated public sector, which expanded by almost 40 percent between 2006 and 2016, and employs one in four paid workers in the country today.
This would be a perfectly acceptable scenario if not for the bureaucracy and inefficiency that has plagued many public sector institutions.
For example, according to a report published by the Department of Census and Statistics in 2016, almost two in five public sector employees aren’t computer literate.
Government revenue as a share of GDP has risen over the past three years from 11.6 percent to 13.8 percent. Yet, we continue to remain below the world average of 15 percent.
In terms of sources of revenue, we’re overly reliant on indirect taxes such as VAT. Such taxes account for over 80 percent of Sri Lanka’s tax revenue compared to 33 percent on average across OECD countries in 2014. This is important to note as indirect taxes (which are levied on expenditure rather than income) are regressive in nature – they impose a more severe burden on lower income segments of the citizenry.
We need to accept that we’re a small country that cannot remain a fiscally irresponsible and bloated welfare state forever. However, the bitter truth is that campaigning on fiscal responsibility is unlikely to win elections at the national level.
So how can we chart a path from extravagance to moderation?