All the beautiful words used in presenting Budget 2009 have been unable to hide the fact that in reality, the burdens of the people would multiply once the budget proposals are implemented. In fact, it has created a fear psychosis among the people that the country would once again return to the era of food shortages and queues like in the '70s, when the present Finance Minister, President Mahinda Rajapakse was serving his first term as a government MP.

The masses who have been burdened with high commodity prices and an intensifying battle for survival amidst a soaring cost of living for the most part of this year, were hoping for some relief in Budget 2009. However, they got the rudest of shocks with the slapping of heavy taxes and cess on imports of even essential commodities such as flour, sugar, milk powder etc. Although the reason given for this was to boost national production, no appropriate plan has been put in place to improve local production.

No reduction in commodity prices

Economic analysts say that the new cess and import taxes proposed in the budget would prevent any chances of seeing a reduction in commodity prices in the local market.

Economist, Dr. Harsha de Silva said that following the budget proposals presented by the government for 2009, it was likely that there would be a price hike on most products in the local market next year.

He said that apart from paying a high price for products, consumers would be compelled to purchase products of poor quality as well. Dr. de Silva explained that due to the taxes imposed on certain imports, businessmen might resort to selling sub standard products to the consumers.

Criticising the government's effort to introduce import substitution industrialisation (ISI), he said it was a failed policy of the '50s and the '60s.

ISI, initially introduced by an Argentine economist was applied in Latin American countries, which was later adopted in India. The ISI policy filtered to Sri Lanka through India and was introduced as government policy.

Dr. de Silva observed that although not a complete failure, ISI recorded limited success in several large countries. "It was a flop in the smaller countries," he said.

However, new global trends have recognised exports as an area that helps the development of a country.

Treasury Secretary Sumith Abeysinghe speaking at a budget seminar soon after the presentation of the budget had said that an import substitution regime existed in the country only in the 1970s and had denied that budget 2009 was aimed at bringing back import substitution to the country.

Threat to local products

He had said the budget for 2009 has not imposed such bans like in the '70s, but has only increased import taxes against such imports which were thought to be a threat to local products.

"Anybody can import anything provided they pay taxes, that is not import substitution," he had said, adding, "What we are now doing is to protect the local manufacturer because there are other countries which give export incentives."

However, analysts did not share the same sentiments as the Treasury Secretary and said the budget proposals were a clear indication of the country adopting a policy of import substitution.

Dr. de Silva says that import substitution would push the country into another era of queues. The concerns aired by analysts of a return to the era of queues, were also widely spoken of in parliament last week during the second stage debate on the budget.

Fear psychosis

An opposition legislator said the 2009 budget is similar to the one presented by the late Finance Minister Dr. N.M. Perera in the '70s. "The budget has created a fear psychosis among the people," he said.

The opposition member also said that a port and airport levy had been imposed on imports of essentials without any proper plan ostensibly to boost local production.

"The prices of essentials will inevitably increase. People will have to give precedence to buying them curtailing expenditure on other activities," JVP Parliamentarian K.D. Lalkantha said. He pointed out that the government has increased the tax on sugar imports while producing only 10% of the country's sugar requirement.

He also charged that the government had failed to work out plans to induce farmers to increase agricultural productivity. He warned that the cost of living would spike sharply due to these budget proposals despite whatever was said by Trade and Consumer Affairs Minister Bandula Gunawardena.

Statistics have revealed that an average Sri Lankan family lived in the red to the tune of Rs. 6,217 per month.

Not commensurate with  expenditure

A Household Income and Expenditure Survey conducted by the Census and Statistics Department has revealed that according to the latest statistics the income of a household in the country is not commensurate with the expenditure. In fact, a household is in the red for Rs. 6,217 each month.

The survey results have revealed the median household income per month for Sri Lanka to be Rs. 16,735 in 2006/2007, which means half of the households in the country have received less than Rs. 16,735 per month per household.

However, while the household income stood at Rs. 16,735 per month, the average household expenditure has been Rs.22,952 per month for 2006/07.

The people's purchasing power has seen a drastic decline in the past three years and following the decline in the global oil and commodity prices the collective hope of the people was that the benefits would trickle down to the masses without any delay.

Unfortunately, the masses have to now once again tighten their belts, as there seems little or no chance of seeing any price reduction in the short term.

On the other hand, the government has also increased the tax burden on the people.

A plethora of new taxes

Although the 15% VAT component has been reduced to 12%, economists have pointed out that this reduction has not affected the government's tax collection due to the imposition of a plethora of new taxes as well as the increase of several other existing taxes and cess.

Initial calculations have revealed that an additional Rs. 30 billion would be placed on the people in the form of tax payments for 2009. (Rs. 1,500 in additional taxes to be paid by each person.)

If you calculate it, the additional Rs. 30 billion the government would earn as taxes would mean an additional Rs. 1, 500 to be added to the amount of taxes to be paid by each person in the country in the coming year.

It is now clear that the government's 2009 budget has been formulated to manage its remaining foreign exchange while not showing its desperation to the people.

According to analysts, the budget proposals should be looked at along with the new government regulations imposed with regard to the margins on LCs, end last month.

Wide-ranging impact on all sectors

Also, some of the new taxes are yet to be clarified. "The Nation Building Tax of 1%, on all importing, manufacturing and service industries could have a wide-ranging impact on all sectors of the economy. The nature and quantum of this needs to be clarified and assessed on a case by case basis," an analyst had reportedly said.

Commissioner General, Inland Revenue Department, S. Angammana addressing a post-budget seminar had reportedly said that the Nation Building Tax, which is 1% of turnover and/or on imports will even impact a barber salon.

As for government debt, it has been pointed out by analysts that the state was looking at cutting down capital expenditure to mend the deficit. It is investments made in capital expenditure that help the long-term development of a country.

Amidst all these issues, there is once again every sign of the inflation rate resuming its upward climb.

Increase in inflation

A former Central Bank Assistant Governor, Dr. Anila Dias Bandaranayake last week told an electronic media institution in an interview that the government's budget proposals would result in an increase in inflation once again.

She said that the increase in the price of certain commodities due to the new levies imposed on imports would result in an increase in the price of certain essential items, which in turn would push inflation up.

The Central Bank of Sri Lanka last week said that inflation has declined to 20.2% in October, from 24.3% in September.

"Benefiting from the downturn in international prices, the domestic fuel prices have been revised downwards and the spillover effects of this move are expected to further ease inflation in the coming months," the Central Bank said in a review.

The budget, which is sometimes referred to as the "bag of goodies," as it carries 'benefits' that would be offered to the people, seems to have turned out to be one big bitter pill, atleast this time.