Taxes

An ‘unhealthy’ tax regime: Is the Govt. stifling basic needs?

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In this weekly column on The Sunday Morning Business titled “The Coordination Problem”, the scholars and fellows associated with Advocata attempt to explore issues around economics, public policy, the institutions that govern them and their impact on our lives and society.

Originally appeared on The Morning


By Anuki Premachandra

This year’s global theme for World Health Day, which falls today, is universal health coverage (UCH) for all. In comparison to most countries in the region, Sri Lanka is in a positive trajectory towards this, with a policy goal to ensure universal health coverage to all citizens through a well-integrated, comprehensive health service.

UHC is a health care system focused on medical service delivery – it predominantly revolves around accessibility, affordability, and availability of healthcare services. However, in the case of Sri Lanka, health needs to be looked at from a broader perspective.
This World Health Day, while commending the country on a great public healthcare system and better access to water and sanitation than most other countries in the region, I’m going to explore the case of how some simple taxes on items that contribute to your health can lead to complicated concerns on your health. Are Sri Lanka’s tax policies depriving you of accessibility, affordability, and availability of proper healthcare, hygiene, and sanitation?

Taxing your menstrual health
Menstrual hygiene is not commonly discussed in Sri Lanka, having very little literature and understanding of proper menstrual hygiene management. This is also probably a reason why a basic item required for proper menstrual hygiene – sanitary pads – have total taxes as high as 62.6% levied on them, despite being a country with 4.2 million menstruating women. More often than not, women are compelled to use unhealthy menstrual hygiene products or practices owing to their monetary conditions. Naturally, an intervention like taxes only worsens this situation. The most appalling of findings is that unhealthy menstrual practices can contribute to cervical cancer, one that unfortunately has proven to fall to the plight of many Sri Lankan women.

Every year, 1,136 women are diagnosed with cervical cancer and 643 die from this disease in Sri Lanka (HPV Centre, 2018). Cervical cancer ranks as the second most frequent cancer amongst women in the country, wherein poor menstrual hygiene management is a direct causal factor of this. Of our population, 52% is women, out of which 4.2 menstruating women stand the risk of being diagnosed with cervical cancer due to poor menstrual hygiene. If we are taxing something as necessary as sanitary napkins that contribute to healthy menstrual practise, are we not then making health a privilege instead of a basic human right?

Taxing your access to proper sanitation
In a recent interview, Senior Advisor at the Sri Lanka Water Partnership Kusum Athukorala stated that the main problem they have had to deal with when conducting sanitation programmes in rural schools is the lack of a proper disposal mechanism for sanitary pads. It is either this or the lack of proper toilet facilities. According to the WHO, although sanitation coverage in Sri Lanka is 92% – the best in the South Asian region – an area that they too have identified as one that requires further development is rural school sanitation. Period-friendly toilets matter.

Additionally, although over 50% of our population have access to household sanitation facilities, diving deeper into the breakdown of these numbers is important. Despite great sanitation coverage, 7.2% of our urban population, 7.6% of our rural population, and 17% of our estate population still rely on a shared toilet facility for their sanitation needs, according to the Household Income and Expenditure Survey 2016. Why then do our rural schools lack proper toilets and why does a portion of our population rely on shared toilets for their sanitation needs? The answer lies in the prohibitively high cost of building toilets.

Total import taxes on sanitary ware like commodes and squatting pans are over 60% and wall tiles, floor tiles, and finishing ceramic are taxed at over 100%. Out of our population, one million people live in temporary houses and 1.2 million people live in underserved settlements. Access to proper toilet and hygiene facilities are very limited in these types of households owing to the exorbitant cost of constructing one. Having access to sanitation is a basic human right, yet a portion of our population suffer on a daily basis from the lack of access to a clean and functioning toilet. Without toilets, untreated human waste can impact a whole community, affecting many aspects of daily life, and ultimately pose a serious risk to health. The issue runs deeper into societal impacts, such as teenage girls often leaving school at the onset of menstruation due to lack of privacy and the risk of contaminating infections due to unhygienic toilet facilities. This narrative needs to change.

An ‘unhealthy’ tax regime

This World Health Day, while we commit our country to global goals that provision for more accessible and affordable healthcare facilities for all, let’s also look at health in a broader perspective. In Sri Lanka, universal health coverage can be realised through affordability, accessibility, and availability of better health, sanitation, and hygiene facilities – end taxes on periods and toilets!


Anuki Premachandra is the Manager – Research Communications at the Advocata Institute. She has a background in public policy with an active involvement in policy communications. She is also an advocate for the reduction of the period tax and contributes to research and policy work in that subject area. If you have any questions or feedback on this article, she could be contacted on anuki@advocata.org or @anukipr on Twitter. Advocata is an independent policy think tank based in Colombo, Sri Lanka which conducts research, provide commentary, and hold events to promote sound policy ideas compatible with a free society in Sri Lanka.

How import taxes drive up the cost of living

Originally appeared on Daily News

By Ravi Ratnasabapathy

“The Lanka Confectionery Manufacturers Association (LCMA) is actively seeking Government intervention to introduce a ‘negative list of manufacturing’ to safeguard local firms engaged in the industry before opening up the economy to giants like India and China.” - DailyFT 25 September, 2017

The above is an illustration of a phenomenon that is common in Sri Lanka – an industry seeking protection from foreign competition. This protection generally takes the form of a tariff – a tax that is imposed on the imported product that is not applied to the domestic equivalent. In the above instance the LCMA is requesting that the existing tariff protection enjoyed by the industry is continued even if a Free Trade Agreement (FTA) is signed. (An item in the “negative list” of an FTA is not subject to the FTA). For example imported biscuits are taxed at a total of around 107% of price, if biscuits are on the negative list this tax would continue, despite the FTA.

Although a tariff is imposed, this does not generally cause foreign exporters to reduce the price that they charge for the product. Therefore the domestic price of the imported product rises by the amount of the tariff.

Domestic producers competing with these imports do not have to pay the import tax so have an advantage over the imported product. As the price of imported products rise, domestic producers have the opportunity to raise their own selling prices because competing imported products now cost more.

Will the domestic producer raise his prices? Yes, it makes no sense otherwise. If the domestic producer were to set his prices at exactly the same level he would if imports were not taxed there would be no point in seeking tariff protection from imports. They very purpose of the tariff is to enable the domestic producer to sell his product at a higher price. The domestic producer is thus better off as a result of the tariff.

What happens to consumers?

Domestic consumers of the product are equally affected by the imposition of the tariff. They must pay a higher price for both imported and local products.

In other words, the protection for domestic industry is actually paid for by domestic consumers, in the form of higher prices.

What of the Government that imposes the tariff?

The government collects tariff revenue, on whatever quantity is imported, although they do not collect it on the local product. The benefit that the Government creates for the local producer by raising the price of imports is collected by the producer. This surplus is called a “rent”, of which more below.

We thus have two domestic winners (domestic producers and the government) and one domestic loser (domestic consumers) because of the imposition of a tariff.

The local producer who is able to charge a higher price from the consumer thanks to the tariff on competing imports is said to enjoy a “rent”. In economics, a “rent”, is an unearned reward. The producer is able to charge a higher price not because of superior quality or service but because a tax imposed by the Government.

If the producer was able to charge a higher price because of better quality, even while cheaper imports were available the producer would be earning the premium price. There is an important distinction here.

Consumers would only buy a more expensive product while lower priced products are available is if they valued what they were getting. The producer must do something extra to persuade consumers that his product is superior and worth paying a higher price.

When a tariff raises the price of imports, local producers are able to charge higher prices with no increase in value to the consumers. Given a choice consumers may well chose cheaper alternatives – but the tariff makes sure that the alternative is no longer cheap. Consumers are thus forced to pay a higher price, not because they want to but because there is no alternative. This is why the premium in this instance is said to be unearned. Consumers do not perceive better value but pay more.

Thus producers gain at the expense of consumers. As noted before, it is domestic consumers (not foreign producers) who pay for the protection of domestic industries. The net impact is a transfer of wealth, from consumer to producer that is facilitated by the tariff.  Is this good policy?

If it were confined to a handful of industries it may not matter much, but in Sri Lanka it is all-pervasive. Over thirty common household items affected are listed below. This is only a selection-many others are affected. It explains why Sri Lanka’s cost of living is so high. All necessities from food (fruit, meats, pasta, jams) to toiletries (soap, shampoo, toothpaste) to household products attract taxes from 62%-101%.

Food Items total tax

Sri Lankan consumers suffer a high cost of living in order to support domestic industries. There is an argument that supporting local producers to build an industrial base will accelerate growth in the long run.

Japan, Korea and Taiwan practiced industrial policy(IP), but even proponents of the policy admit that care is needed to pick the right industries. In Japan and Korea the main industries were steel, shipbuilding, heavy electrical equipment, chemicals and later cars. Taiwan had light manufacturing (electrical appliances, textiles) before moving to heavy and chemical industries and electronics.

Sri Lanka seems to want to emulate this in toiletries, household cleaning products and food: soap, shampoo, washing powder, floor polish, pasta, cheese and biscuits.

Personal Care items tax

To succeed, industrial policies need to foster a structural transformation in the economy that leads to rapid creation of jobs, especially more productive and better jobs. Selecting the right industries is important.

“it matters how realistically the target industries are selected in light of the country’s technological capabilities and world market conditions” [1]

Krugman [2] summarises some criteria advanced by proponents of IP in selecting sectors:

  1. High value-added per worker. Real income can rise only if resources flow to businesses that add greater value per employee.

  2. Linkage industries-such as steel and semiconductors. Industries whose outputs are used as inputs by other industries can create a cycle of industrialization. In Japan cheap, high quality steel gave downstream industries-ships, automobiles, rails, locomotives, heavy electrical equipment-a competitive advantage.

  3. Present or future competitiveness on world markets. If the industry can meet this test, we can presume that resources are being allocated efficiently. Competitiveness is critical for linkage benefits to flow.

The selected industries need to target exports (albeit not exclusively)– to achieve scale economies and because it provides a “tangible criterion for the policy makers to judge the performances of the enterprises promoted by the government” [3]. The failure to promote exports is the key reason for failure of industrial policy in Latin America. (Chang, 2009)

The exports focus also ensures competitiveness. The purpose of policy is not to protect inefficiency but improve productivity.

Therefore support for industry must be conditional-on meeting performance targets.

“The results of industrial policy (or indeed of any policy in general) depends critically on how effectively the state can monitor the outcome that is desired, and change the allocation and terms of support in the light of emerging  results” [4]

Deliberation Councils were set up in Japan and Korea which would set targets together with industry. To ensure targets were stringent they also involved independent technical experts, academics and others.

Performance would be monitored and targets revised. Where a policy was seen to be ineffective it would be revised. Industrial policy is not only about picking winners but also phasing out losers.

“The success of industrial policy depends critically on how willing and able the government is to discipline the recipients of the rents that it creates through various policy means (tariffs, subsidies, entry barriers). The point is that the suspension of market discipline, which is inevitable in the conduct of industrial policy, means that the government has to play the role of a disciplinarian” [5].

This requires a bureaucracy insulated from political pressure to take impartial decisions on the support to industry-and change or withdraw support, depending on performance.

“How closely the government interacts with the private sector while not becoming its hostage is very important.” [6]

It becomes clear that successful industrial policy is a sophisticated partnership between industry and state, governed by the underlying principles of competitiveness and productivity. Unfortunately what takes place in Sri Lanka is unlike that of East Asia but similar to Latin America.

“Import substitution policies got a bad name, especially in Latin America, because the industries that were created often only survived as the result of protection. It was particularly costly when countries protected intermediate goods, because that made goods farther down the production chain less competitive. Countries often paid a high price for this kind of protectionism, and the maintenance of this protection was often associated with corruption.” [7]


[1] Chang, H. J, 2006. Industrial policy in East Asia – lessons for Europe. An industrial policy for Europe? From concepts to action EIB Papers, [Online]. Vol 2 No.6, 106-132. (Accessed 07 January 2019)

[2] Paul R. Krugman, 1983. Targeted Industrial Policies: Theory and Evidence. [Online] (Accessed 07 January 2019)

[3] Ibid

[4] M Khan, 2018. The Role of Industrial Policy:Lessons from Asia. [Online] (Accessed 07 January 2019)

[5] Ibid

[6] Ibid

[7] Joseph E. Stiglitz. Industrial Policy, Learning, and Development. [Online] (Accessed 07 January 2019)


For the full list of taxes on Food Items, Household Items and Personal Care items, click here.

Import Taxes and the Cost of Living

Originally appeared on Echelon

By Ravi Ratnasabapathy

The Encylopaedia Brittanica defines the cost of living as the “monetary cost of maintaining a particular standard of living, usually measured by calculating the average cost of a number of specific goods and services required by a particular group.”

Cost of Living is the most fundamental measure of well-being; how good a life we can lead, the degree of comfort we have, and the number and types of products and services that we can buy.

In a modern society everybody is a consumer, no one is self-sufficient. The prices we pay for our food and clothing, our necessities and luxuries, and everything else in between are what determine our cost of living.

Naturally, for anyone other than a committed ascetic this is the most important aspect of life. For any politician sensitive to the public it should top the list of priorities.

A lot of our daily necessities, from food to household products are imported. This should allow us to take advantage global efficiencies to source the cheapest or best products, depending what people want. Unfortunately high taxes and poor trade policies drive up end-costs for consumers in Sri Lanka.

Sri Lanka imposes a variety of taxes on imports: customs duty, VAT, Port and Airport Levy, Nation Building Tax and Cess. Although the maximum customs duty is only 30%, once these other taxes are added the total tax can increase to anywhere from 50% to 100%.

Heavy taxes are imposed on food (meat, dairy, vegetables, fruit, coffee, cocoa, pasta, breakfast cereal, biscuits, jams); personal care (soap, shampoo, toothpaste, diapers, sanitary napkins, shaving cream, razors), household care ( washing powder, wet wipes, polishes, brooms, brushes),  children’s needs (diapers, pens, pencils, pencil sharpeners, toys).

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Older generations who experienced pre-1970s Sri Lanka may recall people cleaning their teeth with fingers (using charcoal or something called ‘tooth powder’), scrubbing dishes with a pol-mudda (coconut husk) or washing clothes by dashing them on a rock.

Toothpaste, washing powder, soap and shampoo are no longer luxuries; if they were a high tax may be understandable but they are necessities, even for the less well-off. Perversely luxuries like perfumes, wristwatches sunglasses are taxed the most lightly.

Personal Care taxes.jpg

This has a significant impact on overall household budgets and the standard of living.

Household Taxes. jpg

Voters need to ask our politicians why they need to tax these items so heavily. Baloo, the bear in the Disney cartoon sang of the bare necessities of life. Our leaders need to understand just how far their tax and trade policies are putting necessities out of reach for ordinary people; the main reason why so many seek opportunities overseas. Local salaries cannot keep up with the cost of living.

For full list of taxes, click here.

Some of the tariffs generate revenue for the government but many are imposed to protect local industry. Tariff protection for local industry comes at a cost: high prices for consumers. Supporting local industry is laudable but instead of protection the support should be targeted to help improve competitiveness and productivity. Firm level productivity depends on:

  1. the sophistication with which domestic companies or foreign subsidiaries operating in the country compete, and

  2.  the quality of the microeconomic business environment in which they operate.

Government support to upgrade technology, worker skills, improve access to capital, R&D and infrastructure is positive. These, together with more efficient government processes, improved infrastructure, more advanced research institutions-in short a healthier business environment; can yield long term productivity gains for the economy and the firm. Competitive pressure provides the incentive to improve productivity; the Government needs to work with firms to help this happen.  

Price protection for local industry is a blunt tool that hurts consumers and incubates inefficiency. Industry has demanded this for centuries; the French economist Frederic Bastiat explored this in satirical essay in 1845 that addresses the essence protection. It is reproduced, in an edited form, below:

A PETITION

From the Manufacturers of Candles, Tapers, Lanterns, sticks, Street Lamps, Snuffers, and Extinguishers, and from Producers of Tallow, Oil, Resin, Alcohol, and Generally of Everything Connected with Lighting.

To the Honourable Members of the Chamber of Deputies.

Open letter to the French Parliament, originally published in 1845

Gentlemen:

You are on the right track. You reject abstract theories and have little regard for abundance and low prices. You concern yourselves mainly with the fate of the producer. You wish to free him from foreign competition, that is, to reserve the domestic market for domestic industry.

.....We are suffering from the ruinous competition of a rival who apparently works under conditions so far superior to our own for the production of light that he is flooding the domestic market with it at an incredibly low price; for the moment he appears, our sales cease, all the consumers turn to him, and a branch of French industry whose ramifications are innumerable is all at once reduced to complete stagnation. This rival, which is none other than the sun, is waging war on us so mercilessly we suspect he is being stirred up against us by perfidious Albion (excellent diplomacy nowadays!), particularly because he has for that haughty island a respect that he does not show for us. 

We ask you to be so good as to pass a law requiring the closing of all windows, dormers, skylights, inside and outside shutters, curtains, casements, bull's-eyes, deadlights, and blinds — in short, all openings, holes, chinks, and fissures through which the light of the sun is wont to enter houses, to the detriment of the fair industries with which, we are proud to say, we have endowed the country, a country that cannot, without betraying ingratitude, abandon us today to so unequal a combat.

Be good enough, honourable deputies, to take our request seriously, and do not reject it without at least hearing the reasons that we have to advance in its support. 

First, if you shut off as much as possible all access to natural light, and thereby create a need for artificial light, what industry in France will not ultimately be encouraged? 

If France consumes more tallow, there will have to be more cattle and sheep, and, consequently, we shall see an increase in cleared fields, meat, wool, leather, and especially manure, the basis of all agricultural wealth. 

If France consumes more oil, we shall see an expansion in the cultivation of the poppy, the olive, and rapeseed. These rich yet soil-exhausting plants will come at just the right time to enable us to put to profitable use the increased fertility that the breeding of cattle will impart to the land. 

Our moors will be covered with resinous trees. Numerous swarms of bees will gather from our mountains the perfumed treasures that today waste their fragrance, like the flowers from which they emanate. Thus, there is not one branch of agriculture that would not undergo a great expansion. 

The same holds true of shipping. Thousands of vessels will engage in whaling, and in a short time we shall have a fleet capable of upholding the honour of France and of gratifying the patriotic aspirations of the undersigned petitioners, chandlers, etc. 

But what shall we say of the specialities of Parisian manufacture? Henceforth you will behold gilding, bronze, and crystal in candlesticks, in lamps, in chandeliers, in candelabra sparkling in spacious emporia compared with which those of today are but stalls. 

......Will you tell us that, though we may gain by this protection, France will not gain at all, because the consumer will bear the expense? 

We have our answer ready: 

You no longer have the right to invoke the interests of the consumer. You have sacrificed him whenever you have found his interests opposed to those of the producer. You have done so in order to encourage industry and to increase employment. For the same reason you ought to do so this time too. 

....The question, and we pose it formally, is whether what you desire for France is the benefit of consumption free of charge or the alleged advantages of onerous production. Make your choice, but be logical; for as long as you ban, as you do, foreign coal, iron, wheat, and textiles, in proportion as their price approaches zero, how inconsistent it would be to admit the light of the sun, whose price is zero all day long!


For the full list of taxes, click here.

The cost of being a Sri Lankan (woman)

Originally appeared on Sunday Observer

By Anuki Premachandra

Being a Sri Lankan woman is not easy. From having to constantly battle gender stereotypes and rebel gender roles, women also have to burden the financial cost of something that is beyond them; the exorbitant costs of sanitary pads and tampons. With a population that is 52% women, you’d think that we’d know better than to tax a woman’s necessity, but we don't.

Earlier this year, the Advocata Institute revealed some data and statistics on the import taxes on sanitary napkins, which were being taxed at a total of 101.2%. It was our Fellow, Deane Jayamanne who shed light on the absurdity of taxes on diapers and sanitary napkins, both practical necessities. This tax structure is not only a reflection of poor public policy, but also a testament to how little we’ve progressed as a society. Taxing a women’s necessity so heavily (it is treated as a luxury) does not reflect well on our policy choices, especially when our progressive neighbor, India recently scrapped a 12% GST (Goods and Services Tax) on sanitary towels.

A breakdown of the tax system is as follows:

Pink tax infographic.png

At least one could say that we know better now. On that revolutionary note, in a statement last week, the Finance Minister has stated that the CESS on sanitary pads will finally be removed. However, the issue of protective taxes is much larger than just this, and needs immediate attention.

HOW TAXES WORK

In Sri Lanka, a lot of our daily necessities, from food to household products are imported. This is true in the case of sanitary napkins and tampons as well. In an ideal sense, this should allow us to take advantage of global efficiencies to source the cheapest or best products, depending on what people want. Unfortunately high taxes and poor trade policies only end in driving up the price of these products in the market.

Some of the taxes generate revenue for the government but many are imposed to protect local industry. Tariff protection for local industry comes at a cost: high prices for consumers.

In textbook terms, higher prices of imports means that consumers switch to locally produced products, boosting local business. However, a ripple effect of import taxes is that local producers can now sell their products at high profit margins because the selling price of the competing imported product is raised by the taxes - this is unfortunately the case of sanitary towels and many other household products in Sri Lanka.

Our Resident fellow, Ravi Ratnasabapathy highlighted the absurdity of taxes on commonly used household products in his latest column on the Echelon Business Magazine. Import taxes for cereal adds up to 101%, fruit juices to 107%, noodles to 101%, aftershave to 120% , toothpaste to 107%, etc etc. The list continues.

Lifting the taxes on sanitary pads is a signal that as consumers and citizens, we still have hope. Hope, that government authorities realise the absurdity of taxing daily consumption. Sri Lankan’s are literally taxed to go about their daily lives, from the toothpaste you use to brush your teeth in the morning to the ingredients that go into your daily buth packet, our taxes are absurd.

Price protection for local industry is a blunt tool that hurts consumers and incubates inefficiency.

Government support for industry should be directed away from tariff protection towards efficiency improvements: to  upgrade technology, worker skills, improve access to capital, R&D and infrastructure.

These, together with more efficient government processes, improved infrastructure, more advanced research institutions-in short a healthier business environment; can yield long term productivity gains for the economy and the firm.

 

Bringing sanity to public finances

Originally appeared on Echelon

By Ravi Ratnasabapathy

Ad-Hoc policies have created unsustainable long-term spending commitments. A medium-term expenditure framework can discipline policymaking.

Sri Lanka has experienced a large and persistent budget deficit, averaging over 7.7% of GDP since 1990. The deficit has been met partly by borrowing, which is why the debt-to-GDP ratio has averaged 89.1% during the same period, almost double that of our peer group. The government has attempted to close the deficit through painful and unpopular tax increases; but amid the rising cost of living, public patience for this has already worn thin.

With elections looming and the popularity of the government sinking, there is a danger they will revert to giveaways without considering the impact this will have in the longer term. Giving jobs or salary increases to state workers is a popular short-term gimmick, but involves long-term commitments: salary payments over the life of the employee, often followed by a pension. With 1,358,589 people already on the State payroll and a further 600,000 drawing pensions, this is no longer sustainable. Salaries and pensions alone consume half of government revenue.

The accumulated ills of various shortsighted measures have taken the country to the brink of default. There is an unprecedented ballooning of foreign debt repayments over 2018-22 amounting to a massive $14.9 billion. To put this in context, the current IMF facility is only $1.5 billion.

The maturing debt is too large to be repaid, so must be rolled over, which means we need to borrow to repay. In order to do so, we must maintain investor confidence. Failure to do so will lead to higher borrowing costs – something we cannot afford. Moody’s ranks Sri Lanka among the countries most exposed to an interest rate shock. Interest payments already consume around 36% of government revenue, an increase in rates will put severe pressure on the budget.

The accumulated ills of various shortsighted measures have taken the country to the brink of default. There is an unprecedented ballooning of foreign debt repayments over 2018-22 amounting to a massive $14.9 billion

Moody’s warns, “Persistently high government liquidity and external vulnerability risks continue to pressure Sri Lanka’s credit profile, and specifically measures to build reserves and smooth the profile of external payments may be insufficient to stem imminent government liquidity and balance of payments pressures starting in 2019, when large international debt repayments come due and Sri Lanka’s three-year International Monetary Fund Extended Fund Facility programme concludes."

This is why the Finance Ministry has pushed through unpopular tax hikes and increased fuel prices. Foreign lenders will look at the country’s finances to assess its ability to repay; so in the short term, there is no sensible alternative but to collect more taxes. The real problem, however, is not tax but runaway spending; over 2000-16, total spending grew at a compounded annual rate of 12% (from Rs335,822 million to Rs2,333,883 million), with the deficit following suit (Rs119,396 million to Rs640,326 million). Foreign financing of the deficit grew from Rs495 million to Rs429,130 million in the same period. It is government spending not taxation that ultimately determines the total burden of government activity on the private sector. Although spending may be financed by borrowing or printing money (instead of taxes), all government spending is ultimately a call on resources that have alternative uses, or involves transfers from one group of society to another.

Debt is simply taxation postponed, with interest added. Money printing can tide over in the short term, but ultimately results in inflation and currency depreciation. The need, therefore, is to reign in expenditure, which must start with a proper plan.

Large businesses routinely plan for 3-5 years, but the government relies on an annual budget, which is produced by a bottom-up approach – i.e. the various departments submit their estimates of expected expenditure, which are then amended and collated centrally. Planning and policy is geared to the annual budget cycle, and little attempt is made to prioritize spending.

Debt Balloon and Yawning Deficit.png

Planning must move away from annual budgets to a Medium-Term Expenditure Framework (MTEF), three-to-five year rolling plans, the important features of which are as follows:

  • Extends the timeframe of budgeting from 1 year to 3-5 years.
  • Projects the future cost of existing programmes and approved policy changes (baseline).
  • Establishes hard spending limits – fiscal targets (i.e. deficit or total spending).
  • Establishes a procedure for proposing any new policy initiatives.
  • Rolls the MTEF forward each year, adding a year at the end.

The Treasury can work backwards from revenue, assuming no changes in the tax structure and the deficit target to arrive at the overall spending limit. Matching this with projected costs of current programmes will indicate if there is space available in the budget for new policy initiatives. Fiscal space is the difference between baseline projections and the government’s spending target; if there is no space, no new programmes can be accommodated, unless some existing programmes are cut.

The overall spending limit is a ‘hard’ limit, but within the overall limit, reallocation can take place. This forces the Cabinet to consider spending priorities – where should limited resources be allocated? The Cabinet can determine soft ceilings for ministries that need to ‘win’ competitively on the basis of plans submitted.

Although spending may be financed by borrowing or printing money (instead of taxes), all government spending is ultimately a call on resources that have alternative uses, or involves transfers from one group of society to another

The Treasury needs to reward credible plans, so those that provide performance measures, specify outcomes, outputs and costs should receive more funding. Performance measures help make the case for budget allocation and enable monitoring of programmes. Performance measures are based on the following parameters:

  • Inputs: Measures the resources used to provide government services, such as personnel, operating expenses and capital.
  • Activities or output: Measures what an agency does, the number of applications processed, the number of passengers carried and kilometers of roads paved.
  • Efficiency: Measures the cost per unit of activity such as cost per patient, cost per student or cost per child vaccination.
  • Outcome: Measures how well objectives are met. These are usually the ends of government such as safety, health or educational improvement.

Expenditures must be driven by policy priorities, but disciplined by budget realities, which means sudden and unplanned announcements cannot be made. The result is greater policy predictability, a focus on outcomes, priorities and expenditure management.

Conceptually, this is simple, but implementing it in practice is a daunting task involving a lot of political negotiation (to get ministers to agree to spending limits) and administrative work in estimating future costs, revenues and measuring performance.

The trickiest political negotiation involved is in allocating the spending limit according to priorities. This exercise is the most important – with an annual incremental budget, no one is forced to question the ‘base cost.’ With a hard spending limit to be allocated among departments, questions on priorities come to the fore. The other obstacle is weak capacity within the government, both the bureaucracy and among ministers, which means that external technical support is needed to implement this, which is fortunately available through donor programmes.

Bridging the deficit.png

More than 16 African countries have adopted an MTEF, with Ghana and Malawi pioneering it in 1996. Since then, other countries in the region have followed. Implementing may be done in stages, starting with key spending units. In Malawi, the deficit contracted from 15% of GDP in 1994/5 to 5% by 1998/9, partly due to the MTEF. According to the World Bank (2013), by the end of 2008, more than two-thirds of all countries had adopted an MTEF. To work, the MTEF must become the government’s budget process and control the details of spending. Expenditure limits are agreed to by incoming governments giving intra-party policy consistency.

Properly planned expenditure means little need for periodic, ad hoc adjustments to taxes, which are witnessed at every budget, and even in between budgets through gazette notifications. Unexpected tax changes wreck havoc with the plans of businesses and households alike. Greater visibility will increase overall levels of confidence among lenders and investors.

When an MTEF is implemented well, public expenditure is limited by the availability of resources, budget allocations reflect spending priorities, and public goods and services are delivered cost-effectively. MTEFs, therefore, offer the prospect of achieving the three high-level objectives of public expenditure management: aggregate fiscal discipline, allocative efficiency and technical efficiency. Reaching this is an incremental process, but with good technical support, it is possible. The earlier this is adopted, the better.

A woman's monthly tax

In a country with 4.2 million menstruating women, only 30% of them use sanitary napkins (SAARC Chamber Women Entrepreneurs Council). This statistic is appalling and the truth in this is saddening. As a nation where 52% of its population is women, the reality that sanitary napkins are only an option to a handful 30% is an injustice.

A few weeks ago, we highlighted the absurdity of diaper taxes. The tax on diapers is so high that when calculated, for every three diapers bought, the Sri Lankan Government is ‘stealing’ at least one of them. The same applies for the case of sanitary pads and tampons where the government charges a colossal import tax of 101.2%. This 101.2% is on a woman’s basic need, but falls into the general pile of tax calculation without regard of its intrinsic value and purpose.

Are we so focused on our protectionist values that we cannot decipher how unfair and discriminatory it is to tax a women on something that is beyond her control?

A recent Roar article highlighted how most women cannot afford sanitary napkins and have to switch to using cloth rags instead. Cloth rags are both a sanitary and health concern. We are depriving women of what should be a basic right. The average price of a packet of 10 pads in Sri Lanka is Rs. 200. Imported pads are priced between Rs.200 – 250, and locally produced pads are also around Rs. 150 – 200. Protectionist taxes are meant to ensure that local production is boosted and that as consumers and women, we have diverse choice and a range of prices to choose from. However, the reality is that local producers actually have the comfort of enjoying a big profit margin per packet as the prices of the products in the market are high in itself, owing to taxes.

Import taxes on sanitary pads and tampons are calculated as follows:

Sanitary Napkins Tax Breakdown

We’ve also compiled a cross-tabulation of prices of pads and tampons globally:

Price per Pad.PNG

A cost of a single pad is 24% more in Sri Lanka than it is in USA and 26% more than the retail price of a sanitary napkin in India.

Price Per Tampon.PNG

On the other hand, tampons are limitedly available, and when they are, the price of a tampon in Sri Lanka is 20% more than it is in the states?

Aunt Flo’s visits usually are about 5 days long on average meaning that if 4 pads are used a day, a Sri Lankan women spends a total of Rs. 520 a month on something entirely beyond her control. This might not seem like a lot to most people reading this, but when you really look at it, for someone barely making minimum wage a day, this cost becomes a financial burden on them. If the average age of mensuration is between 13 – 45 years, this then means that a Sri Lankan woman spends at least Rs. 199,680 on sanitary napkins itself!

It seems like the rest of the world is progressing fast with global movements against discrimination and injustice. It seems like it’s about time we caught up with #MeToo and #Timesup. We don’t think it’s acceptable that you have to spend close to 200,000 just because you’re a woman. Do you?