Public Finance Data and Analysis
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Sri Lanka's persistent budget deficit has become a perennial issue, plaguing successive governments due to poor financial management practices. Verité Research's recent findings (Read more : State of the Budget: 2024) indicate that the country is poised to miss its budget revenue targets for the 33rd consecutive year, highlighting a pattern of borrowing to cover deficits.
The 2024 Budget set forth an ambitious revenue goal, aiming for a substantial increase of 42% from the previous year. However, Verité Research offers a more conservative estimate, projecting a revenue shortfall of 14% compared to the government's optimistic forecast. This projection aligns closely with the International Monetary Fund's (IMF) forecast, indicating a significant revenue surge.
Government estimates reveal a considerable rise in total expenditure for the year, with interest payments constituting a staggering 66% of the increased allocations. The Fiscal Management (Responsibility) Act (FMRA) of 2003 was enacted to ensure responsible fiscal management, but budget deficits have consistently exceeded the prescribed limit, including the proposed deficit for 2024, standing at 7.6% of GDP.
Verité Research's Lead Economist, Raj Prabu Rajakulendran, highlights Sri Lanka's persistent revenue deficits over the past three decades, attributing them to reliance on Value-Added Tax (VAT) and limited revenue-based options due to previous tax increases. He emphasizes the need to improve revenue collection without resorting to further tax hikes, citing inefficient administration as a root issue.
Rajakulendran underscores the importance of addressing Sri Lanka's high interest-to-revenue ratio, which reached 80% in 2023, posing a significant challenge. He also notes the unsustainable nature of high deficits coupled with soaring interest costs, emphasizing the critical need for effective deficit management and revenue collection to achieve fiscal stability.
Verité Research recommendations
Corporate Income Taxes: Despite an anticipated 30% growth (Rs. 155 billion) in 2024, no adjustments to corporate tax rates or tax-free thresholds have been proposed. Hence, it is advised to revise the estimate downward to Rs. 561 billion for 2024. This reflects only the nominal GDP growth of 9.2%, representing a 9% increase from the 2023 revised estimate, contrasting the Government’s projection of a 30% increase.
Personal Income Taxes: Expected to rise by 100% (Rs. 40 billion) in 2024, without any new tax policies or administration measures. Therefore, it is recommended to adjust the estimate to Rs. 48 billion for 2024, representing a 20% increase from the 2023 revised estimate, instead of the Government’s estimate of a 100% increase.
Value-Added Tax: Projections indicate a 106% increase to Rs. 1,400 billion in 2024, attributed to rate adjustments and the removal of VAT exemptions. However, considering the inflation target of 7% and an estimated VAT-induced inflation of 2.3%, the Budget’s VAT revenue estimates appear overstated. It is advised to revise the estimate to Rs. 1,039 billion, reflecting a 53% increase from the 2023 revised estimate, in contrast to the Government’s projected 106% increase.
Social Security Contribution Levy (SSCL): Anticipated to grow by 19% (Rs. 40 billion) in 2024, without proposed changes to tax rates or thresholds. Therefore, it is recommended to revise the estimate downward to Rs. 229 billion for the year. This represents a 9% increase from the 2023 revised estimate, differing from the Government’s estimate of a 19% increase.
Customs Import Duty (CID): Projected to grow by 99% in 2024, with no administrative or policy measures introduced. Hence, it is advisable to adjust the estimate to Rs. 102 billion, reflecting a 16% increase from the 2023 revised estimate, instead of the Government’s projection of a 99% increase.
Professor Sirimal Abeyratne of the University of Colombo emphasizes the urgency of addressing the public sector's expansion rather than immediate expenditure cuts. He advocates for focusing on revenue generation, particularly through expanding the tax base using technology-driven solutions. Abeyratne highlights the benefits of efficient database systems for better governance and policy interventions. He suggests that increased revenue could eventually lead to manageable tax rates. While acknowledging budget deficits in developing countries, he underscores the importance of keeping deficits within manageable limits to avoid a debt crisis and ensure sustainable economic growth.
