Tax revenue grows but govt. cuts public investment 

      January 21, 2014   

By Devan Daniel
 
Ceylon FT: Tax revenue inched upwards during the period January to September 2013 as capital expenditure or public investments were reduced to contain the budget deficit, latest data released by the Central Bank showed.
Tax revenue increased 4.22% year-on-year to Rs 706.7 billion during the first nine months of 2013, as the government continues to take a piece-meal approach to tax administration reforms. Non-tax revenue fell 10.15% to Rs 73.5 billion and grants fell 79.16% to Rs 3 billion.
 
Total revenue inclusive of grants grew a marginal 1.15% year-on-year to Rs 783.2 billion during the first nine months of 2013.
Recurrent expenditure increased by 3.81% during the nine-month period to Rs 920 billion.Capital expenditure or public investments fell 4.33% to Rs 355.1 billion. Economists have warned against slashing public investments in order to contain the fiscal deficit as it could curtail growth, inhibit much needed investments into the health and education sectors.
 
The budget deficit for the first nine months of 2013 amounted to Rs 491.9 billion, up 1.82% from a year ago. As a percentage of GDP, the deficit is 5.58% with the full year target set at 5.8%.
Economists believe the government could achieve the 2013 deficit target of 5.8% of GDP with tax revenues usually flowing in during the end of the year, but the worrying trend is that the government is sacrificing public investment as it did in 2012 in order to show an improved fiscal performance.
 
“There has to be improvements tax revenue and a significant reduction in recurrent expenditure, if the government is serious about meaningful fiscal reforms. The latest numbers show some improvement, but it is not enough, sacrificing public investment for recurrent expenditure is not satisfactory at all,” an economist said not wanting to be named.
 
Outstanding government debt stood at Rs 6,518.5 billion as at end June 2013, up 9.52% from Rs 5,951.6 billion from a year ago; domestic debt amounted to Rs 3,636.5 billion and foreign debt amounted to Rs 2,882 billion.
 
Tax revenue as a percentage of GDP has fallen from 12.8% in 2009 to an estimated 12.1% for 2013 Treasury data showed, and economists are concerned that the government has increased the tax burden on ordinary citizens.
Economists have pointed out that the implementation of the proposals of the Presidential Taxation Committee could increase tax revenue to 20% of GDP, with present piece-meal approach by the government failing to bring the desired results.
 
Former IMF Resident Representative Dr. Koshy Mathai expressed concern that the fiscal targets for 2014 were based on a higher growth rate between 7.5 – 8.0%.
 
“This over-projection can result in revenues falling below targets and then we may see the government having to curtail, or differ, expenditure so as to meet the deficit target,” Dr. Mathai pointed out at a recent forum in Colombo. He said the IMF projection for Sri Lanka’s economic growth was 6.5%.
 
In recent years, revenues have always been overestimated and expenditure targets under-estimated, leading to widening budget deficits, although in 2012 the government deferred certain expenditure items in order to reach the 6.4% of GDP target, down from 6.9% the previous year.
 
The 2014 deficit would be plugged by resorting to more foreign borrowings, up 34.15% to Rs 331.5 billion in 2014, while domestic borrowings would be reduced by 22% to Rs 280.6 billion.
 
The government’s heavy domestic borrowing programme last year has dented private sector credit growth and corporate earnings and economic growth slowed down over the first half of the year. Although economic growth picked up in the September quarter, corporate earnings were down, reflecting damp sentiments in the economy, analysts point out.
 
The Sri Lanka Economic Association (SLEA) in its 2014 budget proposals asked the government to reduce the budget deficit to sustainable levels so as to ensure equitable sustainable growth.
 
This can be achieved by adjusting the effective rate of income tax, widening tax coverage, reducing recurrent expenditure and decreasing the role of the State in the economy. The association also called for an independent Central Bank.
 
SLEA also asked the government to stop ‘crowding out’ of the private sector from the debt market by limiting the borrowing requirements of the government and preventing State-owned enterprises getting easy and automatic access to credit from the State-owned banks and stop the practice of giving loans and advances to the State and the public sector at lower rates of interest, as such subsidy entails higher rates of interest for the private sector.
 
Economists have also pointed out that the government was too dependent on indirect taxes, which accounted for more than 75% of total tax revenue, which was a burden on the poor and the middle class, with higher income earners not contributing enough through direct income and corporate taxes.