2014 Budget In Focus: Impact And Expectations
Dhanusha Pathirana
The 2014 fiscal proposals place significant emphasis on fiscal consolidation mainly by tightening tax policy measures while continuing the pattern of relatively high growth of state expenses witnessed in the past eight fiscal agendas of the incumbent government. A development framework upheld by the state was set in motion through four consecutive post war budgets from 2010 to 2013. Its basic approach was grounded on raising the growth of the economy through infrastructure centred government expenditure while simultaneously assisting the services led growth of private investments through sharply loosening the tax framework of the economy. The monetary policy stance provided a catalyst for this process by maintaining more or less lower interest rates and stable currency through improving avenues to attract foreign savings/debt. In Sri Lankan Treasury’s terms this is expected to achieve “a real financial development of the economy” which is believed to automatically lead to a sustainable economic growth of nearly 8%. It is our view that the latter framework encouraged the growth in private sector investments which led to higher economic growth centred on services and construction activity. It however suggests that higher economic growth following the war was achieved without a fundamental shift in the economy’s growth pattern and hence, it continued the expansion of nonindustrial type investments as the dominant mode of economic growth.
However, this particular development strategy adopted by the government although accelerated the pace of economic growth, weighed on the tax revenue position and hence the stability of the fiscal sector. The 8.6% YoY reduction in tax revenue in 1H2013 despite the economy growing as much as 6.9% YoY during the first three quarters of 2013 indicates that the broad relaxation of the tax regime in previous years although facilitated higher economic growth, it undermined the financial stability of the government. This is further indicated by the significant increase in public debt despite real growth in the economy beating regional peers. On the other hand, the higher economic growth in the face of falling government revenue further indicates that the economic growth was fundamentally based on expanding government expenditure and the growth in public investments did not in turn generate taxable incomes through increase in the formal sector employment of the economy. This is indicated by unemployment rate increasing to 4.4% in 2Q2013 from 3.9% in 2012 and 87.8% of the labour force being employed in informal sector (62.7%), public sector (16.1%) and as unpaid family workers (9%) despite economy growing at one of the highest rates in the world. Under this backdrop it is our view that the 2014 fiscal proposals are largely aimed at realigning the tax structure to improve the financial position of the government while maintaining economic growth and government expenditure without a structural transformation in the economy. Read More
