Posted on September 16th, 2016

Editorial Courtesy  Ceylon Today

Recently, Health Minister Rajitha Senaratne said that Budget 2017 will be presented to Parliament on 10 November. This budget is crucial for the government as well as to the public due to multiple reasons.

At the moment, the government is caught between the devil and the deep blue sea. On one hand it has to meet the targets provided by the International Monetary Fund (IMF) and on the other hand the expectation of the public has to be met from the upcoming budget.

To put it in simple terms, the budget is nothing, but managing the expenditure and income of the government. However, it becomes a tough job when there is a big gap between the expenditure and the revenue. The bitter truth is that the government revenue in Sri Lanka has been very low for decades and that had pushed the country into a fiscal crisis. The IMF notes that Sri Lanka is amongst the countries that have the lowest tax to GDP ratio and alarmingly that ratio has been declining throughout the last decade.

Tax is the main source of revenue for any government; hence if the fiscal deficit which resulted in increase of the government expenditure is to be met, the tax revenue should increase. According to the Central Bank of Sri Lanka (CBSL) Annual Report 2014, the tax revenue as a percentage of the GDP had reduced to 10.7% from 11.6% in 2013.

Economists as well as the IMF had consistently cautioned the previous government about the falling revenue. Despite all those cautions the total revenue of the government had declined from 13.3% of GDP in 2013 to 13% of GDP in 2014.

According to the CBSL, the medium term objective of the government is to reduce the budget deficit to 3.5 per cent of GDP by 2020. Which is also the target given by the IMF when Sri Lanka obtained the Extended Fund Facility recently. In line with this, regressive taxes are also expected to be minimized while increasing the ratio of direct and indirect tax generation in the medium term to 40:60 per cent from 20:80 per cent.

However, it is a question whether the government genuinely wants tax imposed on the common man. Despite the claim of the Prime Minister of reducing the indirect and direct tax ratio to 60:40, the indirect taxes such as VAT are imposed on consumption making more trouble for the common man.

It is true that the increase of government revenue is not an option, but a must. However, the question is the way in which the government attempts to do that. The so-called, economic experts thus far had failed miserably to raise the revenue without hurting the common man, although they harshly criticized the previous regime when they were in power.
Failing in the attempt to raise government revenue, the government might look into cutting expenditure. Again, it is a question from which sectors expenditure would be cut. Prominent economists had argued that cutting public expenditure had by no means increased growth rates; instead it had reduced not only the growth rate but also employment rate. On top of that, such actions to cut out public expenditure which are known as austerity measures had resulted in reducing the standards of living of the public.
It appears that Prime Minister Ranil Wickremesinghe is trying to implement such austerity reforms hiding behind the debt crisis. Recently, he had claimed that the government debt has exceeded Rs 10 trillion and it has become a serious concern. This was not a new problem. The massive public debt was an issue that the government has been facing throughout the last decade. Therefore, the government should find a way from the budget to pay those debts without further taxing the ordinary people.
Moreover, Budget 2017 is a tough test for the government. Maybe, they will have to make tough decisions. However, the government must make sure that such tough decisions would benefit the public, not a few individuals with vested interests.

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