ECONOMYNEXT – Sri Lanka can resume a high growth seen before a recent slowdown with the right policies, and more taxes should be cut, emerging markets investor Mark Mobius said after the island halved sales tax from 15 to 08 percent and reduced personal income tax.
“I think they should cut the taxes more,” Mobius said at a business forum in Colombo, organized by Cinnamon Life, a real estate development promoted by Sri Lanka’s John Keells Holdings group.
“At the end of the day you need growth. The only way the government can raise more taxes is if the economy grows. And you cannot grow an economy if people are burdened with high taxes in the beginning.
“It is important at this stage to lower taxes and make them easier to pay.”
Sri Lanka’s newly elected government cut personal income tax to 18 percent, and reduced the highest marginal rate from 24 percent to 18 percent.
The last administration, apparently at the behest of a young International Monetary Fund team raised the higher marginal income tax rate from 16 percent, which had been brought down to improve compliance.
The IMF also advocated so-called ‘revenue based fiscal consolidation’, implying that keeping down deficits by cutting state spending was not correct.
There were also claims that a low tax to GDP ratio was somehow bad, and that there was some virtue in high revenue to GDP ratios rather than a smaller deficit that would reduce the accumulation of new debt, defying classical (and neo) liberal economic principles.
However from December, Sri Lanka also halved value added tax, which is a sales tax, causing concern among rating agencies and other analysts given the tendency of Sri Lanka’s soft-pegged central bank to print money to keep rates down and generate balance of payments trouble when deficits go up.
Mobius said he was not a fan of the ‘Laffer Curve’, but believed it had some relevance.
The Laffer Curve named after Arthur Laffer an American, refers to a phenomenon where total income tax revenues tend to go up, when the marginal rate is below 70 percent. However it does not refer to sales taxes like VAT.
Sri Lanka had growth rates as high as 8 percent after the war but it had slowed during the last four years, it had slowed, Mobius said.
He said in 2010, 2011 and 2012 Sri Lanka had growth of around 8 percent, then there was a decline.
“I believe Sri Lanka can re-achieve that high 8 percent growth going forward,” Mobius said. “If the right policies are followed and economy is given the freedom to move ahead.”
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He said the economy should be de-regulated, digital technology should be made use of to make tax payments and government services easier to access for the people.
He said state enterprises like insurance firms, banks, airports, should be listed in the stock market to improve governance, drawn private capital and boost liquidity in the stock markets. (Colombo/Dec11/2019)