ECONOMYNEXT – Sri Lanka hiked taxes, including on pension funds of private sector workers, and held state salaries and pensions for the second year running, in a budget for 2017 that sought to fix finances that were damaged by steep wage hikes and subsidies in 2015.
Encouragingly, the 2016 out-turn was in line with revised targets published by the Finance Ministry under a program backed by the International Monetary Fund.
The budget for 2017 ended tax-free corporate debt, tax-free dividends of mutual funds and relief given to smaller bank depositors from withholding tax.
Finance Minister Ravi Karunanayake blamed the tax hikes on debt taken on by the last regime, rather than subsidies given in a 2015 budget.
Corporate tax was standardised at 28 percent and some firms that were taxed at 10 percent would now be taxed at 14 percent.
"Every Finance Minister wants to give concessions to the people to improve their lives," Karunanayake said. "However, our government inherited the worst economic legacy that anyone could inherit. We are forced to fight a constant battle to relive ourselves from this debt trap we are embroiled in."
Sri Lanka is planning to boost tax revenues by an ambitious 27 percent from a year earlier to Rs1,821 billion.
However, a value-added tax hike passed before the budget, along with a removal of exemptions, was expected to bring in about Rs15 billion of taxes a month.
Current expenditure was only expected to grow at a slower 10 percent to Rs2,024 billion, with no salary on pension hikes for the second year running, allowing taxpayers to absorb the steep hikes in 2015.
If revenues come as expected, the budget will run a revenue surplus of Rs64 billion. Sri Lanka had not had a revenue surplus since 1987.
The government is planning to boost capital expenditure sharply to around Rs798 billion from Rs500 billion in 2016, taking the overall deficit to Rs635 billion.
The deficit would be lower in real (4.6 percent from 5.4 percent) and nominal terms from the Rs670 billion out-turn projected for 2016.
The government is expecting to borrow Rs353 billion from domestic markets (2.6 percent of GDP), up from Rs275 billion (2.2 percent of GDP) in 2016.
Foreign borrowings would be reduced to Rs272 billion, from Rs395 billion.
Revenues from the planned billion dollar sale of the Hambantota port to China was not included in the budget’s non-tax revenues.
The 2016 budget out-turn projected for the end of the year was in line with 5.4 percent of GDP target.
Revenues without provincial councils at Rs1,576 billion was slightly higher than the Rs1,546 billion target published by the Finance Ministry in line with the IMF program, though lower than the Rs1,822 billion discredited number given in the budget for 2016.
Current spending was also only slightly higher than target. The revenue deficit at Rs194 billion was also only Rs20 billion higher than the Rs178 billion target.
Capital expenditure at Rs486 billion was in line with the projected Rs491 billion, giving the overall deficit of Rs670 billion only Rs10 billion off the target.
The final deficit in the past has changed from the out-turn given to parliament, but the overall better performance of the budget, including state energy enterprises, has already helped, easing pressure on credit markets.
Taxes including a recent value-added tax on healthcare is likely to test the popularity of the administration, which has also been wracked by high-profile corruption scandals especially in bond markets, analysts say.
If the Central Bank manages monetary policy and maintains the Sri Lanka rupee’s soft dollar peg, helped by the lower deficit, without allowing it to crawl down as in the past, the poor and the wage earners may be spared further hits on their real income.
Sri Lanka has long pursued a policy of currency deprecation in a bid to promote industrial exports with proverbial beggar salaries, due to a Mercantilist ideology based on unsound money, but the policy has backfired with millions going to the Middle East seeking better real wages.