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Sri Lanka public finances hit by tax cuts: opposition

ECONOMYNEXT – Sri Lanka’s public finances have been hit by tax cuts, triggering a supplementary estimate to a four-month vote-on-account, an opposition legislator said while the ruling party blamed past payment arrears and unprovided expenses for the problem.

A supplementary estimate was put forward by the ruling party which provided for 156 billion rupees in new spending and a 357 billion rupee increase in debt but was withdrawn after the opposition declined support.

Analysts say there had been a practice in Sri Lanka of running payment arrears during the tail end of a year, which may help understate the deficit of the previous year.

But the new administration also slashed taxes including value-added taxes, triggering concern at rating agencies, who feared higher borrowings and an expansion of the deficit.

The ruling party has said there were no allocations for some expenses due in the first quarter including some foreign-funded projects. The debt limit however, is more than twice the new expenses sought for.

“We have now gone into a cash crunch because they have not analysed the fall out from the taxation changes,” opposition legislator Harsha de Silva said.

“They are not talking about the revenue shortfall caused by the reduction of tax. That is the issue,” the Parliamentarian told EconomyNext.

“They have flouted the fiscal responsibility that we had carefully built up.   They have miscalculated as to how much they have lost because of the tax changes.”

The Rajapaksa administration says taxes would eventually increase when the economy recovers later in 2020.

However, there are fears that monetary instability may come if domestic credit picks up if rate cuts are enforced with liquidity injections, as it had done in the past, even when deficits were smaller.

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Information Minister Bandula Gunewardene said if Ranil Wickremesinghe was opposition leader, instead of Sajith Premadasa, he would have supported the motion.

Sri Lanka’s parliament is expected to be dissolved in early March, and elections held in late April.

Gunewardene said the Speaker should recall parliament to pass the supplement to the mini-budget.

But even if not, contractors and others will be settled within a month of the election.

He said there would be no crisis in public finances as the President had constitutional powers to draw funds for three months after parliament was dissolved without a budget in place.

Sri Lanka is now operating on a four-month vote on account passed in 2019, instead of a full budget. (Colombo/Feb24/2020)

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