ECONOMYNEXT – Sri Lanka’s state workers and the ruling class have taken home 84 cents out of every tax rupee collected in the first eight months of 2020 as salaries and pensions, as revenues fell amid cuts and a Coronavirus shock, official data shows.
Sri Lanka’s bloated state sector made up of state workers and politicians have generally been the main beneficiary of taxes collected from the people, taking home over cents of every tax rupee collected for many years.
Under an extraordinary policy framework called the ‘revenue based fiscal consolidation’ under then Prime Minister Ranil Wickremesinghe, tax collections were raised from 1,050 billion rupees to 1,734 billion from 2015 to 2019 or an absolute increase of 65 percent.
In addition to a value added tax increase which was much required, the administration also raised direct taxes, which kills future investment and growth, bringing back socialist ‘progressive taxation’ to personal income tax.
In an agreement negotiated with the International Monetary Fund the administration put withholding taxes on a wide variety of incomes such as royalties of musicians which brought tiny volumes or revenues but alienated many sections of the population.
Under the extraordinary policy revenue based fiscal consolidation (under basic economic principles spending has to be cut), annual tax revenues were increased by 684 billion rupees and 50.7 percent was given to state workers and pensioners.
The state worker cadre is bloated each year with unemployed graduates, who strike in front of the Colombo Fort railway station demanding lifetime jobs and pensioners.
However many pensioners are those who had joined the public service through the correct channels and had received low real salaries especially in the 1980s, when the Sri Lanka rupee was collapsing steeply and served the country for over three decades.
Under revenue based fiscal consolidation tax revenues were raised to by 2.5 percent of gross domestic product to 12.6 percent of GDP by 2019 from 10.1 percent in 2014.
Current spending was then raised by 2.6 percent of GDP from 12.7 percent of GDP to 15.3 percent.
Total spending was raised from 17.2 percent to 19.4 percent.
The IMF program which raised the tax take without putting the brakes on spending, under ‘revenue based fiscal consolidation’ also failed to put the brakes on the central bank which printed money and triggered currency collapses before and during the program, wiping out fiscal corrections.
The Sirisena-Wickremesinghe administration hiked salaries by 20,000 rupees a month, taking the salary and pensions bill to 914 billion rupees in 2019 from 567 billion rupee in 2014.
State workers also voted against the administration at the 2019 elections, despite getting most of the benefits under ‘revenue based fiscal consolidation’.
The United National Party in the past had lifted income tax from state workers, and started giving tax free Mitsubishi Pajeros and BMWs to politicians.
The President Mahinda Rajapaksa brought income tax back to state workers. Before that Inland Revenue officer who did not themselves pay tax, were collecting taxes from the people.
State workers also get additional benefits including health insurance and subsidized credit. The 2021 budget also gave them additional benefits but did not raise salaries.
The current administration however in addition to cutting income tax rates, also cut value added tax de-stabilizing state finances and is now printing large volumes of money with state workers and pensioners taking home 84 cents out of every tax rupee collected up to August 2020. (Colombo/Dec11/2020)