COLOMBO (EconomyNext) – Sri Lanka newly elected administration said it will keep the budget deficit at 4.4 percent of gross domestic product but the revenue deficit has deteriorated by 149 billion rupees from an already over-ambitious surplus projeced by the last regime.
Finance Minister Ravi Karunanayake said total revenues would be revised down to 1,622 billion rupees for 2015 from 1,689 billion rupees projected in a budget by the ousted Rajapaksa regime amid a series of tax cuts on consumer goods.
Current spending zoomed to 1,612 billion rupees from 1,525 billion in an earlier budget, amid state sector salary and pensions increases. Finance minister Ravi Karunanayake said the state salary increase was the highest in the country’s history. Salary hikes which have to be financed monthly and cannot be delayed, are among the most dangerous expenditure items.
It is also not clear whether the costs of guaranteed prices for tea and rubber are acurately reflected in the budget, which are open ended items as global commodity prices have been falling.
The balance of the current budget deteriorated from an already highly ambitious surplus of 129 billion rupees to a negative 20 billion rupees, representing a reversal of 149 billion rupees.
The capital budget was cut from 521 billion rupees to 499 billion rupees, keeping the overall deficit at 4.4 percent, around the same as the Rajapaksa budget.
The revenue deficit which involve monthly cash payments (the net operating cash deficit) is the most dangerous to economic stability and the exchange rate.
If the deficit is financed through bank borrowings without raising interest rates quickly and sterilizing excess liquidity in the banking system on a longer term basis, exchange rate weakness and accelerated forex reserve losses are inevitable, analysts warn.
The finance minister imposed some quick fire one-off taxes on large corporates, telecom firms and casinos which will provide instant cash in an unprecedented deterioration of predictability of taxes, claiming windfall gains were made by some firms during the Rajapaksa regime. It would also set a bad precedent, which the elected ruling class would mis-use to fund their spendin plans in the future.
However some taxes including a billion rupee levy on a sports television channel connected to the Rajapaksa regime which was set up with state privileges may be difficult to realize analysts say.
The finance minister said total taxes taken from the people would be kept at 14.1 percent of gross domestic product, down from a planned 14.4 percent.
Bringing Sri Lanka’s budget deficit down by steadily cutting current spending without raising the overall tax take has been the most important achievement of the Rajapaksa regime if reported GDP numbers are correct.
A lower tax to GDP ratio leaves more money in the hands of citizens to spend as they see fit.
While anyone may be able to bridge budget deficit by taxing the people more, it is more difficult to squeeze state spending and reduce the budget deficit. But Sri Lanka now has the advantage of not having a war.