Budget deficit expands in 1H despite higher tax revenue

• Fiscal deficit in first half expands by 6% to Rs.780.2bn
• Govt. revenue up 7.5% to Rs.715.3bn; tax revenue up 10%
• But tax revenue largely off target compared with budget estimates 
• SL is set to record a budget deficit in excess of 10% of GDP for 2021

Sri Lanka’s fiscal deficit expanded slightly despite higher revenues during the first six months of 2021 compared to the same period last year, made possible by the higher tax revenues collected during the first three months of the year from a burst in economic activities, before things began to sour thereafter due to virus related restrictions on the economy.  

According to the latest fiscal data published by the Finance Ministry together with the Central Bank, State revenues led by tax revenues increased by a modest 7.5 percent to Rs.715.3 billion in the first half of 2021 from the same period last year. 

The tax revenues rose 10.4 percent year-on-year (YoY) to Rs.641.2 billion from the same period in 2020. Although the YoY figure of tax collections came in higher, the actual tax collections remained way off with the budget estimates for the year largely due to COVID-19 related disruptions and restrictions on economic activities in the second quarter.   

Sri Lanka has a total tax revenue target of Rs.1, 724 billion for 2021, of which Rs.371 billion is earmarked from corporate and personal income tax, Rs.823 billion from the taxes on goods and services and another Rs.530 billion from the taxes on external trade. 

However, during the first three months, Sri Lanka’s tax collections reached almost the budgeted levels as the Inland Revenue Department indicted it had collected 98 percent of the tax revenue budgeted for the same period.
The government of President Gotabaya Rajapaksa introduced sweeping tax cuts in December 2019 to unshackle businesses and consumers from higher taxes imposed under an International Monetary Fund-backed programme.  

However, COVID-19 pandemic did not even allow the result of such tax cuts to take effect on the broader economy, although the corporates benefitted briefly as seen from their record performances partly made possible by lower corporate income tax.  

Meanwhile, the State expenditure during the first half of 2021, identified with lending minus repayments, rose by a modest Rs.6.7 percent to Rs.1, 495.5 billion from a year ago. Recurrent expenditure rose by 5.9 percent YoY to Rs.1,311.0 billion, while capital and lending minus repayments rose by 12.7 percent YoY to Rs.184.5 billion, as the government did not stop infrastructure development programmes despite the virus-induced health and economic challenges, including spending over Rs.30 billion as cash transfers for those who lost their livelihoods due to lockdowns. 

As a result, the overall budget deficit was recorded at Rs.780.2 billion for the six months of 2021 compared to Rs.735.7 billion in the same period last year, logging a 6.0 percent increase.  With a lingering pandemic, which is set to foil any near-term economic rebound, Sri Lanka is projected to record a budget deficit in excess of 10 percent of its Gross Domestic Product for 2021.