• Economist says credible revenue-enhancing measures vital, given country’s widening fiscal deficit
• But points out such measures shouldn’t disincentivise production and output, given current low growth environment
• “That’s a very tough balance”-- Verité Research Research Director Deshal de Mel
• Introducing a new tax similar to Nation Building Tax, which applies across board, likely
• Equity market analyst says increase in taxation on banking likely 
• Sri Lanka told to focus more on wealth taxes such as capital gains and property taxes while moving away from indirect taxes

By Nishel Fernando
Top economists in the country opine that the new government faces a daunting task in containing the rising fiscal deficit with credible revenue-enhancing measures while ensuring a speedier recovery of the coronavirus-battered economy, as it is scheduled to present its maiden budget for 2021 in Parliament today. 

“The government has to identify credible revenue-generating measures, so Sri Lanka can demonstrate a medium-term path to reduce the budget deficit. It’s vitally important that given the weak growth environment, whatever revenue-enhancing measures don’t disincentivise production and output as well. That’s a very tough balance,” Verité Research Research Director Deshal de Mel opined.

Prime Minister Mahinda Rajapaksa, who is also the Finance Minister, is scheduled to present the second reading of the Appropriation Bill for the financial year 2021, in Parliament, today. 

For the first time in recent history, media wouldn’t be able to cover the budget presentation, with the public and media galleries remaining closed, due to health reasons related to COVID-19, according to the Government Information Department.

Following the budget speech, the traditional tea party hosted by the Finance Minister would also be limited to the Members of Parliament, ministers, ambassadors and invitees this year.

The government is seeking to allocate Rs.2.67 trillion in current expenditure and Rs.2.2 trillion in capital expenditure, with a limit on borrowings set at Rs.2.9 trillion for the financial year 2021, according to the bill.
Economists weighed in on reversing some of earlier tax cuts introduced at the latter part of last year and returning to the revenue consolidation path, which may include new taxes, as the budget deficit is projected to exceed 10 percent of GDP this year.

However, de Mel speaking at a recent discussion organised by the Advocata Institute emphasised that the credibility of such revenue-enhancing measures would come into scrutiny this year, unlike before.

“Whatever the measures being spelled out, it has to be credible. You can’t just give numbers without a meaningful analysis and basis behind it. That’s where we have risk in falling short and that credibility is going to be crucial this time,” he said.

Meanwhile, speaking to Mirror Business, First Capital Holdings Head of Research Dimantha Mathew said that there’s likelihood of introducing a new tax similar to Nation Building Tax (NBT), which applies across the board, however, at a lower rate.

As the banking sector so far being one of least affected by the pandemic, he expects that the government could possibly increase taxation on the sector.

Among non-tax measures, he noted that the government is likely to dispose or reduce ownership of some of the state-owned assets, such as Hilton Colombo, Grand Hyatt Colombo and Grand Oriental Hotel (GOH). With limited capital expenditure, the government is also expected to look to rely on private equity for key projects by adopting the build-own-operate and transfer (BOOT) basis, for example.  

In order to return to somewhat stable fiscal deficit levels seen in last few years, it would essentially involve the abandonment of the generous tax concessions offered early in 2020 and going for the previous strategy of revenue-based budgetary consolidation on one side and placing a firm cap on the consumption expenditure bill on the other, according to the former Central Bank Deputy Governor and economic commentator W.A. Wijewardena. However, de Mel opined that incremental return to some of the measures is the more likely scenario, without harming the economic recovery prospects.

Mathew highlighted that Budget 2021 could be a pathway for a possible International Monetary Fund (IMF) programme by mid next year, as the government struggles to win back the confidence of international investors amid high fiscal deficit and worsening debt dynamics. Driven by record money printing exceeding Rs.500 billion, Mathew noted that there’s a high likelihood for an exchange rate shock towards the second quarter of next year and a spike in interest rates adjusting to recent developments. However, he noted that the IMF-backed policies would only be considered in the following year’s budget. First Capital expects Sri Lanka’s budget deficit to remain high at 7.5-8 percent of GDP in 2021. De Mel opined that the current government has the best chance to solve the country’s fiscal deficit issue for the long term, with its political capital and right communication tools. He pointed out that Sri Lanka’s high fiscal deficit has to do mostly with the low rate of tax collections, due to the narrow tax base while noting that Sri Lanka’s state expenditure ratio to GDP is well below the global median. With Sri Lanka becoming a middle-income country, he backed focusing more on wealth taxes such as capital gains and property taxes while moving away from regressive, indirect taxes, which account for 75 percent of the country’s tax income.