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he government has managed to contain its budget deficit to 3.5 percent of gross domestic product (GDP) during the four months to April 2014 due to the expanding economy but the deficit in absolute terms has edged up to Rs.347 billion from Rs.343.5 billion a year ago, the Finance Ministry’s mid-year fiscal report showed.
This was an improvement from the 3.9 percent budget deficit recorded during the corresponding four months in the previous year and 5.9 percent for the full year.
The government has been showing the much-needed fiscal discipline during recent times and was able to increase its revenues by 11.5 percent to Rs.345 billion. This is despite many experts and agencies claiming that the government revenue projections are overly optimistic.

Although the tax revenue was up by 8.5 percent to Rs.310.6 billion against the corresponding four months in 2013, this was short by 15.6 percent against the estimated Rs.368 billion.

Non-tax revenues were up by 48.7 percent to Rs.34.5 billion due to profits and dividends from state-owned enterprises and the growth in social security contribution from public servants. However, there was a decline in the Central Bank profit transfers.  

Meanwhile, the government expressed much optimism in further increasing its revenues and tightening the expenditure during the second quarter, to maintain the annual budget deficit at 5.2 percent. The government projects to trim its fiscal deficit to 3.8 percent by end-2016.

Under direct taxes, the corporate and non-corporate income tax grew by 9.2 percent to Rs.19.7 billion due to the gradual completion of tax holidays by many companies and the buoyant performance of the banking and financial institutions, food and beverages, manufacturing, tourism and services, despite the impact of relative lower private sector credit growth.

The pay-as-you-earn (PAYE) tax grew by 1.6 percent to Rs.7.4 billion despite the lower rate structure and higher threshold inbuilt in the post-2010 tax system.

However, the total direct taxes decline by 8.4 percent to Rs.57 billion predominantly due to the 20.2 percent decline in tax on the interest income and the 5.0 percent contraction in the Economic Service Charge (ESC).

Among the indirect taxes, the value-added tax (VAT) showed a 6.3 percent increase to Rs.84.9 billion. This was possible due to the improved domestic economic activities and the extension of the VAT net on the wholesale and retail sectors.

The import-related taxes too increased by Rs.20.4 billion during the four months reflecting an enhancement of the domestic demand.

However, it was only this week that HSBC expressed its worry over Sri Lanka’s poor consumption growth despite the multi-year low lending rates.

State overshoots expenditure budget The State has yet again overshot its expenditure budget during the first four months of this year by 6.0 percent to Rs.692.8 billion.   The government has spent Rs.144.8 billion on salaries, the second biggest government recurrent expenditure. This was 14 percent or Rs.18 billion in excess of what it spent last year, mainly due to the increase of the cost of living allowance by Rs.1,200 and the full impact of the special allowance made in 2013. Sri Lanka’s public sector was more than doubled to 1.3 million between 2006 and 2013. Total pension payments amounted to Rs.43.6 billion during the first four months of 2014, in comparison to Rs.41.7 billion in the same period in 2013. The interest payments on foreign and domestic debt amounted to Rs.157.98 billion – the biggest recurrent expenditure – and was decreased by 10.4 percent over the corresponding four months in 2013, due to relatively low interest rates on government securities. The government’s welfare payments and subsidies increased by 37 percent to Rs.30.6 billion. The welfare payments are a powerful method of preserving the once voter base. Meanwhile, the public investment expenditure was slightly above its 2013 levels at Rs.193.8 billion but lesser than the estimate of Rs.209.4 billion for the four months. In 2013, with the pressure to meet the target budget deficit, the government resorted to cutting its capital expenditure heavily towards the end of the year.