Punishing the poor with skyrocketing indirect taxes

Sri Lanka’s 2024 budget, touted as “revolutionary,” punishes the poor with sky-rocketing indirect taxes to reward owners of government debt, by allocating the largest share of expenditure on domestic interest payments and servicing International Sovereign Bonds. This means that the public will pay more for essentials like fuel and electricity, while the unproductive rich owning government debt get even richer. The budget also ignores massive debt fraud and tax evasion, appeasing rentier interests over public needs. It slashes essential education funding while pouring money into unproductive road projects. Public assets are on the auction block, and 60 new laws are proposed to lock in this neoliberal nightmare. The result is impoverishment, higher unemployment, a deeper economic crisis, and a country on the brink of collapse with over half of the population sinking below subsistence.  
The budget’s underlying motive appears to be the relentless extraction of indirect taxes from the public, with the proceeds channeled towards rewarding an unproductive rentier elite holding the country’s domestic and foreign debt hostage. This manoeuvre further escalates Sri Lanka’s debt burden by proposing to nearly double the government’s borrowing limit, increasing foreign borrowings and blatantly disregarding the Auditor General’s Department’s findings revealing the misappropriation of over two-thirds of the foreign borrowings between 2006 and 2021 (This was also corroborated in the International Monetary Fund’s (IMF) Governance Diagnostic on Sri Lanka).  

2024 Budget Scoffs IMF’s Revenue Proposals
Despite IMF’s demand to prioritise non-inflationary methods for boosting tax revenue, Sri Lanka’s 2024 budget proposes a significant increase in indirect taxes on goods and services, disproportionately burdening the working population. In its second review of Sri Lanka’s Extended Fund Facility, the IMF advocated for enhancing tax administration by broadening the income tax base, recovering unpaid taxes, and gradually phasing out tax breaks for Board of Investment (BOI) firms. These demands, which mark a departure from previous IMF programmes, were likely prompted by public campaigns and protests organised by the independent trade union movement. Whether the IMF is genuinely committed to upholding these demands remains to be seen.  
The 2024 budget however, proposes an impractical 47% increase in tax revenue to Rs. 4.13 trillion, primarily driven by a projected 62% surge in inflationary indirect taxes on goods and services. It implies a significant rise in the tax burden on the working population, estimated to be around Rs. 13,500 per month. It effectively erases the Rs. 10,000 salary increase for public sector employees even before factoring in the inflationary erosion of real wages in 2022-23. Furthermore, the tax proposals will raise the poverty threshold for a family of four from Rs. 64,000 per month in August 2023 to over Rs. 83,700. The United Nations Development Programme (UNDP) recently revealed that approximately 56% of Sri Lankans - a staggering 12.34 million people - are multi-dimensionally vulnerable, facing a combination of deprivations in areas including health, education, living standards, and personal security. The 2024 budget proposals will therefore exacerbate the already dire poverty situation, pushing more people into the depths of economic ruin, and further tearing the country’s already fragile social fabric. 

Who Benefits from Inflationary Taxes?
The lion’s share of the tax revenue through ‘extortionary’ indirect taxes will be enriching the domestic rentiers, the owners of the government’s domestic debt, by servicing their interest receipts at the expense of the public’s means of survival. It is startling to note that interest payments will increase by 25% to Rs. 2.7 trillion (or 8.4% of GDP in 2024, up from 5.9% in 2021), surpassing the budget deficit of Rs. 2.4 trillion! Moreover, approximately Rs. 2.5 trillion or 94% of the total interest expenses will be financing the domestic interest payments even after wiping out 50% of EPF/ETF and pension funds’ incomes through domestic debt restructuring (DDR) in next 15 years (see https://www.ft.lk/columns/DDR-wipes-out-half-of-EPF-ETF-incomes-An-act-of-financial-terrorism-by-CBSL/4-753829). This further reiterates the position of the Independent Trade Union Movement of Sri Lanka that the DDR will not relieve the government’s domestic debt burden, given that the business elite in the private sector purchased over 75% of the high interest yielding treasury bonds issued in 2022, whilst the pension funds only purchased 21% of the total.  

Salaries and Wages Vs Interest Cost
The astronomical surge in interest payments also shatters the myth that salaries and wages of government employees are the primary impediment to fiscal consolidation. Wages only account for Rs. 1.1 trillion in expenses in 2024, while interest expenses dwarf this figure by 160%. Therefore, it is crucial to reduce the interest burden on domestic debt by slashing the yields of the privately held treasury bonds to current market levels, hand in hand with reducing high fixed deposit rates issued in 2022-23 by commercial banks. It holds far greater promise for fiscal consolidation while preserving and improving banking sector stability and growth, than downsizing the public sector workforce already facing tremendous economic distress. 

Sri Lanka’s Interest Cost By Far The Highest In The World
Sri Lanka holds the dubious distinction of dedicating the highest proportion of its government revenue to interest payments among nations worldwide. In 2023, a staggering 77% of the government’s income was allocated towards servicing interest cost, which witnessed an unprecedented surge from 35% in 2015. Ghana occupies the second place in the list and only channeled 45% of its revenue towards interest payments in 2021, significantly below that of Sri Lanka. In stark contrast, the global average for interest payments as a percentage of government revenue was only 5.7% in 2021. Even Argentina, a country notorious for its debt woes, manages to keep its interest payments to a relatively low 7.8% of its revenue. This inordinate focus on repaying domestic rentiers, the holders of government debt, by taxing ordinary citizens, comes at the expense of addressing Sri Lanka’s pressing socioeconomic issues like collapsing production, unemployment, poverty, the unbearable price level of essentials and collapsing public services. 

 
Increasing Unemployment with Indirect Taxes
In his budget speech, the unelected President acknowledged the alarming trend of SME closures, stating that 20% of these businesses have shut down this year. This staggering figure translates to a potential 10% island-wide unemployment rate stemming from the SME sector alone, considering that approximately 45% of Sri Lanka’s workforce relies on SMEs for employment. The proposed tax measures – particularly the extension of 18% VAT on electricity, fuel and water – will exacerbate this trend, compounding the economic collapse.  

The People, Subsidising Electricity to Tourists and Non-Tradables
Sri Lanka’s current energy landscape is characterized by antagonism between the needs of its citizenry and the demands of external creditors. An estimated 10% of Sri Lankan households representing 700,000 families have plunged into darkness due to prohibitively high electricity tariffs, demanded explicitly by the IMF to defend the interests of foreign creditors, primarily to secure the funds necessary for debt servicing.  
Also, businesses, including those from the non-tradable sector that do not earn foreign exchange, continue to enjoy subsidised electricity tariffs. The sector accounts for nearly 70% of Sri Lanka’s GDP. The new tariff structure is therefore further incentivising the unproductive sector which contributes to the foreign exchange crisis and shortages. On the other hand, hotels, catering to foreign tourists, bask in the luxury of subsidised electricity, paying a mere Rs. 28/unit, while ordinary households exceeding 181 units monthly face a peak-time tariff of Rs. 106/unit. This disparity is further amplified when compared to neighboring India, where certain states offer free electricity to low-consumption households up to 200 units monthly. In essence, the Sri Lankan public is forced to subsidise not only the interests of foreign creditors but also the electricity consumption of foreign tourists and businesses that not even contribute to the nation’s foreign exchange earnings. 

Sri Lanka holds the dubious distinction of dedicating the highest proportion of its revenue for interest payments. In 2023, a staggering 77% of the government’s income was allocated towards servicing interest cost. Even Argentina, a country notorious for its debt woes, manages to keep its interest payments to a relatively low 7.8% of its revenue

Tax Evasion, Foreign Debt Fraud and the Cost of Tax Holidays
The 2024 budget blatantly ignores the rampant tax evasion and fails to address the alleged foreign debt fraud amounting to a staggering US$ 41.1 billion between 2006 and 2021, as meticulously documented in the Auditor General’s Department’s 2021 Annual Report. The IMF, in its Governance Diagnostic asserted that the misappropriated debt has been skillfully stashed offshore. Despite this compelling evidence, the government remains apathetic, taking no action to legally prosecute those involved or recover these funds. These glaring omissions paint a clear picture of the government’s deliberate disregard for the IMF’s recommendations on taxation, prioritising the interests of the unproductive rentier elite they represent.  
In essence, Sri Lanka’s economic revival hinges on a fundamental shift in policy, one that prioritises state-led industrialisation to address market failures. This shift should maximise positive externalities, address indivisibilities and pursue dynamic comparative advantages.