January-September budget deficit widens despite increased tax revenues

• Deficit in the overall budget widens to Rs.1,613.58bn in the nine months from Rs.1,244.41bn YoY
• Tax revenue up over 50% to Rs.1934bn amid upward revisions to tax rates and introduction of new taxes
• However, total expenditure up by 38.5% to Rs. 3,732.33bn with recurrent expenditure surging 44.7% to Rs.3,327.68bn
• Primary balances records a surplus of Rs.123.7bn compared to a deficit of Rs.317.04bn

Despite increased tax revenues, Sri Lanka’s budget deficit widened in the first nine months to September 2023 compared to the same period last year, driven by a surge in expenses amid sharply rising prices.

According to latest Finance Ministry data, the Treasury had collected Rs.2,118.76 billion from taxes and grants compared to Rs.1,450.38 billion recorded for the same period last year. This translated into a 46.1 percent increase between the two periods. 

Taxes brought in Rs.1,933.98 billion, up as much as 50.7 percent in a sign that the higher tax rates and the new taxes imposed from June last year are reversing the low tax regime of the previous government which was faulted for cutting taxes and causing the economic crisis. 

Sri Lanka raised both corporate and personal income taxes, raised Value-Added Tax three times and introduced new taxes such as the Social Security Contribution Levy to rake in as much as possible revenue, both to refill the virtually empty government coffers and also to comply with the International Monetary Fund (IMF) programme conditions. 

While the government has certainly made more money out of these measures, they have put a significant damper on consumption, production and investment activities, significantly weighing on the economy’s slow recovery. 

In response to a question about the impact of consistently high taxes on the economy, Central Bank Governor Dr. Nandalal Weerasinghe expressed the view that he does not believe higher taxes necessarily hinder the recovery or growth of the economy; instead, he emphasised that interest rate is 
the key factor.

The Monetary Policy Board has delivered back-to-back rate cuts, including the most recent one in November, bringing the total rate reduction for the year to 650 basis points to accelerate the recovery of the economy. 

Despite this, sentiments remain dampened among both businesses and households, with rising costs and taxes significantly straining their budgets, as indicated by both business and consumer confidence surveys.

Meanwhile, during the first nine months of 2023, the total expenditure increased by 38.5 percent to Rs. 3,732.33 billion from the same period last year. 

The recurrent expenditure, encompassing State sector salaries, pensions, interest payments, and other items, witnessed a substantial increase of 44.7 percent, reaching Rs. 3,327.68 billion. Capital and lending minus repayments stood at Rs.404.65 billion, up 2.5 percent. 

These developments widened the deficit in the overall budget to Rs.1,613.58 billion in the nine months from Rs.1,244.41 billion in the same period last year. 

However, the primary balance – the overall balance excluding net interest payments – recorded a surplus of Rs.123.76 billion compared to a deficit of Rs.317.04 billion recorded in the same period last year. 

The revised budget estimates for 2023 showed that the government expects the overall deficit to reach Rs.2,402.0 billion or 8.5 percent of the Gross Domestic Product (GDP) and Rs.2,401.0 billion or 7.6 percent of GDP in 2024 barring the Rs.450.0 billion earmarked for State bank recapitalisation.

Sri Lanka is pursuing a revenue-based fiscal consolidation strategy as part of its 17th IMF programme, aiming to reduce the medium-term fiscal deficit to approximately 3.5 percent of GDP.