State revenue gets boost from inflation and tax hikes

Finance Ministry in Colombo

• 7-month revenue up by 37% from last year while budget deficit edges down 

State revenues received a tailwind from the recently introduced tax hikes and inflation that climbed to 70 percent levels helping the government to control the unrestrained budget deficit, which has been expanding at a faster clip in the two years of the pandemic.
According to the most recent Treasury data up to July, the total government revenue including grants climbed 36.7 percent from a year ago to Rs.1, 093.3 billion.
The revenues from taxes generated Rs.1,092.2 billion compared to Rs.798.9 billion in the same period last year as the tax collections had a sizable impact from the surge in inflation, which boosted the cash flows of companies, while the higher taxes also started kicking in from June onwards.

Meanwhile, expenses rose by 15.9 percent to Rs.2, 103.4 billion in the seven months from a year ago with recurrent expenditure rising by a similar percentage to Rs.1, 827.5 billion.
The capital expenditure minus repayment rose by 16.7 percent to Rs.275.8 billion.
After the economy collapsed in March firing runaway inflation, the government raised tax rates effective from June before raising them again in August while keeping a closer tab on the expenditure in a bid to contain the budget deficit which had been a main source of inflation and thereby causing instability in the Sri Lankan economy.

As a result of these first round of revenue reforms and other factors that contributed to keep a check on the budget deficit, the government managed to report a budget deficit of Rs.1, 010.1 billion in the first seven months, slightly down from Rs.1, 014.5 billion in the same period last year.

As one of the crucial prior actions to qualify for the US$ 2.9 billion economic bail-out package from the International Monetary Fund, Sri Lanka in August presented an interim budget aiming to bring down the budget deficit to 9.8 percent of GDP, which contained another round of tax hikes before presenting the 2023 budget last month aiming to cut the deficit to 7.9 percent of the GDP.  But, economists and analysts opined that the revenue estimates contained in the 2023 budget were highly optimistic given its 63 percent revenue enhancement target when the economy was projected to contract through next year.

Meanwhile, in the seven months, domestic financing of the budget deficit fell to Rs.1, 053.4 billion compared to Rs.1, 204.6 billion in the same period last year, while the foreign financing of the deficit recorded a net repayment of Rs.43.3 billion in rupee equivalent compared to a net repayment of Rs.190.1 billion in the same period last year.
The outstanding government debt increased to Rs.24.7 trillion by June end from Rs.17.6 trillion at the end of 2021, as the sharp depreciation in the rupee against the dollar since March caused the rupee value of the foreign currency debt to inflate.