Budget 2021 reflects govt.’s growth-oriented approach

Prime Minister and Finance Minister Mahinda Rajapaksa presenting the Budget for 2021 in Parliament yesterday

• Broadly sticks to policies spelt out in govt.’s policy framework ‘Vistas of Prosperity and Splendour’
• Despite speculations, no major increases in taxes or new taxes announced 
• Expects higher tax revenue through economic expansion 
• Broad tax concessions, concessionary loan schemes and incentives announced for domestic industries 
• Govt. expects economy to grow 5.5% in 2021; budget deficit to narrow to 4% by 2025

The maiden budget of President Gotabaya Rajapaksa’s government presented yesterday in Parliament by Prime Minister Mahinda Rajapaksa, who is also the country’s Finance Minister, broadly aligned with the policies spelt out in the government’s policy framework ‘Vistas of Prosperity and Splendeour.’

Despite speculations that the government would opt for increase in taxes and/or slap new taxes to strengthen its coffers to plug an ever-expanding hole in its finances, the Budget 2021 continued on the path where the priority is given to stimulate investment and growth while maintaining a stable tax policy.

President Rajapaksa’s government introduced sweeping tax concessions in November last year to reinvigorate economic growth, which was stalled in the 2015-2019 period as Sri Lanka’s economic policy direction during that period revolved more around austerity than growth, largely due to the country’s sizeable foreign debt pile.

The new policy direction was actually showing some degree of success in the first couple of months of 2020, with higher private credit and increased economic activities. But the outbreak of COVID-19 in March destroyed the momentum.

However, the lower taxes and dovish monetary policy have helped businesses to recover fast after the first wave of COVID-19 and the lockdowns that ended mid-May. Since July, Sri Lanka’s key economic indicators – merchandise exports, industrial production and foreign remittances—recovered strongly to almost pre-COVID-19 levels until the second wave struck in early October, which disrupted economic activities again to a certain extent. As far as the new taxes go, the Budget 2021 only mentioned one such tax—Special Goods and Services Tax— and no increases to any existing taxes were announced.

Prime Minister Rajapaksa said the Special Goods and Service Tax will be introduced “in place of the various goods and service taxes and levies, imposed under multiple laws and institutions on alcohol, cigarettes, telecommunication, betting and gaming and vehicles, which account for 50 percent of the income from taxes and levies.”

However, the Budget 2021 announced a host of tax breaks, concessionary loan schemes and various other incentives to encourage domestic industries to up their game in order to boost exports and cut imports.

Also, several measures were introduced including cess taxes and special commodity levies on imports to protect local industries, while removing import taxes on raw materials not available in the country to 
boost production. 

The estimated government revenue, including grants, for 2021 is Rs.2, 029 billion—which is an increase from Rs.1, 588 billion in 2020— and out of which, Rs.1,724 billion is estimated as tax revenue. The total expenditure for 2021 is estimated at Rs.3, 594 billion. 

“I believe that we can manage this budget gap, due to enhanced opportunities to reissue local and international currency denominated debt at maturity. Interrelated development proposals presented under this budget are appropriate for rural as well as urban settings, traditional as well as modern contexts, micro financial as well as capital market objectives will lead to an increase of the present low level of economic capacity utilisation,” Prime Minister Rajapaksa said.

Meanwhile, Sri Lanka’s total payments in 2021, including debt repayments, are estimated at Rs.4, 808 billion.
The government expects the economy to grow 5.5 percent and to reduce the budget gap increasing the economic growth up to 6 percent and increasing government revenue from its current level of 9.7 percent of the gross domestic product (GDP) to 14.1 
percent of GDP.

“By 2025, the budget deficit is targeted to be 4 percent due to growth in tax revenue through the expansion of the economy and the trust placed on the management of public expenditure and public enterprises. 

I request all of you to give your blessing to the development budget aimed at economic revival and poverty reduction,” Premier Rajapaksa said.