Budget deficit hits Rs.1.33tn end of 3Q as revenue dries up

• Pandemic and 2019 tax cuts blamed for revenue shortfall
• Expenditure up but some restraint seen over the same period last year
• This year’s budget deficit estimated at 11.1% of GDP, much higher than original estimates
• Govt. expects to bring down deficit to 8.8% in 2022

The fiscal deficit continued to expand in the nine months through September 2021 on the back of revenue shortfalls, which were sharper than expected due to the pandemic-induced economic restrictions and sweeping tax cuts in 2019, and the expenses which kept going up, despite some restraint seen over the same period last year. 
According to the latest fiscal data made available by both the Finance Ministry and the Central Bank for the period ended September 30, 2021, Sri Lanka recorded an overall budget deficit of Rs.1,328.2 billion compared to Rs. 1,153.8 billion recorded in the same period in 2020. 

The deficit shot up during the period under review despite the targets set at the beginning of the year as large sections of the economy had to be closed down since around April this year due to the new waves of the virus, which struck the country pushing revenue targets off course by large amounts as tax incomes fell. 

The tax income during the nine months rose by 4.1 percent to Rs.951.8 billion in the period under consideration over the same period last year, although this achievement diverged by a large margin from what was expected to collect in the year. 

This was reflected in the 1.5 percent contraction recorded in the economy in the third quarter, which came as bit of a surprise but pronouncing the impact the virus restrictions had on the broader economy. 

Some sections however have been making a strong argument that the 2019 tax cuts were the key culprit for the revenue losses and the resulting fiscal woes the country experienced during 2020 and 2021 as they say it was uncalled for at that time as the economy was on course to a nascent recovery after the Easter attacks in that year. 
However, others argue that the tax cuts were offered by the new administration to stimulate the economy (which was for five years and losing steam), and to unshackle businesses and individuals from what was referred to as ‘the revenue based fiscal consolidation’ path which the then government subscribed to under an International Monetary Fund (IMF) backed package of reforms.  

This may be one of the key reasons why the present government is trying to avoid seeking IMF support to overcome the pressing foreign currency and debt repayment troubles facing the country at present, as such policies could deal a lethal blow to an already unpopular government and spark widespread outrage among the masses.

Meanwhile, the total revenue including grants for the nine months were reported at Rs.1,052.2 billion, slightly up from Rs.1,031.7 billion in the same period last year. 

On the expenses side, there was some restraint in recurrent expenditure compared to the previous year’s as it rose only by 7.7 percent to Rs.2,087.3 billion amid the heavier unexpected expenditure the Treasury had to incur in respect of virus containment and also to give cash to those who lost livelihoods due to the lockdowns. 

Meanwhile, capital and lending minus repayments were at Rs.293.1 billion for the nine months compared to Rs.246.7 billion in the same period last year. 

The government estimates to end the year with a revised fiscal deficit of 11.1 percent of Gross Domestic Product, at a much higher level than it expected at the begining of the year.

The budget presented in November aims to narrow the fiscal deficit to 8.8 percent in 2022, but some have already pointed out that some revenue proposals were too ambitious.