Govt. likely to raise some taxes to balance loss of revenue from stimulus package

• ICRA Lanka highlights need to cut recurrent expenditure to avoid fiscal slippage 
• Acknowledges potential demand boost from stimulus package 

The government may raise some taxes to compensate the loss of tax revenue stemming from the sweeping tax cuts announced about three weeks ago aiming to stimulate economic growth, according to ICRA Lanka, the local arm of credit rating agency Moody’s Investors Service.

“Reduction in tax revenue is highly unlikely to be compensated by raising non-tax revenue in the short-run. Therefore, we expect the government may consider raising some taxes to counterbalance the loss in revenue. 

Furthermore, increasing profitability of SOEs can also improve non-tax revenue,” ICRA Lanka said in its latest analysis on the Lankan economy.
The government estimates revenue loss from the tax cuts at Rs.500 billion while Moody’s estimates the hit to revenue to be around 1 to 1.5 percent of GDP.
Sri Lanka’s total government revenue in 2018 was Rs.1.9 trillion. 

ICRA Lanka also highlighted the need to reduce the government’s recurrent expenditure to avoid fiscal slippage in light of the estimated loss to the government revenue due to the tax cuts.

Interest payments and salaries and wages of the public sector account for about 71 percent of the recurrent expenditure. About 30 percent total recurrent expenditure goes to pay salaries and wages of state sector employees.

Sri Lanka spent just over Rs.500 billion, an amount roughly equal to the fiscal stimulus on interest payments to treasury bond holders alone in 2018. 
ICRA Lanka pointed out that reducing interest payment component is extremely challenging amid a widening fiscal deficit as the government requires continuing issuing bonds. 
ICRA Lanka believes the government should attempt to restructure debt to bring down the debt servicing cost.  

Acknowledging the stimulus package could boost the aggregate demand and corporate profitability in the short run, ICRA Lanka cautioned that Sri Lanka should broaden the tax base and continue fiscal consolidation to avoid macroeconomic instability to benefit from the tax buoyancy effect.

ICRA Lanka cited Vietnam as an example where the low-tax environment has not translated to increasing tax revenue, compared to the size of the economy.
In the span of four years from 2012, Vietnam’s tax incentives for businesses accounted for 7 percent of the total state budget revenue. However, revenue from corporate income tax fell sharply from 6.9 percent of the GDP in 2010 to 4.3 percent in 2016.