Jan.-July budget deficit surpasses trillion rupees 

• Pandemic-related restrictions continue to bite into state revenues
• Expenditure up due to pandemic-related and welfare spending 
• Full-year budget deficit expected at over 10% of GDP

The pandemic-induced economic restrictions inflicted widespread pain on both private and public incomes and the latter sent the fiscal deficit over a trillion rupees during the first seven months of 2021, as the government lost over Rs.1.5 trillion in tax revenues.

According to the latest fiscal data available through the first seven months of 2021, Sri Lanka has recorded a budget deficit of Rs.1,014.5 billion, compared to Rs.872.6 billion in the same period in 2020. This marked an increase of Rs.141.9 billion from last year’s level, as the government lost sizeable tax revenues and incurred unexpectedly higher expenses on virus containment measures.

Basil Rajapaksa in his maiden speech made in Parliament in early September, since becoming the Finance Minister, said the state revenues had fallen by between Rs.1,500 billion to Rs.1,600 billion, against the estimates. 
The data from both the ministry and Central Bank showed that the state revenues for the first seven months had been Rs.798.9 billion, slightly up from Rs.763.2 billion in the same period in 2020. 

For the full year, the government budgeted total revenues of Rs.2,019 billion, expenditure of Rs.3,594 billion and a budget deficit of Rs.1,565 billion, equivalent to 8.9 percent of gross domestic product (GDP). 

In June, amid the third wave of the virus, the government sought to raise the spending limit by Rs.200 billion for the year, which made up to about 1.2 percent of GDP, sending the total budget deficit to 10.1 percent of GDP, if there is no change in revenues. But with the shortfall in revenues, the deficit could be even higher. 

The latest data for the seven months showed that the total expenditure and lending minus repayments was Rs.1,814.4 billion, compared to Rs.1,637.9 billion in the corresponding period in 2020, which made up to a Rs.176.5 billion increase. 

The recurrent expenditure rose to Rs.1,578.0 billion, from Rs.1,457.7 billion, while the capital and lending minus repayments rose from Rs.180.2 billion to Rs.236.3 billion.    

Capital expenditure so far is only a fraction of the Rs.1,070 billion budgeted for the full year.  As the fiscal management became more daunting, due to the pandemic this year, adding to the expanding deficits, which are going to be difficult to finance from both foreign and local financing sources, the government has resorted to self-imposed austerity measures by way of freezing hiring to the state sector, suspending new projects and targeting subsidies and other welfare. The state sector salaries and pensions absorb 84 percent of the tax revenues.  There could be some tweaks made to the tax policy in the upcoming budget in November to strengthen the state revenues and thereby to narrow the bloated, unsustainable budget gaps, which ultimately leads to indebtedness.  Giving cues, the six-month roadmap presented by the Central Bank on Friday proposed the government to raise the corporate income tax rate to 28 percent, from the current 14 percent on exporters who fail to convert their dollar earnings to rupees.