Jan-July budget deficit up by Rs.189bn; tax income picks up on economic recovery

• Fiscal deficit in first 7 months of 2020 at Rs.873bn, up from Rs.684bn last year
• Month-on-month data shows tax revenue gaining momentum
• Recurrent expenditure picks up from June but discipline maintained broadly
• Capital expenditure becomes victim of deficit reduction 

The deficit between the government’s revenue and expenditure for the seven months ended July 2020, expanded by Rs.188.5 billion, declining from the deficit of Rs.214 billion recorded for the first six months, while the data showed tax revenues making month-on-month gains with the recovery in economic activities.

The Finance Ministry data showed a fiscal deficit of Rs.872.6 billion from January through July, compared to Rs.684.1 billion in the corresponding period in 2019.

Revenue from taxes remained under pressure throughout this year, initially due to the broader tax cuts afforded to both businesses and consumers while the bigger impact came from the coronavirus lockdowns, which damaged the incomes of businesses and individuals alike, depressing tax revenues.  

Albeit lagging behind the year earlier levels, the total tax revenue of the government rose by Rs.89.6 billion in July, from Rs.72.5 billion in June, indicating that economic activities are gaining momentum.

The tax revenues for the first seven months is still off by Rs.274 billion, as the total tax revenue for the seven months ended in July was Rs.670.4 billion, compared to Rs.944.4 billion in the corresponding period in 2019. 
The government earned total revenues of Rs.765.4 billion, which includes non-tax revenue and grants from January through July, while the expenses for the period stood at Rs.1.64 trillion. 

Despite the short to medium-term impact on the fiscal deficit, taxes should remain low until businesses recover, as higher taxes hinder incentives for investments and consumption, stifling the recovery and job creation by the private sector, economic analysts say. 

“…it is heartening to note that the government has well understood that of the two deficits faced by Sri Lanka, it is the trade deficit (or external current account deficit) that needs immediate attention and not the fiscal deficit,” said Waruna Singappuli, an economic analyst, in a recent opinion piece published on Daily FT.  

According to Singappuli, what has been ailing the Sri Lankan economy is the expanded deficit in the external current account and not the deficit in the fiscal account. He advocates for a slightly stretched budget deficit at least for the next three to five years, to make the investments on creating industries and businesses, which can produce for the global market and thereby help close the deficit in the external current account. 

Such a strategy would not only create jobs but will also invite private investments from both home and abroad, which will put the economy on to a high growth path, creating higher incomes for people and tax revenues to the government. 

“While some are concerned about the increase in fiscal deficit, I agree with the government’s rationale that at this point in time, the economy needs to be revived. The economic slowdown from fiscal tightening over the last few years has been aggravated by the COVID-19-related repercussions. Therefore, it is imperative that concessions are provided and an economic recovery is facilitated,” Singappuli added.

Meanwhile, the recurrent expenditure, which makes up of more than three quarters of the total government expenditure, rose by Rs.220.3 billion in July, to a total of Rs.1.46 trillion. This is in comparison to Rs.1.34 trillion in the corresponding period in 2019. 

Despite the heavy expenditure having to be made during the coronavirus, the government appears to have broadly exercised discipline in its recurrent expenditure. 

However, the biggest victim of all is the capital expenditure, as the capital and lending minus repayments had been slashed by Rs.193.2 billion during the first seven months to Rs.180.2 billion from the same period last year, to minimise the budget deficit. 

Curtailing public investments has an adverse impact on future economic growth.

It is expected that the fiscal deficit for 2020 would reach 8 percent of gross domestic product (GDP) this year, as overall economic output remains far less than the potential, due to the coronavirus damage during the first half of the year.