Now is not the time for fiscal consolidation as it kills growth incentive

• Nation Lanka Equities says it would be unwise to take back tax cuts announced last year
• Says tax cuts act as stimulus for biz to return to normalcy and make a leap forward
• Points out tax income in 2020 fell not because of tax cuts but due to lower economic activity
• Claims it was stagnant GDP growth last seven years, which negatively affected debt sustainability, and not the debt itself

While fiscal consolidation should be the medium term agenda for the government, now is not the time to push it through, as it takes away the biggest incentives available for accelerating economic growth, according to a research arm of a Colombo-based equity brokerage. 

Taking a more pragmatic view of the situation at hand, Nation Lanka Equities said it would be unwise to take back the tax cuts announced last year, which act as a predominant stimulus to the people and the businesses to return to their normal course of activities and also to make a leap forward. 

Issuing a report titled ‘Sri Lanka: Forging ahead amidst adversity,’ the researchers said the tax income fell in 2020 not because of the tax cuts but “due to lower economic activity,” partly coming from the absence of large ticket imports from automobiles and other non-essential imports, which typically attract higher tax rates. “The pandemic destroyed the growth spurt, which began in 2020 and strained the broad economy, since March 2020. Therefore, focusing on fiscal consolidation at this juncture will send the economy into a tail spin and while understanding the ground situation we endorse the pro-growth fiscal budget of 2021,” said Danushka Samarasinghe and Anjula Nawarathna, the authors of the report. 

“However, an IMF programme is likely to envisage an increase in indirect tax rates, which would give a death blow to the informal economy, which in our opinion would be disastrous to domestic economic recovery,” the duo said in reference to a situation had an IMF programme was in place. 

Nation Lanka Equities is optimistic that Sri Lanka would achieve 5.3 percent growth in 2021 as “the small and resilient US$ 80 billion economy could easily jumpstart with reopening for tourism, locally funded infrastructure spent and FDIs into Colombo Port City development”. Referring to doubts on debt sustainability raised by certain factions, the equity brokerage said it was the sticky GDP growth in the last seven years, which negatively affected the debt sustainability, and not the debt itself.