Tax policy stability reflected in Budget 2021 hailed despite ideological biases

• Govt. cuts recurrent expenditure while doubling capital expenditure laying platform for future revenues 

Amid noise over the lack of additional revenue streams and the debates over the continuation of the stimulus path kick started end of last year, a deeper look at the Budget 2021 reflects that it doesn’t promote fiscal profligacy and has allocated more money for investments, which will generate increased revenues to the State.

The Budget 2021 has cut down on recurrent expenditure— of which the majority consists of public sector salaries and interest payments— to 14.4 percent of the gross domestic product (GDP) from 15.3 percent of GDP in 2020, a post budget analysis by First Capital Research (FCR) showed. 

“Salaries and interest payments are expected to be the largest components of recurrent expenditure amounting to 35.7 percent and 33.9 percent of recurrent expenditure respectively,” the research firm said.

While the feedback on the Budget 2021 showed the typical partisanship and prejudices of the legislators across the isle, it broadly received positive responses from analysts and economists despite their ideological biases.  
At the outset, they were seen commending the continuation of the tax policy, which was set in motion early this year, in line with the government’s broader fiscal policy.

“The absence of any shockers or any wow effects itself is a sign that the Budget 2021 is a success, a major break from the traditional ones which were not most of the times aligned with the governments’ policy framework. A recent example of this is the complete policy U-turn, which led to the death of electric vehicle market in Sri Lanka,” an economic analyst who preferred anonymity stressed.

“But the key for its (Budget 2021) ultimate success hinges on implementation”, he added.

Meanwhile, FCR appreciated the government’s attempts at simplifying the tax system while enhancing tax collection through investments on tax administration. 

“The government’s tax simplification policy is taken forward as it plans to combine multiple taxes to GST while also investing further on the RAMIS system.” 

The Budget 2021 also appears to be free of diktats by multilateral lending agencies such as the International Monetary Fund (IMF), who typically push countries towards austerity by way of higher taxes and tighter monetary policy, which often tends to kill growth and leave people impoverished.

The budget 2021 is a direct opposite to this policy prescription, which Sri Lanka experimented from 2016 to 2019. 
Meanwhile, the Budget 2021 proposes to increase the planned spending on public investments to 6.1 percent of GDP, which amounts to Rs.1, 070 billion from a low of 2.6 percent of GDP in 2020.  

This reinforces the government’s heavy focus on continuing its infrastructure drive—this time both hard and soft—as seen from the desire to allocate Rs.10, 000 million for techno-parks as eco-friendly new cities are aimed at increasing export earnings from technology, knowledge and professional services.