Budget deficit narrows to single digits on higher taxes, recovery in economy

Sri Lanka has managed to trim its budget deficit to 8.3 percent of the Gross Domestic Product (GDP) in 2023, from 10.2 percent levels in 2022. This is with the government having raised taxes heartlessly and defying any logic to do so in return for a pittance of US$ 2.9 billion bail-out money from the International Monetary Fund (IMF), spread over four years.  

In nominal terms it translated into Rs.2,282.3 billion deficit compared to a deficit which wasn’t too far at Rs.2,459.9 billion just a year ago during when the economy gutted due to the social and political chaos and also the short lived foreign currency shortage.

In the preceding two years, fiscal deficit soared just like in any other nation on earth as governments around the world had to spend record sums of money to provide support to the people and the economies affected by the pandemic.

In 2020, the budget deficit in Sri Lanka was 10.7 percent of GDP going up to 11.7 percent in 2021 as the economic interruptions were severe due to the third and the fourth waves of the virus at the time which both caused revenues to come below expectations while the government had to expense more to keep the economy humming amid the pandemic.

In 2019, when former President Gotabaya Rajapaksa took over the country and when the country was under its sixteenth IMF programme, the budget deficit was at a high of 9.0 percent, while the taxes were also high.
However, so called experts, specially the Colombo based think-tanks and many others faulted the then tax cuts which were announced in December 2019 for the economic collapse in 2022 when in fact the deficit was already explosive back then at 9.0 percent of GDP while the taxes were high.

The then private sector and the people were under a lot of pressure by he then higher taxes and were clamouring for lowering the taxes, but they changed tune two years later as if they never existed two years before after enjoying two years of historically low taxes.

The government recorded revenue of Rs. 3,074.3 billion in 2023, which was a 52.8 percent growth from 2022 and equivalent to 11.0 percent of GDP.
The government aims to raise this percentage to 13.0 percent in 2024 and perhaps further up to 15.0 percent in 2025.
The tax revenues rose by 55.4 percent to Rs. 2,720.6 billion in 2023.
The expenses and net lending rose by 19.8 percent to Rs. 5,356.6 billion.

The primary balance which is the one that excludes the interest expense from the overall deficit recorded a surplus of Rs.173.3 billion or 0.6 percent of GDP compared to a deficit of Rs.894.8 billion or 3.7 percent of GDP.
Sri Lanka is unable to reach its full economic potential without supporting industries with lower tax rates to provide them competitiveness in the global stage, and also without the crucial government spending on subsidies, welfare and infrastructure development.