Five-month fiscal deficit surges despite elevated tax revenue

• Deficit expands from Rs.637bn to over a trillion rupees on higher spending 
• Revenue up sharply to Rs.1,120.64bn, with taxes contributing Rs.1,029.40bn
• Expenditure surges to Rs.2,137.10bn; recurrent expenditure up sharply to Rs.1,937.90bn 

The deficit in the budget jumped to over a trillion rupees in the first five months in 2023, from around Rs.600 billion in the same period last year, despite the sharply higher taxes, reflecting that the containing expenses in a crisis-stricken economy is a tall order. 
The government data showed that the budget deficit in the first five months through May was recorded at Rs.1,014.68 billion, sharply higher from Rs.636.69 billion in the corresponding period in 2022. The numbers defied logic as to how and why the deficit rose sharply higher, even after the government resorted to painful austerity measures under an International Monetary Fund-backed programme, which also advocated for higher taxes. 

 
However, what matters most is not the deficit in absolute numbers but in relation to gross domestic product (GDP), which is set to gradually decline to below 4.0 percent in the medium term. 
During the period, revenues experienced a significant increase to Rs.1,120.64 billion, with taxes contributing Rs.1,029.40 billion, a notable rise from Rs.710.61 billion recorded in the corresponding period of the previous year.
Sri Lanka raised taxes across the board and introduced new taxes to rake in billions of rupees from the private sector businesses and individuals—both when receiving incomes as well as when spending—to fix the budget, which many believed was the root cause of the crisis that unfolded in 2022. 
Although the deficit in absolute terms remains notably higher compared to the previous year, there were signs of gradual economic recovery in Sri Lanka. 
High-frequency data indicates that foreign currency liquidity conditions are slowly improving from the low levels reached in the previous year.

The Purchasing Managers’ Index and private sector credit data for June, which came out in the last two weeks, pointed to a gradual revival in the activity levels.
Both going into the crisis and coming out of the crisis is associated with Sri Lanka’s foreign currency conditions, the data shows.  
During the five-month period, expenditure surged significantly to Rs.2,137.10 billion, a notable increase from Rs.1,449.39 billion recorded in the previous year. 
Recurrent expenditure also experienced a sharp rise, reaching Rs.1,937.90 billion, compared to Rs.1,275.4 billion of the previous year. 
This rise can be attributed in part to the inflationary effects on government spending and challenges in scaling back such expenditure.