Sri Lanka’s tax hikes must be complemented by spending rationalization: Eran

ECONOMYNEXT – Sri Lanka needs to raise taxes on the people, but they will also have to come with spending cuts, opposition lawmaker and former minister of state for finance Eran Wickremeratne says after the tax hike on value added and telecommunications charges and the announcement of new taxes.

Sri Lanka increased its revenue under an International Monetary Fund program after 2015, although spending also increased due to a large increase in state salaries under a so-called 100 day program.

Tax mistakes were corrected by tax hikes and a wage freeze under Finance Minister Mangala Samaraweera and Wickremeratne, and fuel was also at market price.

But monetary policy became more active under “flexible” inflation targeting, triggering a monetary crisis due to the existence of a fixed exchange rate regime, ultimately slowing growth.

Now taxes must be raised to pay state workers, to prevent more money printing, amid the worst monetary crisis in the history of the middle regime central bank after two years of money printing.

“We are pleased that the administration has finally answered the call from opposition parties, economists and business leaders to re-engage with the IMF,” Wickremeratne said in a statement.

“However, the road to recovery is long and any further delay will only aggravate the difficulties of the most vulnerable sections of our society.

“That is why these fiscal policies need to be complemented by expenditure rationalization so that social protection mechanisms can be expanded.”

Wickremaratne said tax cuts in December 2019 were the immediate cause of the current economic crisis.

In 2015, as part of the revenue-based fiscal consolidation promoted by Western ‘progressives’, expenditure rationalization (expenditure-based consolidation) was abandoned.

From 2014, taxes to gross domestic product increased from 10.1% of GDP to 11.9% of GDP in 2018 and 11.6% in 2019 with the increase in taxes.

However, spending fell from 17.3% of GDP in 2014 to 18.7% in 2018 and 19.4% in 2019 without any expenditure-based consolidation being dropped under the IMF program .

Growth also stagnated under two currency crises due to flexible monetary policy.

Sri Lankan tax fell sharply after 2019 as a new administration cut taxes on top of money printing, saying there was a “persistent output gap”.

In 2020, revenue fell to 8.1% of GDP while spending increased to 20.3% amid the coronavirus crisis.

After two years of money printing that triggered the worst monetary crises in the history of the central bank “soft-pegged”, the economy is expected to contract.

Meanwhile, a sharp collapse in the soft-peg had also put food out of reach for the poor in particular, requiring a social safety net amid fears of malnutrition. (Colombo/Jun 07/2022)