Many experts view the 2017 Budget as a positive step towards fiscal consolidation. However, there is quite a discussion whether the revenue targets are too ambitious and the expenditure cuts too significant. The attempt to reduce the budget deficit from 7.4 per cent of GDP in 2015 to an expected 5.4 per cent in 2016 and to 4.7 per cent of GDP thereon in 2017 are significant steps towards fiscal consolidation. Achieving such reductions in the budget deficit requires considerable increases in revenue and substantial cuts in wasteful expenses.
Government expects revenue to increase from 13 per cent of GDP in 2015 to 15.5 per cent in 2017. This, if achieved, is an achievement that would place us on par with other countries in the region in terms of revenue collection. However the long term objective should be to increase revenue to about 20 per cent of GDP.
Government has rightly identified the need to impose high taxes on high income earners, often those who evade taxes. Budget 2017 has suggested imposing taxes on luxury items consumed by the rich. There are also suggestions of taxes on capital gains when transferring property. Removal of tax exemptions is also a step towards progressive taxation. Revenue would be increased if the above are effectively implemented.
For this to happen, tax administration has to be made efficient. The figures are easily said than done. Tax structure and administration in Sri Lanka are still weak. There are ample numbers who evade and avoid taxes. Strengthening tax administration and tightening regulations is the need of the hour. Tax net should be further widened. As per experts, tax structure in Budget 2017 is still complicated. Tax structure has to be more simplified.
There is controversy in the country regarding the reduced government allocations for Education and Health in Budget 2017. Investments in these two spheres are most important and there should be adequate allocations in order to attain sustained economic growth. Although the allocation for Education next year is lower than the current allocation, Budget 2017 reveals plans for increased infrastructure in education, especially in rural areas, and programmes to enhance education like giving iPods and computers to students, and providing them with health insurance. This is quite problematic, at a time when the government speaks of not allowing for supplementary estimates.
Increased expenditure categories which allow for economic growth, either in short or longrun are reasonable. It is the wasteful expenses which should be cut down, and Sri Lanka should prioritize its expenditure, given the local and international challenges the country faces. For instance, a tower in the North is not a priority now, but allocating that expenditure on more useful developmental expenditure, such as agriculture, housing and rural infrastructure that is definite priorities is beneficial.
Increased revenues and reductions in unnecessary expenditure are essential for Sri Lanka to establish the long awaited fiscal discipline, thus creating fiscal space for development projects and an opportunity to reduce the already high debt burden. It is not at all an easy task. Not only the government, all tax payers of the country are accountable, one way or the other, for achieving the fiscal targets.
Effective revenue collection and curtailing expenditure overruns are of utmost importance to achieve the fiscal targets in 2017. Keeping to its word, government should not allow for supplementary estimates, and should not allow for expenditure, exceeding the allotted amount.
Government cannot go with the popular demand, to increase social welfare and development expenditure while also reducing taxes on people. Hence, government is faced with two conflicting objectives. First, is to achieve a lower budget deficit, thus creating macroeconomic stability in the country. Second, is to increase revenues from people who are so used to getting something from the government, but not used to give something in return to the government owing to the socio-political climate prevailing in the country over the years since independence. Strong political commitment, therefore is necessary to achieve the budget target of 4.7 of GDP in the coming year.