Will the 2022 Budget herald changes for the better?

By Sanjeewa Jayaweera

The newly appointed Finance Minister will present the Budget for 2022 on November 12, 2022. Over the years, the public has come to expect concessions whenever a Budget is presented. The corporate sector usually canvasses for the corporation tax rate to be reduced and various incentives to facilitate new investments and expand current operations. Those employed in the private sector hope that the single person tax-free allowance will be increased and a reduction in the income tax rate. Those employed in the public sector and those who have retired hope for salary and pension increments whilst consumers pray that the Value-Added Tax (VAT) rate and other taxes and import duties will be reduced so that prices of goods might be reduced. Only those who consume liquor and smoke cigarettes know that they will not receive any “gifts” from the Budget!

The tax concessions granted soon after President Gotabaya Rajapaksa was elected delivered most of the manifesto promises. The VAT rate was reduced from 15 percent to eight per cent, whilst the Nation Building Tax (NBT) levied at two per cent was abolished. In addition, the single person tax-free tax allowance for a year given to individuals, was increased to Rs. 3 million from Rs. 500,000. To be precise, for those who received employment income, the tax-free allowance was Rs. 1.2 million before the increase. Employees subjected to Pay As You Earn (PAYE) tax which required the employer to deduct the tax when paying salaries, were granted an exemption and told to pay the tax directly to the Department of Inland Revenue every quarter. The five per cent withholding tax (WHT) deducted when banks and finance companies paid interest income was abolished. The tax was only to be paid in case the total income exceeded Rs. 3 million for the year. The tax if due was to be remitted every quarter. The corporation tax rate was reduced to 18 per cent from 28 per cent for those engaged in manufacturing. Businesses whose turnover was less than Rs. 300 million for a year were exempted from VAT. The turnover threshold for VAT exemption previously was Rs. 30 million.

The GOSL did not disclose the anticipated reduction in revenue due to these concessions, nor did they announce how they intended to bridge the shortfall in revenue. However, there was an assumption that the tax concessions granted would increase aggregate demand for goods and services and increase the overall size of the economy.

Although many Sri Lankans were happy with the concessions granted, those knowledgeable in economics and finance were surprised and concerned. In a country where most people are exempted from direct taxation, and many required to pay, did not comply with the law, these concessions were considered illogical and ill-timed.

International rating agencies were swift to react to these concessions by downgrading the credit rating of the country. The credit rating applies to the outlook on Sri Lanka’s Long-Term Foreign-Currency Issuer Default Rating (IDR). The rating agencies justified their negative sentiment by stating that the significant revenue reduction would weaken the ability of the GOSL to repay debt. The Treasury and the Central Bank of Sri Lanka released statements sharply rebuking the rating agencies for the downgrade.

Those surprised and concerned by these concessions were so because there was no logic and was in essence against economic and financial commonsense. In an article of mine published in the Sunday Island of January 12, 2020, captioned “Sri Lanka’s Tax Conundrum”, I did raise some questions about the assumption that the tax concessions would benefit the poor and drive aggregate demand.

The GOSL was reducing revenue when there was a significant budget deficit and accentuating the problem; there was no action to reduce public expenditure. Instead, it was announced that 100,000 unemployed graduates are to be employed in the already bloated state sector. In addition, the country’s accumulated debt was high as successive governments since independence had acted irresponsibly.

The GOSL is partly correct in attributing the current economic crisis to the pandemic. There is no doubt that there has been a severe economic upheaval worldwide due to the pandemic. Most economies have contracted to cause unemployment and a lot of misery to many. Having said that, many developed and developing countries have begun to bounce back, and there is optimism that we will overcome the pandemic. However, in Sri Lanka, the economy has still not started to recover. We are facing multiple challenges on several fronts. Government revenue reduced significantly due to the various tax concessions granted in 2020 has been further reduced as the economy has contracted. The country is in the midst of a severe foreign exchange crisis. The majority of consumers are finding it challenging to manage as prices of commodities are skyrocketing. That this is a global problem is of no comfort to those who cannot finance their expenses.

In light of the challenges mentioned above, what can we expect from the 2022 Budget? According to press reports, the newly appointed Finance Minister is quoted to have said that “There is nothing to give to the public but only to take back some of the concessions given.” I may not have repeated what he has stated precisely, but I hope I have accurately conveyed his message. As usual, the comment has drawn criticism from both the Opposition parties and some in the government. Those in the Opposition who have experience in governing the country, know well that there is no alternative. On the other hand, those who have never been involved in governing the country and those driven by misplaced ideology will protest and mislead the public.

I, for one, agree with what the Finance Minister is quoted to have said. There is a need to roll back all tax concessions granted in 2020 and reduce public expenditure. I am confident that many would disagree with me and say that this is not the time to tighten our belts. I agree that increasing tax rates and a cut in public expenditure would result in hardship to many. However, there is no alternative. The Central Bank of Sri Lanka (CBSL) has been printing money in the last few years. A retired Deputy Governor of the CBSL has stated that the recently resigned Governor, Professor Lakshma, converted the CBSL to a printing press! Suppose corrective action is not taken this time around to introduce much needed economic reforms, revenue-enhancing measures and cut down expenditure; the GOSL may well be taking the country down a path that has impacted Zimbabwe and Lebanon.

I hope the President, the Finance Minister, the Prime Minister, and the Cabinet have the foresight and courage to introduce meaningful changes in managing the economy and finances of our country. That we all need to tighten our belts considerably is a given. However, it is time that difficult and unpopular decisions are taken for the country’s medium and long-term good, and winning the next election should not be a consideration.

A significant quote attributed to the late Singaporean Prime Minister Lee Kuan Yew, who said that “elections in Sri Lanka is an auction of non-existent resources.” Maybe we need to now replace the word “Elections” with “Budget.”