Sri Lanka has to rationalize state spending, reduce the size of government, not just raise taxes; Treasury Secretary Mahinda Siriwardene said making a case for spending-based consolidation.
“Increase of the revenue and also the reduction of expenditure have to go hand in hand,” Secretary Siriwardene told forum in Colombo.
“Other-wise there is no point in generating revenue if there is no control on the expenditure side.”
Sri Lanka went on an International Monetary Fund backed Western anti-austerity spending spree and state expansion drive called ‘revenue based fiscal consolidation’ from 2015, where spending as a share of GDP was pushed up from 17 percent of GDP to around 19 to 20 percent.
Revenue based fiscal consolidation, where spending based consolidation was dropped, was in line with the expansion was a Janatha Vimukthi Peramuna and Rajapaksa regime policy bulwark involving state expansion.
Sri Lanka in 2019 cut taxes, also on a Cambridge economics style stimulus attempt, leaving wide deficits which were filled by printed money.
In April a hiring freeze was ordered and strict expenditure controls were requested from line ministries, he said.
“This is the time to act responsibly,” Siriwardene said. We are closely monitoring and we are seeing results.”
However in the short term the public services had to be maintained, he said and taxes had to be raised.
Current conditions were painful for both firm and the public generally, he said.
Siriwardene said Sri Lanka now had a public sector of 1.4 million persons and a Presidential Commission will review the public sector.
Sri Lanka had a public sector of around a million public workers when Wickremesinghe was criticized by the JVP for not hiring unemployed graduates and transferring peoples’ taxes to them in 2004 when he was Prime Minister.
The Finance Ministry was trying to control spending and stop printing money, Siriwardene said.
“We have to stop central bank financing,” he said. “We have to stop printing money and contribute to the lowering of inflation from ministry of finance.”
Sri Lanka however had printed money to keep rates down when revenues were 23 percent of GDP in the 1960s and 1980s.
B R Shenoy, one of a handful of classical economists that South Asia produced, was engaged by President JR Jayewardene in 1966 to find solutions to the country’s economic problems.
Revenue based fiscal consolidation he said would not work in a country with the popular vote.
“Past experience in Ceylon, which is in line with experience in virtually all parts of the world, is that in a democratic set up political and other pressures are heavily on the side of more and more spending by the government,” Shenoy said in his reform report.
“When Revenues increase, under the weight of these pressures, expenditures too increase to meet, or even exceed, Revenue collections.
“In Ceylon during the past seven years Revenues rose by 45 per cent and Expenditures charged to Revenues by 48 per cent.
“There is a real danger that any programme for increased Revenue collections may be attended by a corresponding increase in the consumption expenditures of the government, and little may be left of the a,Jditional Revenues to cover Budget deficits.”
The IMF may not have known that Sri Lanka had revenues of 23 percent of GDP lower deficit.
Shenoy pointed out that countries like Japan and Germany which were growing very fast at the time and no monetary trouble (German money was fixed by Ordoliberals and the Japanese central bank was fixed by Joseph Dodge, a US banker who was involved in fixing German money under the Allied occupation authority).
Japan’s revenue was 13.9 percent of GDP, and Germany’s was 13.7 percent. A lower government tax take would increase private sector savings and investment, he said.