Red alert: GDP growth and tax revenue

GDP growth was published as 3.7% for the second quarter of 2018, apparently an improvement from 3.2% in first quarter. The average citizen would believe this and may get optimistic that things could be improving, at least somewhere out there. The more inquisitive citizen could do a bit of homework such as what appears in table 1.

Was GDP growth 2.7% and 2.4% in 2018Q1 and 2018Q2?

The GDP as at the second quarter of 2017 has been revised down which has resulted in a growth of 3.7% for the second quarter of 2018. If the original GDP for the second quarter of 2017 was retained, the growth for the second quarter of 2018 would have been just 2.4%. 

The same happened for the first quarter of 2018 as well. The growth was shown as 3.2% based on a revised GDP value for the first quarter of 2017. If the original GDP value for the first quarter of 2017 was maintained, the growth for the first quarter of 2018 would have been just 2.7%.

In 2019 we’ll be told 

that growth in 2018 

was less than 3%

The authorities would say that the revision of past numbers is standard practise. However such revisions should be explained to the public clearly so that the public understands what has happened. 

For instance, when the GDP value for the second quarter of 2017 was revised, it should have been disclosed that the growth for the second quarter of 2017 was revised down from 4% to 2.7%. Similarly it should have been disclosed that the growth for the first quarter of 2017 was revised down from 3.9% to 3.5%. 

Basically what this means is, the growth in the first half of 2017 was lower than what was disclosed last year. The wider public may not worry too much as we are in 2018 and need not bother too much about 2017 anymore. However the more alert citizen would realise that repeating this practise would result in the 2018 growth figures also being revised down in 2019! 

This results in a scenario where higher GDP growth numbers are released, although the size of the economy is not growing at the stated rates due to the continuous downward revisioning of past data. This is quite a serious issue which the responsible authorities do well to address to ensure the credibility of the national statistics. 

High taxes apply 

brakes on economy

Based on the original data for 2017, the growth for the first half of 2018 falls well below 3%. This confirms what this writer has been anticipating in this column in the past. The current fiscal consolidation exercise is firmly applying brakes on the economy, while the fiscal consolidation objective is also not being met due to the slowness of the economy. A glance at table 3 shows that the tax revenue in the first half of 2018 is well below the budget.

Higher taxes fail to achieve fiscal consolidation

Tax revenue has increased by a mere 3% in the first half of 2018 despite the implementation of the new Inland Revenue Act and higher tax rates in general. The actual numbers clearly show the slowness in economic activity has shrunk the tax base and despite higher tax rates, the tax revenue collected hasn’t grown as expected. The Government’s budget for 2018 indicates that they were anticipating a 22% increase in tax revenue for 2018.

As for the fiscal consolidation exercise of reducing the overall budget deficit, the actual data for the first half of 2018 indicates that the budget deficit has expanded by 4%. The Government’s objective was to reduce the overall budget deficit to Rs. 675 b in 2018 (from Rs. 733 b in 2017). The latest data clearly shows that the Government is not on course to achieve those goals.

Low growth and 

no fiscal consolidation

Further, the budget deficit would have expanded further if not for the reduction of Government capital expenditure. While the budget was to increase capital expenditure by 16% in 2018, the actual performance in the first half of 2018 shows that the capital expenditure has reduced by 5%. It is no secret that the long-term development of the country depends on prudent capital expenditure, and slashing of that signs lower long-term growth as well.

The statistics are clear. The high tax rate driven fiscal consolidation strategy has not only curtailed both short-term and long-term economic growth prospects but as a result, the fiscal consolidation objective itself is not being met. 

(The writers could be contacted via [email protected])