Growth after consolidation in Budget 2017

By Charumini de Silva 

A “consistent and coherent” policy framework together with a stronger growth framework would be at the core of Budget 2017, emphasised Finance Minister Ravi Karunanyake this week, as the private sector waits for the Government to set the growth agenda and goals for next year .

Responding to issues, suggestions and comments from the business community at the sixth consecutive annual pre-Budget forum jointly organised by the Daily FT and the Colombo MBA Alumni Association and supported by the Standard Chartered Bank, the Finance Minister fought hard for the policies of the Government and acknowledged several points including efficient collection had been successfully upgraded by the Government. 

“VAT certainly is a tax that was accepted by many. Don’t say it was because the IMF came here and ordered us. Even if Kim Jong-un from North Korea comes here and tells us what is correct, we will do it. Trying to say that the IMF told us is something that we want to put a stop to. We are a sovereign nation, we are professionals and we don’t need foreigners to tell us how to run our economy. We certainly can do better than them,” he said. 

Better collection 

“Today, I’m proud to say that we have managed to collect money that is due. Today revenue is 13.6% of GDP and we are expecting 15% next year. This shows that this is through pure collection. A good example is excise. Excise which was Rs. 40 b in 2014 is Rs. 160 b as of today; you can see a 400% increase. Today everybody is made to pay. Customs also had revenue of only Rs. 450 to Rs. 500 b which has reached Rs. 800 b now. Inland Revenue, which generated Rs. 350 b, now has roughly Rs. 600 b. We are getting things moving. One of the most satisfying things we can see is that people have responded to the need to pay taxes.” 

Karunanayake also explained that many of the taxes outlined in Budget 2016 could not be implemented because of numerous court cases lodged against them resulting in a significant loss of revenue, which the Government had leveraged against by taxing previously exempted sectors. He also pointed out that private healthcare had been given concessions from the VAT increase of 15% by the Government taxing gold transactions.

“2016 was a year where we expected to consolidate certain things and in revenue terms we certainly did it. Even though we were unable to collect VAT from 13 May 2016 and collect roughly Rs.100 b we have not been able to do so. From November to December we will only be able to collect around Rs. 12 billion. There is a gap but there is a tremendous increase in other revenue collection. So we could keep the budget deficit at the 5.4% that we outlined.”

Revolutionary budget  

Despite challenges, the Government has refused to budge from its fiscal consolidation process, a point Karunanayake called on rating organisations to take note of when they were evaluating the economy. 

“It is going to be a revolutionary budget looking at all sectors. If everybody is paying their share of taxes there is no need to rob from anybody to give to the poor,” he said. 

The Finance Minister was also highly critical of the previous Government whom he accused of increasing the country’s debt. 

“The economy we inherited was not easy for any Finance Minister but we managed it. How did we do it? We had roughly Rs. 9.9 trillion public debt to GDP, beside that we had Rs. 1.3 b off balance sheet. We have a revenue of Rs. 1215 b when we took over, where as we had a debt servicing of Rs. 1400 b.” 

“Illogical economic investments we have put in from 2009 to 2014. The payment starts coming in from 2017, 2018 and 2019. You could see that the only way out was financial discipline. We have to have fiscal consolidation. We are having 6.5% to 6.7% debt to GDP and we thought it was prudent to have 3.5% of debt to GDP by 2020. Fiscal consolidation was one of the first things we had to do and to do that we need to increase the revenue, and reduce costs. When we took over once again, the revenue to GDP was 10.2% in 2015 January. In 1999 it was 20.9% in 2000 it was 19.8%. You could see a huge drop in revenue. Now we have go to increase that.” 

Karunanyake defended the 4.9% growth rate last year, pointing out that in 2013 growth was said to be 6.5% but later changed to 3.4% while in 2014 it was 4.5%.

 Budget 2016 taxes 

“2016 was a year where we were expected to consolidate revenue and certainly we have done so; even though we were unable to collect VAT from 13 May 2016. From November to December we will be only be able to collect around Rs. 12 b. There is a gap, but there is also a tremendous increase in other revenue collections. So we can keep the budget deficit at the 5.4% that we outlined.” 

Most tax changes proposed in Budget 2016 were not implemented due to political and legal constraints noted a tax professional during a presentation on the outcome of 2016 tax proposals by PricewaterhouseCoopers.

The Nation Building Tax (NBT) was viewed as a regressive tax as it is charged on turnover and was initially intended by the previous Government to exist only for two years but has continued under the current administration. Indirect taxes continue to be the main source of public revenue.