- CAL Research Equity Analyst Sajani Dewapura on Budget 2024’s dependency on revenue collection
Budget 2024 presented by President and Minister of Finance, Economic Stabilisation, and National Policies Ranil Wickremesinghe has been termed a “fairy tale” with promises of revenue that lack grounding in reality, by Verité Research Executive Director Dr. Nishan de Mel.
Admittedly, it is a challenging time when a balancing act is required in keeping the masses happy on the one hand and donors on the other, all the while ensuring that the country stays on the rails. The Budget addressed all major areas as expected, including key industry developments, the social net, female empowerment, environmental aspects, and education – both in literacy and higher academics, while also dealing with Government revenue increases, capital allocations, and debt restructuring.
But what does the new Budget mean for Sri Lanka and what can we expect from it, given last year’s (2022) Budget proposals and follow-through? Capital Alliance Limited (CAL) Research Equity Analyst Sajani Dewapura provides a critical analysis of Budget 2024 on Kaleidoscope.
Following are excerpts from the interview:
What are the salient points in Budget 2024 that you’ve observed?
The overall Budget for 2024 aims to improve tax collection rather than increasing tax rates. The total tax revenue for 2024 comprises 28% from income tax, 59% from taxes on goods and services, and 13% from taxes on external trade. The Government aims to increase tax collection mainly from taxes on goods and services, which is expected to increase by Rs. 859 billion out of a total tax increase of Rs. 1.2 trillion.
Meanwhile, 38% of the total expenditure has been allocated to interest payments, indicating a substantial debt-servicing burden on the Government’s finances. This expenditure increase is mainly driven by rising interest costs and capital expenditure/expense (capex). Interest spending is expected to grow by Rs. 458 billion, and salaries and wages for Government employees and pension holders has increased by Rs. 141 billion, mainly because of the increase in allowances on living cost by Rs. 10,000 for public servants, while capex has increased by Rs. 469 billion (excluding bank recapitalisation).
Overall, the fiscal balance for 2024 is estimated at Rs. 2.4 trillion (excluding bank recapitalisation of Rs. 450 billion).
Are there any surprises?
Yes. Certainly. Incremental tax revenue for 2024 is Rs. 1.2 trillion, which is mainly driven by tax collection on goods and services. When it comes to taxes on goods and services, this mainly comprises value-added tax (VAT) on domestic products, VAT on imports, and excise duties including taxes on alcohol, tobacco, vehicles, and petroleum products. This increment, as a percentage of the gross domestic product (GDP), is 2.7%. The exemption on VAT has been taken out on goods such as fuel; however, exemptions on healthcare, education, and some basic essentials still prevail.
What sectors and industries are gaining fillip?
The main sectors are construction; agriculture and dairy; and beverages, food, and tobacco.
In terms of construction, Government spending on capital expenditure is approximately 15% of the total estimated expenditure of Rs. 1.2 trillion in 2024. This includes Rs. 325 billion for road development and Rs. 47 billion for urban development and housing.
At CAL Research, we expect the construction sector to experience a gradual pick up.
In agriculture and dairy, a fertiliser subsidy of Rs. 19.5 billion has been proposed. We believe that the lower allocation for fertiliser subsidies will result in lower sales volumes driven by lower activity. There is also a proposed implementation of a special programme to increase milk production by 53%. With only 40% of the milk requirement being locally sourced at the moment, we expect this programme to improve the production to cater to the demand.
For beverages, food, and tobacco, the proposal to increase public sector salaries by Rs. 10,000 from January 2024 will improve purchasing power, thus increasing overall consumption.
Most budgets look fine on paper but are challenged in implementation. What would be the challenges in implementation?
In 2023, from the initial Budget, the target was to collect 6.25% of the GDP from taxes on goods and services. However, looking at the revised estimates published by the Government, it has only achieved 5% of the GDP, a shortfall of 1.4%.
Collecting 7.6% of the GDP will be challenging because of the heavy dependency on consumer-based taxes. A drop in consumption due to inflationary pressure or other inflationary shocks could lead to a decrease in tax collection from goods and services. In 2023, the highest shortfall in tax collection was from goods and services, which was Rs. 387 billion out of the total Rs. 534 billion shortfall.
Expenditure on capex will also be a challenge. For 2023’s initial Budget, the Government estimated to achieve Rs. 1.2 trillion on capex, but the revised estimates show that it has only been able to achieve Rs. 782 billion, which is 64% of the initial estimates.
The 2024 Budget has a target of Rs. 1.2 trillion on capex, excluding the bank recapitalisation of Rs. 450 billion. If the Government fails to achieve the estimated revenue targets in 2024, its only option to achieve International Monetary Fund (IMF) targets is cutting down capex, as was done in 2023. However, without spending on capex, it will be hard for the Government to achieve growth in economy.
Will the IMF and other donors be appeased by this Budget?
Under the IMF Extended Fund Facility (EFF) programme, a set of targets has to be achieved during the 2023-2032 period. Achieving these targets is crucial for gaining confidence from the IMF and other donors, including the World Bank, the Asian Development Bank (ADB), and bilateral creditors.
According to the IMF, our goals include achieving a primary balance surplus of 0.8% in 2024 and 2.3% from 2025 onwards. Additionally, public debt should be below 95% of the GDP by 2032, annual foreign debt services of the Central Government should remain below 4.5% of the GDP, and average gross financing needs should stay below 13% of the GDP between 2027 and 2032.
Most of these debt targets are expected to be met through debt restructuring programmes. The domestic debt optimisation (DDO) has been finalised and executed successfully, and currently, external debt restructuring is ongoing. However, managing our fiscal responsibilities is crucial. If we continue with an overall deficit of 8.5%, the Government will not be able to achieve these debt-related targets. There is no alternative to increasing Government revenue to meet the IMF’s targets.
So yes, the 2024 Budget is aligned with the IMF’s targets, but the IMF has already raised concerns about the need to expand the tax net and to introduce more efficient and effective tax collection methods.
Will the private sector be happy?
Responses to the Budget have been mixed. The Government initially expected to collect Rs. 100 billion from pay-as-you-earn (PAYE) tax, but it actually achieved Rs. 150 billion. This led some to believe that the Government could have expanded the tax brackets or reduced the income tax rates.
On the other hand, there is concern that the people’s disposable income has decreased due to income taxes and high inflation, especially as the Government is expecting Rs. 1.4 trillion from VAT. If consumer spending decreases, it may be challenging to achieve these targets, as in 2023.
Another point of debate in this Budget is the lack of detailed information regarding tax collection on goods and services. While the Government has estimated a VAT collection of Rs. 1.4 trillion, the Budget speech provided limited details beyond the change in VAT from 15% to 18%. It did not specify any new VAT-related amendments, leaving some aspects of the tax collection process unclear. This lack of detail has been a source of concern and discussion among various stakeholders.
Have the social nets been covered?
The 2024 Budget estimates that the Government will spend around Rs. 370 billion on welfare programmes, maintaining the same proportion of 1.17% of the GDP as in 2023. Therefore, we don’t observe a significant increase in welfare programme-related spending in 2024 compared to 2023. However, the Government has not reduced its expenditure on welfare programmes, and overall, has managed to cover the social safety nets. But it is crucial to ensure that these funds reach people who genuinely need them.
What will the priorities be when it comes to implementation?
The Government anticipates a substantial year-on-year (YoY) increase in tax collection for 2024 amounting to Rs. 1,224 billion (47%). This surge is chiefly attributed to enhanced collection from goods and services, notably including a VAT collection boost of Rs. 125 billion. To meet the remaining estimated target of Rs. 734 billion for 2024, the Government may need to consider measures such as lowering VAT threshold levels and expanding the VAT base.
What would you list as negatives and positives in this Budget?
In terms of negatives, it’s the heavy dependence on consumption-based taxes which makes revenue vulnerable to economic fluctuations; if there’s inflationary pressure that causes consumption to drop, there’d be a decrease in tax revenue. That, along with low economic growth, poses a risk to fiscal stability. Since there’s more focus on indirect taxes, the challenge is real for low-income earners.
The VAT increase from 15% to 18% may contribute to inflationary pressures, which would impact the cost of living. The higher prices of goods and services could reduce purchasing power. Additionally, the overall fiscal balance for 2024 is estimated at Rs. 2.4 trillion, which is 7.6% of the GDP. If the fiscal deficit isn’t managed effectively, it could lead to concerns about the sustainability of public debt and long-term economic stability.
In terms of positives, the increase in Government revenues is notable. The Government projects a significant increase in tax collection for 2024, with a 47% YoY growth, driven by higher taxes on goods and services, including VAT. This can potentially boost Government revenues, providing enough space to achieve IMF fiscal targets.
The Budget also emphasises tax collection and administration as a priority, indicating a commitment to enhancing revenue collection efficiency. The substantial rise in capex by 60% YoY indicates a focus on infrastructure development. Increased investment in infrastructure can have positive long-term effects on the economy.
(The writer is the host, director, and co-producer of the weekly digital programme ‘Kaleidoscope with Savithri Rodrigo’ which can be viewed on YouTube, Facebook, Instagram, and LinkedIn. She has over three decades of experience in print, electronic, and social media)