According to the Ministry of Finance, government revenue is expected to reduce from LKR 1,891 billion in 2019 to LKR 1,450 billion in 2020. Projected government revenue for 2020 will be less than 10% of GDP, among the lowest in the world. This change in revenue is largely due to tax cuts which were implemented in late 2019 and due to the economic impacts of the mitigation strategy for Covid-19.
The reduction in revenue poses a significant fiscal challenge as a large share of government expenditure is non-discretionary. For instance, the government’s projected revenue for 2020 is not sufficient to pay recurrent obligations of salaries and interest expenditure. Salaries and Interest payments combined is equivalent to 127% of revenue.
In addition, there are other recurrent expenditure items including welfare programmes such as samurdhi and fertilizer subsidies which are also in effect non-discretionary given the political economy challenges associated with downward revisions to these.
Financing recurrent expenditure through increased borrowings is an unsustainable strategy which will compound Sri Lanka’s existing debt sustainability challenges. Considering the high level of non-discretionary expenditure, the path to improved fiscal sustainability is through revenue enhancement. Given prevailing weak economic growth, such revenue enhancement measures will need to be those which do not disincentivize economic output.