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Why Did the Budget Deficit Increase in 2020?​

Sri Lanka’s budget deficit has doubled between the period of 2019 and 2020. The budget deficit increased from LKR 1,016 billion in 2019 to LKR 2,090 billion in 2020, which is an increase of LKR 1,074 billion. The increase in the budget deficit can be attributable to LKR 526 billion decline in revenue and LKR 548 billion increase in expenditure.  

Fall in the government revenue  

The decline in the government revenue is due to a reduction in the revenue collected mainly from several taxes such as Value Added Tax (LKR 210 billion), Excise duty on Motor Vehicle (LKR 82 billion), Nation Building Tax (LKR 68 billion), Corporate tax (LKR 46 billion), Withholding tax (LKR 40 billion), Economic Service Charge (LKR 40 billion), and PAYE tax (LKR 34 billion). However, there has also been a moderate increase in tax revenue from Special Commodity Levy (LKR 12 billion) and Import Duties (LKR 16 billion). For details on the change in all revenue items see Exhibit 1

It is important to note that there were also several key tax policy changes in late 2019 which contributed to the decline in revenue. The key tax policy changes were;  

  1. Abolition of Nation Building Tax, Economic Service Charge and PAYE tax.  
  2. Withholding tax was exempted for residents.  
  3. Standard corporate income tax rate was reduced to 24 percent from 28 percent and tax rates for sectors such as construction and manufacturing was also reduced and exempted for other sectors such as IT and Agriculture.  
  4. Value Added Tax (other than financial services) was reduced from 15 percent to 8 percent and threshold for the registration for VAT was increased, from LKR 3 million per quarter (LKR 12 million per annum) to LKR 75 million per quarter (LKR 300 million per annum). 

In addition, the government also banned the import of most motor vehicles from April 2020, which could have led to a significant reduction in the excise duty on motor vehicles.  

Increase in the government expenditure  

The increase in government expenditure is mainly due to increase in; capital expenditure (LKR 176 billion), Transfer Payments (LKR 166 billion), Salaries and Wages (LKR 108 billion) and Interest Payment (LKR 79 billion). For details on the change in all expenditure see Exhibit 2

It is important to note the government had allocated LKR 35 billion for the provision of COVID-19 relief assistance through the State Ministry of Samurdhi in the 2021 Budget which was presented in November 2020. The government also recruited 160,000 unskilled and unemployed graduates that cost LKR 65 billion as additional expenses per annum (see https://publicfinance.lk/en/topics/New-Government-Recruitment-Schemes:-An-increased-burden-on-taxpayers-1620677894)  

Note: 2019 and 2020 budget deficit figures reported by the CBSL Annual Report are inconsistent with the previous years, hence cannot be used for comparison across years. Please refer our previous insight for more details on this; https://publicfinance.lk/en/topics/2020-Records-the-Highest-Budget-Deficit-Since-1982-1620901757  

*A budget deficit occurs when the government expenditure is higher that the government revenue. 

Source: Annual Report (2020), Central Bank of Sri Lanka  


Exhibit 1: Government Revenue and Grants (2019 and 2020) 

All figures in LKR Million 

Category 

2019 

2020 Provisional 

Decline in 2020 

Tax Revenue 

1,734,925 

1,216,542 

518,383 

Taxes on Foreign Trade 

280,965 

312,334 

-31,369 

Imports 

98,427 

114,183 

-15,756 

Import Duty (gross) 

98,427 

114,183 

-15,756 

less Duty Rebate 

                    -    

 - 

                  -    

PAL/RIDL/SCL/Other 

182,538 

198,151 

-15,613 

Taxes on Domestic G&S 

843,355 

555,718 

287,637 

GST/VAT 

443,877 

233,786 

210,091 

Domestic GST/VAT 

273,963 

148,061 

125,902 

GST/VAT on imports 

169,914 

85,725 

84,189 

Excise Tax 

399,478 

321,932 

77,546 

Excise Tax on Liquor 

115,443 

120,990 

-5,547 

Excise Tax on tobacco/cigarettes 

87,367 

94,345 

-6,978 

Excise Tax on petroleum 

61,740 

53,111 

8,629 

Excise Taxes on MV and other 

134, 

53,486 

81,441 

National Security Levy 

                    -    

                  -    

                  -    

License Fees 

N/A N/A N/A

Taxes on Net Income and Profits 

427,700 

268,249 

159,451 

Corporate 

261,089 

214,819 

46,270 

Non-Corporate 

11,514 

13,517 

-2,003 

Tax on Interest 

50,351 

9,989 

40,362 

Capital Gains Tax 

N/A N/A N/A

Stamp Duty/Cess Levy/SRL/NBT/DL/TL 

182,905 

80,241 

102,664 

Debits Tax 

                    -    

  

                  -    

Non Tax Revenue 

155,974 

151,417 

4,557 

Current Revenue 

155,974 

151,417 

4,557 

Property Income 

46,404 

60,984 

-14,580 

Rent 

4,727 

12,055 

-7,328 

Interest 

13,819 

7,297 

6,522 

Profits and Dividends 

27,857 

17,624 

10,233 

National Lottery 

N/A N/A N/A

Central Bank Profit transfers 

24,009 

24,009 

Social Security Contributions  

28,985 

32,417 

-3,432 

Fees and Administration Charges 

73,884 

47,370 

26,514 

Other 

6,701 

10,646 

-3,945 

Capital Revenue 

 - 

Total Revenue  

1,890,899 

1,367,960 

522,939 

Grants 

7,909 

5,348 

2,561 

Total Revenue  

1,898,808 

1,373,308 

525,500 

 

Exhibit 2: Government Expenditure (2019 and 2020)  

All Figures in LKR Million 

Years 

2019 

2020 

Increase in 2020 

1. Recurrent Expenditure 

2,424,582 

2,671,786 

247,204 

1.1 Expenditure on Goods and Services 

848,278 

974,351 

126,073 

Salaries and Wages 

686,452 

794,158 

107,706 

Civil Administration 

420,300 

509,555 

89,255 

Defence 

266,152 

284,603 

18,451 

Other Purchases of Goods and Services 

161,826 

180,193 

18,367 

Civil Administration 

82,489 

100,006 

17,517 

Defence 

79,338 

80,187 

849 

Provision for Under Expenditure 

 - 

 - 

1.2  Interest Payments 

901,353 

980,302 

78,949 

Foreign 

233,970 

266,679 

32,709 

Domestic 

667,383 

713,623 

46,240 

1.3  Transfer Payments 

551,524 

717,133 

165,609 

Households 

456,241 

610,486 

154,245 

Sub National Governments 

 - 

 - 

Non-financial Public Enterprises 

26,153 

17,712 

-8,441 

Institutions and Other 

69,130 

88,936 

19,806 

2. Capital  Expenditure 

619,069 

795,368 

176,299 

2.1  Acquisition of Fixed Capital Assets 

385,366 

483,543 

98,177 

2.2  Capital Transfers 

239,688 

307,917 

68,229 

Institutions 

200,172 

254,384 

54,212 

Non-financial Public Enterprises 

20,704 

34,365 

13,661 

Sub National Governments 

18,812 

19,168 

356 

Abroad 

1,951 

N/A N/A

Provision for Under Expenditure 

 - 

2.3 Other 

-5,985 

3,907 

9,892 

3.  Lending Minus Repayments 

-4,933 

-3,552 

1,381 

3.1  Net Lending through Advance Accounts 

1,172 

-529 

-1701 

3.2  Lending to Public Enterprises 

12,166 

16,405 

4,239 

3.3  Loan Repayments in Public Enterprises 

-18,271 

-19,429 

-1,158 

3.4  Restructuring Expenditure 

 - 

 - 

Total 

2,915,291 

3,463,602 

548,311 

Source: Annual Report (2020), Central Bank of Sri Lanka  

2021-09-14
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