Taxing the poor to reward the rentiers: Ranil-Rajapaksa’s “revolutionary” Budget of 2024

The 2024 Budget proposals will exacerbate the already dire poverty situation, pushing more people into depths of economic ruin and further tearing the country’s already fragile social fabric

Sri Lanka’s 2024 Budget, touted as “revolutionary,” punishes the poor with skyrocketing indirect taxes to reward owners of Government debt by allocating the largest share of expenditure on domestic interest payments and servicing International Sovereign Bonds. This means that the public will pay more for essentials like fuel and electricity, while the unproductive rich owning Government debt get even richer. This Robin Hood in reverse also ignores massive debt fraud and tax evasion, prioritising rentier interests over public needs. 

It slashes essential education funding while pouring money into unproductive road projects. Public assets are on the auction block, and 60 new laws are proposed to lock in this neoliberal nightmare. The result is impoverishment, higher unemployment, a deeper economic crisis, and a country on the brink of collapse with over half of the population sinking below subsistence. But there’s another way. Sri Lanka needs State-led industrialisation, strengthen social safety nets, improved healthcare and education. It needs a government that serves the people over the privileged few. 

Despite the unelected President Ranil Wickremesinghe’s fervent proclamations about the 2024 Budget being a “revolutionary” package to revitalise Sri Lanka’s crumbling economy, the Budget’s underlying motive appears to be the relentless extraction of indirect taxes from the masses, with the proceeds channelled towards rewarding an unproductive rentier elite holding the country’s domestic and foreign debt hostage. This manoeuvre further escalates Sri Lanka’s debt burden by proposing to nearly double the Government’s borrowing limit, increasing foreign borrowings and blatantly disregarding the Auditor General’s Department’s findings revealing the misappropriation of over two-thirds of the foreign borrowings between 2006 and 2021. (This was also corroborated in the Executive Summary of the International Monetary Fund’s (IMF) Governance Diagnostic Report on Sri Lanka). 

The Budget 2024 simultaneously proposes to slash essential education expenditures while amplifying unproductive investments in corruption-infested road and highway constructions. It is expediting the sale of public assets, accompanied by the ‘proposal of 60 new laws’ (Dr. Ahilan Kadirgarmar, 2024 Budget Presentation, November, 16, 2023) to facilitate these neoliberal objectives, ‘fundamentally altering Sri Lanka’s political and economic landscape’. 

2024 Budget scoffs IMF’s revenue proposals

Despite IMF’s demand to prioritise non-inflationary methods for boosting tax revenue, Sri Lanka’s 2024 Budget proposes a significant increase in indirect taxes on goods and services, disproportionately burdening the working population. In its second review of Sri Lanka’s Extended Fund Facility, the IMF advocated for enhancing tax administration by broadening the income tax base, recovering unpaid taxes, and gradually phasing out tax breaks for Board of Investment (BOI) firms. These demands, which mark a departure from previous IMF programs, were likely prompted by public campaigns and protests organised by the independent trade union movement. Whether the IMF is genuinely committed to upholding these demands remains to be seen. 

The IMF also called for greater transparency regarding the extent of revenue lost due to indiscriminate tax holidays granted to BOI companies accounting for 70% of country’s merchandise exports. In stark contrast to these demands, the 2024 Budget proposes an impractical 47% increase in tax revenue to Rs. 4.13 trillion (13% of GDP from 10% in 2023), primarily driven by a projected 62% surge in inflationary indirect taxes on goods and services. It implies a significant rise in the tax burden on the working population, estimated to be around Rs. 13,500 per month. It effectively erases the Rs. 10,000 salary increase for public sector employees even before factoring in the inflationary erosion of real wages in 2022-23. 

Furthermore, the tax proposals will raise the poverty threshold for a family of four from Rs. 64,000 per month in August 2023 to over Rs. 83,700. This revision will have detrimental consequences for Sri Lanka’s already struggling population, pushing scores of people deeper into debt and impoverishment. A research conducted by the United Nations Development Programme (UNDP) in September 2023 revealed that approximately 55.7% of Sri Lankans, a staggering 12.34 million people, are multidimensionally vulnerable. This means they face a combination of deprivations in areas such as health, education, living standards, and personal security. The study further identified North and East provinces, Nuwara Eliya and Puttalam districts as regions with multidimensional vulnerability values exceeding 65% of the population. The 2024 budget proposals will therefore exacerbate the already dire poverty situation, pushing more people into depths of economic ruin and further tearing the country’s already fragile social fabric.

Who benefits from inflationary taxes? Workers or interest earning rentiers?

The lion’s share of the tax revenue through extortionary indirect taxes will be enriching the domestic rentiers, the owners of Government’s domestic debt, by fuelling their interest receipts at the expense of the public’s means of survival. It is startling to note that interest payments will increase 25% to Rs. 2.7 trillion, (or 8.4% of GDP in 2024 from 5.9% in 2021), surpassing the budget deficit of Rs. 2.4 trillion excluding Rs. 450 billion bank recapitalisation expenses! Moreover, approximately Rs. 2.5 trillion or 94% of the total interest expenses will be financing the domestic interest payments even after wiping out 50% of EPF/ETF and pension funds’ incomes through domestic debt restructuring (DDR) in next 15 years (see https://www.ft.lk/columns/DDR-wipes-out-half-of-EPF-ETF-incomes-An-act-of-financial-terrorism-by-CBSL/4-753829). 

This further reiterates the position of the Independent Trade Union Movement of Sri Lanka that the DDR will not relieve the government’s domestic debt burden, given that the business elite in the private sector purchased over 75% of the high interest yielding treasury bonds issued in 2022; the pension funds only purchased 21% of the total. 

Salaries and wages vs. interest cost

The astronomical surge in interest payments also shatters the myth that salaries and wages of government employees are the primary impediment to fiscal consolidation. Wages only account for Rs. 1.1 trillion in expenses in 2024, while interest expenses dwarf this figure by 160%. Therefore, it is crucial to reduce the interest burden on domestic debt by slashing the yields of the privately held treasury bonds to current market levels, hand in hand with reducing high fixed deposit rates issued in 2022-23 by commercial banks. It holds far greater promise for fiscal consolidation while preserving and improving banking sector stability and growth, than downsizing the public sector workforce already facing tremendous economic distress.

Sri Lanka’s interest cost by far the highest in the world

Sri Lanka holds the dubious distinction of dedicating the highest proportion of its government revenue to interest payments among nations worldwide. In 2023, a staggering 77% of the government’s income was allocated towards servicing interest cost, which witnessed an unprecedented surge from 35% in 2015. Ghana occupies the second place in the list and only channels 45% of its revenue towards interest payments in 2021, significantly below that of Sri Lanka. In stark contrast, the global average for interest payments as a percentage of Government revenue was only 5.7% in 2021. Even Argentina, a country notorious for its debt woes, manages to keep its interest payments to a relatively low 7.8% of its revenue. This inordinate focus on repaying domestic rentiers, the holders of Government debt, by taxing ordinary citizens, comes at the expense of addressing Sri Lanka’s pressing socioeconomic issues like collapsing production, unemployment, poverty, unbearable price level of essentials and collapsing public services. Sri Lanka needs a government that invests in its people, not its creditors. It needs to reclaim itself from clutches of debt, build an economy where prosperity is shared, not hoarded through interest payments.

Raising the borrowing limit

Decision to raise Government debt ceiling to Rs. 7.35 trillion, a staggering 78% higher than expected revenue (Rs. 4.1 trillion), and total Government expenditure (Rs. 7 trillion) accompanied by foreign borrowings of Rs. 1,000 billion ($ 3.1 billion), further cements the Government’s prioritisation of the privileged class and foreign creditors. This reckless pursuit of debt will inevitably lead to a surge in domestic interest rates, further burdening ordinary citizens already struggling under the weight of economic hardship. The 2024 Budget, therefore, serves as a stark reminder of the incumbent Government’s absence of public mandate.

Increasing unemployment with indirect taxes

In his Budget speech, the unelected president acknowledged the alarming trend of SME closures, stating that 20% of these businesses have shut down this year. This staggering figure translates to a potential 10% island-wide unemployment rate stemming from the SME sector alone, considering that approximately 45% of Sri Lanka’s workforce relies on SMEs for employment. The proposed tax measures, particularly the extension of 18% VAT on electricity, fuel and water, will exacerbate this trend, compounding the economic collapse. 

People subsidising electricity to tourists and nontradables

Sri Lanka’s current energy landscape is characterised by antagonism between the needs of its citizenry and the demands of external creditors. An estimated 10% of Sri Lankan households, representing 544,000 families, have plunged into darkness due to prohibitively high electricity tariffs, demanded explicitly by the IMF to defend the interests of foreign creditors, primarily to secure the funds necessary for debt servicing. 

Also, businesses, including those from the nontradable sector that do not earn foreign exchange, continue to enjoy subsidised electricity tariffs. The sector accounts for nearly 70% of Sri Lanka’s GDP. The new tariff structure is therefore further incentivising the unproductive sector which contributes to foreign exchange crisis and shortages. On the other hand, hotels, catering to foreign tourists, bask in the luxury of subsidised electricity, paying a mere Rs. 28/unit, while ordinary households exceeding 181 units monthly face a peak-time tariff of Rs. 106/unit. This disparity is further amplified when compared to neighbouring India, where certain states offer free electricity to low-consumption households up to 200 units monthly. In essence, the Sri Lankan public is forced to subsidise not only the interests of foreign creditors but also the electricity consumption of foreign tourists and businesses that not even contribute to the nation’s foreign exchange earnings.

This iniquitous arrangement, orchestrated by the unmandated Ranil-Rajapaksa regime in conjunction with the IMF, paints a grim picture of a government prioritising external interests and the comfort of privileged sectors over the basic needs of its own people. The proposed tax increases are expected to worsen this situation, potentially leading to the imposition of additional ad hoc indirect taxes in a desperate attempt to boost Government revenue to appease the IMF’s insatiable thirst for revenue.

Indirect to direct tax ratio will worsen

The projected surge in taxes on goods and services will further exacerbate the imbalance in the contribution of indirect taxes, pushing the indirect to direct tax ratio from 67% in 2023 to 72% in 2024. In contrast to the longstanding recommendation to broaden the direct tax base, the 2024 Budget prioritises expanding the indirect tax net, deviating from the conventional wisdom that advocates for widening the direct tax base. This shift will inevitably lead to higher production costs and erode Sri Lanka’s external competitiveness. The resulting decline in export revenues which already declined 10% Jan-Oct this year, could aggravate the country’s foreign debt crisis, especially if foreign debt repayments commence from 2024 onwards, leading to a second debt default. 

Tax evasion, foreign debt fraud and cost of tax holidays dwarf the bond scam

The 2024 Budget blatantly ignores the rampant tax evasion plaguing the country and fails to address the alleged foreign debt fraud amounting to a staggering Rs. 5.5 trillion or $ 41.1 billion between 2006 and 2021, as meticulously documented in the Auditor General’s Department’s 2021 Annual Report, Table 12, page 114. The IMF, in its Governance Diagnostic of September 2023, further corroborates these findings, asserting that the misappropriated debt has been skilfully stashed offshore by the perpetrators. Despite this compelling evidence, the government remains apathetic, taking no action to legally prosecute those involved or recover these stolen funds. Furthermore, the 2024 Budget makes no attempt to phase out the perpetual tax breaks granted to BOI firms. These glaring omissions paint a clear picture of the Government’s deliberate disregard for the IMF’s recommendations on taxation, prioritising the interests of the unproductive rentier elite they represent. 

It is worth noting that the infamous bond scam, in which the incumbent president played a pivotal role, is estimated to have cost the Government approximately Rs. 12 billion. This incident sparked widespread public outrage, with opposition parties mobilising thousands of protestors to surround the Central Bank, demanding accountability. However, tax evasion continues to run rampant, with the Inland Revenue Department estimating that the current outstanding amount exceeds Rs. 944 billion (excluding its present value). This dwarfs the losses incurred from the bond scam by a staggering 78 times. Yet, despite this alarming reality, opposition parties appear to turn a blind eye when the perpetrators are the powerful business elite, in its totality.

Conclusion

In essence, Sri Lanka’s economic revival hinges on a fundamental shift in policy, one that prioritises State-led industrialisation to address market failures. This shift should maximise positive externalities, address indivisibilities and pursue dynamic comparative advantages. Since comparative advantage is inherently shaped by past technological advancements, which in turn influence contemporary scientific progress, specialisation based on current comparative advantages under free trade like labour-intensive garments and apparels, electronics assembly, plantation crops, etc. hinder the expansion of science, labour productivity and ultimately, economic prosperity. The policy framework must therefore foster job creation in sectors that align with scientific advancement. It enables the endogenous strengthening of social safety nets and also the advancement of essential public services like health and education. In light of this, the principal demand of the public must be the immediate resignation of the unmandated and undemocratic Ranil-Rajapaksa regime, calling for fresh elections to preserve democracy and public interest.  

(The writer can be reached via: [email protected].)