Monday, 2 December 2013 00:00
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By Asia Securities Research
The 2014 Budget proposals have been received with a mixed note by the investment community mainly on the back of concern on rise in taxes on key consumer goods and the increase in corporate tax on selected sectors coupled with a relaxation of the tax exemptions provided for businesses.
Strengthening the fiscal consolidation process
Despite the not-so-vibrant approach of the market towards the 2014 fiscal agenda the increase in consumer and corporate taxes and the relaxation of tax exemptions were however aimed at strengthening the fiscal consolidation process.
The latter was undermined by the implementation of an ultra lose tax policy which did not financially facilitate the State expenditure based economic growth strategy of the Government. Hence, the aim of 2014 fiscal proposals is to bridge the gap between tax policy and the expenditure strategies of the Government which may assist sustain high economic growth rates.
However, the market is likely to have responded to the immediate effect on aggregate demand in the economy by tax increases given that private investments growth is based on non-restricted growth of domestic demand.
On the other hand, more long term policy measures introduced by the 2014 Budget includes reducing the fiscal deficit and public debt as a share of the GDP to 5.2% and 74% respectively in 2014 and continuing the relatively high growth in government expenditure on infrastructure development. However, these latter long term policy measures have not been viewed as providing sufficient boost to revive trading activity in the Colombo Bourse.
Market is receptive
This is to say that currently the market is receptive towards mainly the short term changes in the economy and long term developments are considered with a lesser degree of intensity within the market mechanism.
Furthermore, it reveals that market expects the Government to offer fresh wave of optimism through each and every fiscal proposal. This was adhered to by the Government during the four budgets immediately after the ending of ethnic war. However, this is not practical within the current context of the economy and may bear on the growth potential and economic stability by causing a misalignment in key macroeconomic variables.
