Salary increase for striking public servants would require VAT hike: Treasury Secretary

• Explains to meet demands of public sector would require VAT rising from 18% to 21%
• Opines imposing such burden not viable in meeting with President to address trade union actions 
• Says salary increase is not feasible this year; plan underway to revise public service salaries in 2025 Budget based on recommendations of expert committee investigating salary disparities
• Claims Rs. 10,000 hike for public servants would require additional Rs. 140 b annually, whilst for Rs. 20,000 it would necessitate extra Rs. 280 b
• State Minister of Finance Shehan Semasinghe highlights fiscal challenge of public sector salary increase 

Treasury Secretary Mahinda Siriwardana yesterday said that meeting the salary demands of striking public servants would necessitate increasing the current Value Added Tax (VAT) from 18% to between 20%-21%. 

During a discussion with President Ranil Wickremesinghe at the Presidential Secretariat, Siriwardana explained that imposing such a burden on the public is not viable.

The meeting, which addressed the trade union actions taken by several public service unions, sought to explore potential solutions to their demands. 

Siriwardana highlighted that while a salary increase is not feasible this year, there is a plan to revise public service salaries in the 2025 Budget, based on recommendations from an expert committee investigating salary disparities.

The Treasury Secretary also noted that a salary increase of Rs. 10,000 for Government employees would require an additional Rs. 140 billion annually and an increase of Rs. 20,000 would necessitate an additional Rs. 280 billion. 

“To generate the required income, even with optimal management of current revenues, additional tax increases will be necessary,” Siriwardana pointed out.

He explained that to raise salaries by Rs. 10,000 the VAT would need to be increased by 2%. 

“Meeting the trade unions’ wage demands would require raising the VAT by more than 3%. However, with the VAT already at a maximum rate of 18%, further increases are not feasible at this time,” he added.

Separately, State Minister of Finance Shehan Semasinghe expressed concerns over the significant fiscal challenge posed by the proposed Rs. 20,000 monthly increase in public sector salaries. 

“The adjustment, estimated to cost Rs. 275 billion annually, equivalent to 1% of GDP, demands sustainable revenue sources or other fiscal adjustments,” Semasinghe stated via a post on ‘X’.

He said to offset this expenditure, finding sustainable revenue sources or implementing other fiscal adjustments is crucial.

“One potential approach to generating the necessary revenue is to increase VAT by 4.75%, raising it to nearly 23%, or to elevate the corporate tax rate to 42%,” he added

However, Semasinghe warned that such measures could strain the economy further. 

“This could potentially increase the primary budget deficit, jeopardise debt restructuring efforts and derail the International Monetary Fund (IMF) program,” he added.

The State Minister also cautioned that these adjustments could lead to a recurrence of the severe economic and social conditions experienced in 2022.

He asserted that a path to economic recovery and growth requires the cooperation of every individual, community, and institution. “With your continued support, we can navigate these challenges and work towards a more robust economy,” Semasinghe added.

Treasury Secretary Siriwardana also highlighted that the Government’s efforts to stabilise the country’s economy mean that the Central Bank can no longer print money as it did before, as this would jeopardise the program with the IMF.