Addressing inequality

Global inequality may be reducing but Sri Lanka is still among half the countries in the world that have seen a significant rise in inequality. According to the International Monetary Fund (IMF) in its latest Fiscal Monitor Report launched earlier this week, Sri Lanka was in the company of many of the world’s advanced economies including Australia, North America and parts of Europe as well, where inequality has been on the rise over the last decade.

The report added that in emerging economies, the pace of fiscal consolidation has slowed to a standstill while pointing out that the increase in public debt in some countries was concerning as it coincided with elevated corporate leverage.

In low-income and developing countries (LIDCs), fiscal deficits sharply increased between 2011 and 2016. However, they are expected to start steadily declining in 2017. The composition of spending is expected to improve with consolidation relying less on cutting capital spending and more on controlling current spending. 

The report also underscored issues that are important for Sri Lanka, which is focused on fiscal consolidation to increase public revenue, reduce deficits and implement structural reforms such as tackling loss-making state-owned enterprises (SOEs), targeting inflation and implementing flexible exchange rates.

The Fiscal Monitor projected Sri Lanka’s general government revenue to hit 14.5% of GDP, a marginal increase from 14.3% in 2016. This is the highest government revenue since 2008. However, with the Inland Revenue Bill and other measures, revenue is expected to rise to 15.4% next year and reach 16.7% by 2020.

Sri Lanka’s debt levels will peak at 79.6% of GDP in 2017 before declining to 77.6% of GDP in 2018 and ending up at 72.1% in 2020. Ratings agencies say Sri Lanka will have to repay an estimated $ 13.8 billion in debt from 2019 to 2022 with the bunching of debt likely to result in tight policy and moderate growth. General government expenditure is also to rise correspondingly from 19.7% in 2017 to 20.3% of GDP till 2020 and beyond, the report showed. 

IMF officials believe that mobilising revenue will be crucial to finance growth-enhancing expenditures. Investments in public infrastructure, education and health are needed to support growth as well.

The report called for redistribution of taxes through aggressive redesign and redistribution policies that would be tailor-made for specific country needs. It also calls for such policies to be periodically evaluated to prove their efficacy.    

In Sri Lanka, successive governments have bowed to powerful lobbies and each year increased indirect taxes that have a deep impact on the poor but rarely affect the rich. As much as 80% of taxes are indirect and public expenditure is slashed yearly resulting in progressive reduction of Government revenue that can be invested in housing, healthcare and education essential to a developing country.

Corrupt political leadership is another problem that plagues the country. Corruption seeps into all levels of governance: lucrative contracts are handed out to businessmen linked to political parties, policies are made to benefit certain industries at the cost of others and reforming state-owned enterprises is hampered by the appointment of loyalists to boards.

In the backdrop of increased inequality and the growing disparity between the rich and the poor, the debilitating power of inequity has taken its toll on the people who grow restless of the same empty promises being made. Especially for a country that is rife with disgruntlement, the impetus falls directly on the Government to bridge these gaps effectively and competently.