Budget 2024: A tightrope walk

As aptly titled by the annual post-Budget forum, which was jointly organised by the Daily FT and the University of Colombo MBA Alumni Association, President Wickremesinghe had to endure a tightrope walk when compiling the 2024 Budget in the backdrop of the two national elections that are scheduled to be held next year as well as the necessity to continue with the measures of fiscal consolidation in order to sustain the IMF arrangement, the continuity of which is critical to the macroeconomic stability.

The major highlight of the Budget was the proposal to hike the cost-of-living allowance of public servants by Rs. 10,000, effective from 2024 April. Although the move would have emboldened the public sector employees, it might have not pleased the country’s hardworking private sector employees. The Government is poised to raise the VAT rate from 15% to 18% apart from eliminating exemptions in order to raise additional revenue for the proposed expenditure measures in the Budget. This would have not gone down well with the workers in the corporate sector who are already feeling the punch from the expanded PAYE tax threshold limits. Expanding the tax base for VAT is a much needed move to strengthen revenue mobilisation, but the increase in the VAT rate is no doubt an added burden on the masses.

Making it mandatory to have a Tax Identification Number (TIN) to open a bank account, obtain building plan approvals, register vehicles, and acquire lands needs to be commended as Sri Lanka’s collection of direct taxes is extremely weak, hence, such stringent measures are necessary to achieve fiscal prudence. Sri Lanka cannot be a country like Singapore with low income taxes, as social welfare has been an intrinsic legacy of the Island since independence. The President touched on this point during the Budget Speech by posing the question whether the country aspires to be a low-tax nation with limited public services or high-tax country with a large government involvement.

Meanwhile, the Ceylon Chamber of Commerce has lauded the Budget for phasing out non-tariff barriers in trade like import CESS and Port and Airport Levy and establishing the National Trade Facilitation Committee under the chairmanship of the Secretary to the Treasury in order to stimulate trade and investments. Furthermore, funds (Rs. 250 million) have been set aside to establish a National Economic Commission which is expected to integrate the functions of the BOI, EDB, IDB, and the National Enterprise Development Authority.

The Budget has also proposed to divest 20% of shares of the two largest state-owned banks – People’s Bank and Bank of Ceylon – to strategic investors or the public to improve capital and support the future growth of the two state-owned banks. Also, the President shed light on several measures that are being currently implemented to improve the governance and risk management practices like applying stringent criteria on the appointment of chief officers and state bank board members to prevent future financial deterioration of the state-owned banks. 

State banks have often been accused of granting loans based on political patronage without paying attention to the creditworthiness of borrowers, and therefore the proposals outlined in the Budget would be helpful to improve the performance of the state-owned banks while also greatly contributing towards ensuring the stability of the financial system.

Except in 1954 and 1955, under the then Finance Minister M.D.H. Jayawardena, the nation has always experienced deficit budgets. Unlike in the West, there are no fiscal conservatives or deficit hawks in Sri Lanka’s political spectrum. The voters too have a craving for freebies and handouts that come at tremendous costs to the economy. Attempts to practice fiscal discipline are often met with political defeats. Within such an environment, presenting budgets that emphasise fiscal discipline is extremely difficult, particularly during an election year.