NPP’s maiden Budget: Pros and cons

Last Monday marked a momentous occasion as it was the first Budget speech of the fresh NPP Government, and people were eagerly waiting for it with great expectations. Budgeting is never a pleasing task and differs markedly from the ruling coalition’s populist rhetoric which was conveyed at the election platform. 

Unrealistic offers of complete tax removals from fuel and public sector salary revisions once every six months were thankfully not included. The necessity of continuing with the IMF Extended Fund Facility program is indeed a blessing for the country and prevents populist political regimes from indulging in fiscal profligacy. The willingness of the Government to remain in line with the IMF program provides a huge comfort from the standpoint of economic stability.

Public servants enthusiastically supported the NPP victory and hence the Government was politically liable to satisfy them via a salary increase in spite of the enormous fiscal burden. The Government has proposed to increase the minimum monthly basic salary from Rs. 24,250 to Rs. 40,000. However, the current ad-hoc interim allowance and special allowance would be integrated into the basic salary. As a result, the net increase in the minimum salary represents only Rs. 8,250. The total estimated cost of the salary increase is Rs. 325 billion. 

Meanwhile, the Budget has outlined moves to implement a strategic recruitment plan to hire 30,000 individuals in essential public service roles, strictly according to cadre vacancies starting from this year. Sri Lanka’s current public sector cadre is already highly overstaffed. Nevertheless, there are certain Government departments that are seriously understaffed such as Customs, Police, and Inland Revenue. Such vital departments need to be strengthened by filling the staff vacancies. Yet, the practice of recruiting graduates as Development Officers and by other means with political gains in mind should not even be deliberated.

Commendably, the Treasury has decided not to go ahead with the Imputed Rental Income Tax proposal mooted by the previous administration. As pointed out by this column last year when the idea was suggested, it is an administratively cumbersome tax and many countries have removed such inheritance/property taxes after realising the meagre revenue generated through such levies cannot be justified given their complexity and the high administrative costs. The Government is hopeful that any loss of revenue from such a measure can be recouped through proposals like the introduction of VAT on digital services as well as the imposition of corporate income tax on export of services. 

The Budget also mentioned the Government’s intention to enact a new Customs Act in place of the existing Customs Ordinance of No. 17 of 1869. Exporters in particular have repeatedly stressed on the need to overhaul the archaic piece of legislation but forces with vested interests have blocked any attempts to reform the highly outdated Customs Law. 

On the flip side though, the Special Interest Scheme for Senior Citizens is more driven by politics than anything else. A sum of Rs. 15 billion has been allocated to provide an additional 3% interest rate above the prevailing market interest rate. The proposal has obviously been made to appease elders who are unhappy about the prevailing low interest rates. There are multi- millionaires and billionaires among people who are 60 and above. Should taxpayers’ funds be used to enrich them further? Also, do Government pensioners need to be given this benefit as they are already looked after by the State by Sri Lanka’s highly generous pension system?

Former President Ranil Wickremesinghe raised the rate of VAT in 2024 despite it being an election year. The economic governance is not a quest to gain political popularity. Trying to appease everyone by giving some goodies or the other may be good politics but not good economics.