The Fiscal policy is central government policy which engaging with controlling government
revenue and expenditure as well as how financing budget deficit. The government can be created
income though many resources and cost arise from different activities and
categories.
Ministry of Finance is the authorized government institution which estimated the SriLanka
Annual Budget under the Minister of Finance. But it is a responsibility of Central bank of
SriLanka to determine the actual amount of government income and expenditure ending of
each year.
Classification of Revenue
According to the Central bank of SriLanka revenue can be categorized as Tax revenue, Nontax
revenue and Grants.
Tax Revenue
Tax revenue is the income that is gained by governments over taxation. Taxation is the
primary source of income for a government. Revenue may be pulling out from sources such
as individuals, public enterprises, trade, royalties on natural resources, and foreign aid.
Direct Tax: Personal Income tax, Corporate Income tax, Tax on Interest
Indirect Tax: VAT, Excise tax, Import Duties, other Indirect Taxes
Composition of Revenue in SriLanka
Revenue mainly consists of Tax, Non-Tax, and Grants. According to the various scholars'
structure of the country, income must be highly precious with tax revenue rather than the other two
elements. (Graph 01)
Regime wise Analysis of tax revenue (Graph 2)
According to the graph tax revenue of SriLanka has different fluctuations from 1977 to 2016
due to various reasons that had been taken by the relevant government for an appropriate period.
Importance of Tax
The main objective of taxation is to be resources to “finance government expenditure in a
way that is administratively feasible, equitable, and efficient” (Burgess & Stern, 1993). A
country’s tax system is one of the elements of other macroeconomic indices such as
economic growth, public debt, fiscal deficit, and inflation. Lewis (1984) argues that an
“increasing share of tax revenue in GDP is an instrumental objective of economic
development policy.” High-income countries have had rising shares of tax revenue and
government expenditures to income as they became more economically advanced.
Laffer curve concept (Graph 3)
It shows the relationship between tax rates and the amount of tax collected by the
government. According to this study, there are two tax rates which give the same amount of
revenue to a government. Not only that, policymakers should know this concept to recognize
the tax level, which offers the maximum income.
Relationship between Tax Revenue and Economic Growth
There is no direct relationship between total tax revenue and economic growth of a country.
But different types of taxes give a different kind of relationship on the growth of the economy. VAT
gives a positive impact on economic growth because of it demotivates consumption while
motivating production and investment. As well as there is a negative impact between income
tax, import tax and growth due to incensement of those taxes undermine the incentive to work,
savings, and investment. But excise tax should be paid on personal consumptions such as
liquors, alcohol, and tobacco products. Then there is no significant impact on economic
growth.
Issues in Tax Revenue in SriLanka
Low level of tax ratio (Graph 4)
Sri Lankan tax ratio has been lower than the average tax ratio of little income country since
2005 and world economic indicators suggested that the tax ratio of smaller income country must
be more significant than 16.5% to GDP.
Slow structural change of tax system (Graph 5)
Direct taxes show a significant impact on the development of a country, while indirect taxes
play an insignificant role in a developed country. But it is different in a developing country such as
a portion of the indirect taxes must be gradually decreased during their development process.
Dismal outcome even after the changes of the tax system (Graph 6)
SriLanka Tax System is mostly rich with VAT. But it has not functioned as a promising tax
system.
Remedies for Issues
Simplify the tax system, Improve the tax administration uses of new technology Reducing
corruptions by introducing a new penalty system, providing incentives to genuine tax
payers, Avoiding politically motivated tax amenities
Non-Tax Revenue
Regime wise Analysis of Non-tax revenue 1977 – 2016 (Graph 7)
Non-tax revenue consists of Profit and Dividend, Fees and Chargers, Interest Income and
Others. Non-tax revenue shows a gradual increase from 1977 to 2016.
Grants
It is a non-repayable fund or gifted by one country, often a government department,
Corporation foundation or trust. There are two types of donors which named as bilateral
donors and multilateral donors
Regime wise Analysis of Grants 1977 – 2016 (Graph 8)
.Classification of expenditure
Current expenditure
Current cost is expenditure on good and services consumed within the current year,
which needs to be made recurrently to sustain the existing of an economic condition of a
country.
Expenditure can be categorized into two types which named as Functional and economical
Classification.
• Economic Classification: Expenditure on excellent services, Interest Payments, Current
transfers and subsidies
• Functional Classification: General public services, Social service, Economic services
O other
Regime wise Analysis of Current Expenditure 1977 – 2016 (Graph 9)
There are several fluctuations occurs due to the defense expenditure continuously increase
since 2005, interest payments have changed due to market influences and pension payments
increases year by year due to the increasing number of pensioners
Capital Expenditure
Capital expenditure refers to the spending which either creates an asset or causes a
reduction in the liabilities of the government.
Regime wise Analysis of Capital Expenditure 1977 – 2016 (Graph 10)
Several fluctuations occur due to continuation of selected projects from 2005 to 2015 and
after 2015 there is a significant decline due to slowdown public investment.
Insufficient spending area
Spending on health and education are law relative to another middle-income country
Government expenditure on education fell to 1.4 percent from 2.9 percent during the period
2005 to 2012. As well as health expenditure fell down to 1.1 percent from 1.9 since 2007
to 2012. (Graph 11)
Not only that, when SriLanka comparing with other middle-income countries, it has the
lowest position among them with the respected year 2015. (Graph 12)
Social Transfer did not keep pace with GDP Growth
The total amount of transfer payments has increased in its absolute term, but it is not paced with
the growth of GDP. (Graph 13 and 14)
