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Budget deficit expands as revenue growth slows down

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Vice President - Equity Analytics
Vice President - Equity Analytics

The budget deficit has expanded by 11.12 percent during the first eight months of this year to Rs. 349.6 billion, which is estimated to be 5.51 percent of GDP, as revenue growth slowed down although still ahead of expenditure growth, latest data from the Central Bank showed.

According to fiscal data for the period January to August 2011, the budget deficit grew 11.12 percent year on year to Rs. 349.6 billion from Rs. 314.6 billion. As a percentage of GDP, the deficit amounted to 5.51 percent, slightly better than 5.61 percent a year earlier.

Year-on-year tax revenue growth, which was 22.45 percent from January to July, slumped to 16.43 percent by the end of August. Tax revenue amounted to Rs. 513.5 billion. Non tax revenue grew 14.54 percent to Rs. 62.2 billion while grants declined by 19.73 percent to Rs. 6.1 billion.

Total expenditure of the government grew 13.93 percent during the January-August 2011 period to Rs. 931.4 billion from Rs. 817.5 billion a year earlier.

Recurrent expenditure growth which was 6.63 percent for the January to July period accelerated to 8.78 percent by end August, reaching Rs. 691.1 billion from Rs. 635.3 billion from a year earlier.

Capital expenditure increased by 31.88 percent to Rs. 240.3 billion from Rs. 182.2 billion a year ago.

Sri Lanka is committed to reaching a budget deficit target of 6.8 percent of GDP this year under a standby facility arrangement with the International Monetary Fund (IMF).

Governments have always overestimated revenue and underestimated expenditure, resulting in deficits significantly deviating from budgeted estimates. But with the partial implementation of recommendations made by a Presidential Taxation Commission, the government has been able to increase its tax revenue.

Going forward, two leading international bank operating in the country have opposing views on where the deficit would head this year.

Standard Chartered Bank in a recent report (published in these pages) said it was not concerned about the country’s fiscal performance, an indication that the government has achieved a certain degree of fiscal discipline.

HSBC, however, has another view.

"Fiscal consolidation is set to continue, which should support macroeconomic stability, however, it may prove difficult to meet this year’s deficit target," HSBC Chief Economist for India & ASEAN Leif Lybecker Eskesen told a recent forum in Colombo.

"The government’s fiscal plans are to a large extent bound by the IMF’s fiscal consolidation programme. In line with this arrangement has planned to cut the budget deficit to 6.8 percent for 2011 from 7.9 percent in 2010. However, tax cuts could leave revenue collections short of target, despite tax broadening measures and strong growth. This could leave the deficit a notch higher than planned at 7.1 percent of GDP, leaving the fiscal stance a little less tight," Eskesen said.

"Nevertheless, this is still an improved performance, crucial to sustain macroeconomic stability," he said.

For the IMF’s part, it said last September that according to data available to it the government would keep to the fiscal deficit to GDP target.
http://island.lk/index.php?page_cat=article-details&page=article-details&code_title=38983

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