The government treasury recorded a net cash outflow of Rs. 117.4 billion for the first five months of the year against an estimated outflow of Rs. 5.4 billion.

"The recessionary pressure in the world economy and related slowing down of the domestic economic activities negatively affected the government’s revenue collection," the Mid Year Fiscal Position Report 2009 of the Ministry of Finance and Planning said.

During the first four months of the year, revenue collection had declined by 10 percent with contractions in the domestic manufacturing and service sectors severely affecting indirect taxes such as VAT and excise duties.

On the other hand government expenditure during this period increased by 28 percent compared to the same period last year.

"High interest payments, enhanced wages and pension bills, fertilizer subsidy payments and enhanced funds allocated for capital projects influenced the growth in government expenditure," the fiscal performance report said.

The overall deficit increased to Rs. 199 billion which is 4 percent of GDP during the first four months of the year.

The Treasury said that foreign assistance for capital projects had increased to US$ 403 million as against US$ 368 million during the first four months of 2008.

Revenue...

Government revenue collected during the period January-May 2009 declined by 8 percent to Rs. 239.6 billion.

VAT collections had declined by 24.3 percent, excise duty by 21.8 percent and Port and Airport Development Levy by 10.2 percent, reflecting the impact of the global financial crisis on domestic industries.

Cess, import duties and other taxes however grew by 11.1 percent, 7.5 percent and 39.5 percent respectively but these taxes account for 22 percent of total revenue to the government.

The report said a 30 percent decline in imports have also affected the collection of trade related taxes.

"Scaling up of cess rates, introduction of an excise duty on gas, introduction of a Nation Building Tax, scaling up of tobacco and liquor excise duty and the introduction of other specific duties on selected imports were introduced to minimize the erosion of government revenue," the Treasury said.

However, analysts said increasing taxes in a time when the economy was in contraction would not help. They suggest the government take steps to widen the tax net instead.

Expenditure...

Expenditure for the period of January-April 2009 increased by 28 percent from the corresponding period last year to Rs. 389.8 billion.

Recurrent expenditure accounted for Rs. 308.4 billion and capital spending amounted to Rs. 81.3 billion.

"The increased disbursements on account of interest cost reflecting high interest rates that prevailed in the latter part of 2008 coupled with high borrowings from the domestic market in the absence of foreign capital market borrowings exerted severe pressure on recurrent expenditure," the Treasury said.

Expenditure on public sector wages increased by 16 percent while interest payments on government debt rose by 52 percent.

Welfare and subsidy payments increased to Rs. 30 billion during this period compared with Rs. 26 billion for the same period last year.

Public investments too increased by 14 percent to Rs. 85 billion during this period.

Resettlement of IDPs...

The Treasury said Rs. 4.3 billion had been spent on resettling IDPs in the North and East.

As at end June 2009, the total number of IDP was 258,059 and the report said the government had spent Rs. 1 billion on providing cooked meals during the first four months of the year.

Health and Education...

Expenditure on health and education for the first four months of the year amounted to Rs. 11.2 billion and Rs. 11.9 billion respectively.

Government must increase spending...

Economists believe government should increase its spending because it meant the IDPs were taken care of, infrastructure development projects were taking off the ground and social welfare services received crucial funds.

"Many things the government spends on is unavoidable and even necessary, especially with regard to the humanitarian work in the North but there are things that the government can do," Dr. Sirimal Abeyratne, Senior Lecturer in Economics, University of Colombo, told the Island Financial Review in an earlier interview.

However, analysts warn, maintaining a large government, continued spending on loss making government institutions and the culture of bribery and corruption threaten Sri Lanka’s economic stability and could delay equitable growth to all people of the nation.