Slowdown in economy, revenue and expenditure will contain fiscal deficit?

The government is confident of containing the budget deficit to 6.2 percent of GDP this year despite the economy slowing down, as both revenue and expenditure growth are expected to ease as well, a senior Treasury official said.

For the first six months of this year, the budget deficit has already reached 4.03 percent of GDP and UNP Economic Spokesman Dr. Harsha De Silva MP said the deficit would more likely reach 8 percent of GDP by the year’s end. "I don’t see how the government is going to meet the deficit target unless it increases taxes," he said in response to a query raised by The Island Financial Review at a recent media conference.

However, a senior Treasury official said although it would be a very hard task, the government was committed to containing the budget deficit at 6.2 percent of GDP this year.

"The economy is slowing down. Our earlier forecast was for a 7.5 percent economic growth rate and now we feel it would be around 7 percent. The slowdown in the economy will reflect on both the revenue and expenditure so we are confident the deficit would be contained," Deputy Treasury Secretary S. R. Attygalle told The Island Financial Review.

He said revenue targets would be hit by falling imports.

"Falling imports growth is hurting us but it is good for the macro economy. We are seeing a slowdown in indirect taxes as well with the domestic economy slowing down, but not to a significant extent. However, a bulk of the tax revenue flows in during the final quarter of the year. This together with expenditure savings will help us reach the 6.2 percent deficit target. We will somehow achieve this," Attygalle said.

Since peaking at 9.9 percent of GDP in 2009, budget deficits have eased to 8 percent in 2010 and 6.9 percent last year and Attygalle said the government was keen to continue the trend.

As earlier reported in these pages, tax revenue grew 14.05 percent during the first six months of this year to Rs. 496.8 billion while recurrent expenditure grew 17.4 percent to Rs. 563.8 billion and capital expenditure grew 40.94 percent to Rs. 235.8 billion. The deficit had increased by 39.64 percent to 302.9 billion and estimated to be 4.03 percent of GDP.

Once touted as the bane of macroeconomic stability in the country, fiscal indiscipline is waning with the government being able to contain high deficits over the last few years.

"Anything divided by GDP looks good, this is why we have to look at the underlying fundamentals of the economy," one senior economist said.

"Our budget deficit and debt when divided by the GDP figure shows a declining trend and it is good, but this is also misleading at the same time," Prof. Sirimal Abeyratne, Head of the Economics Department of the Colombo University said.

Economists have for long argued the big ticket government spending is also reflected in the GDP which does not solely gauge the productive output of the economy.

"We need to look at the ground realities. The country’s economy is driven by the private sector and if we look at corporate earnings we see a declining trend (cumulative earnings of listed companies have fallen under 18 percent year-on-year during the June quarter). Business confidence is eroding and we have not yet created an environment conducive enough for businesses to really take off," Prof. Abeyratne said. "FDI inflows have so far been disappointing this year. Our economic fundamentals are far from stable," he said.

Loose monetary policy led to the build up of a credit bubble which fed into the balance of payments with surging imports last year. The Central Bank failed to contain the problem for more than eight months which meant that the ensuing corrective measures adopted since February, although necessary and widely commended, were nonetheless severe on the economy.

animated gif
Processing Request
Please Wait...