Sri Lanka's 2014 budget which expanded a value added tax net though next year's revenue estimates may be too optimistic requiring further spending cut, an International Monetary Fund official said.
"Our overall view of that budget was quite positive. We see continued policy consistency in the budget," IMF resident representative Koshy Mathai said.
"We see tax rates not being adjusted too radically. We see deficit reduction enshrined as a goal for one more year. We see capital expenditure raised to 6.7 percent of gross domestic product. We see important measures to raise revenues."
He said value added tax was extended to a broader set of retailers, leveling the playing field.
"We've seen continued progress in bringing deficits down to 5.8 percent of gross domestic product this year and next year targeting 5.2 percent," Mathai said.
"Revenues have been weak and the government has sought to maintain their momentum towards reducing deficits by controlling expenditures, which is admirable, commendable but at the same time there is a large priority keeping capital expenditures up."
The IMF also had concerns because the revenues appeared too optimistic based on a high growth number.
"That means the revenue forecasts are likely to be too optimistic and if we are basing a budget on that we may find that once again in the course of the year having to cut expenditures in order to meet deficit targets," Mathai said.
"But that may mean that the capital expenditures proposed in the budget may not be fully executed."
The IMF has been pushing that the state extract more taxes from the people along with some other Sri Lankan policy advocates.
Parkinson's Law
But economists have pointed out that controlling expenditure is higher quality deficit reduction possible and raising more revenues to cut the deficit keep the state and rulers afloat is a second best option at best and an unfortunate and dangerous economic myth at worst.
"Those people who are properly worried about the deficit unfortunately offer an unacceptable solution: increasing taxes," US economist Murray Rothbard wrote.
"Curing deficits by raising taxes is equivalent to curing someone's bronchitis by shooting him. The "cure" is far worse than the disease.
"The only result is that the producers' money is confiscated for the benefit of a bureaucracy that adds insult to injury by using part of that confiscated money to push the public around."
More than half the taxes collected even now goes to pay the wages and pensions of Sri Lanka's bloated state sector.
Last year 50,000 more tax spenders made up of unemployable graduates taught at taxpayer expense, were added to the state worker cadre.
Though Sri Lanka has a revenue-to-GDP ratio of around 13 to 14 percent now, the country at one time had a revenues of around 20 percent.
Even at that time Sri Lanka ran a current account deficit on the budget indicating that 20 percent revenues-to-GDP were overtaken by current spending of more than 20 percent.
Analysts say this indicates that Sri Lanka has been a classic case of Parkinson's Law applied to the fiscal front: Expenditure's rise to meet income," and it would be naïve to expect a change in the mindset of the elected ruling class.
State Burden
A lower tax take while cutting the deficit reduces the burden on the state on the people and raise their living standards.
A higher tax take could divert resources to unproductive vote buying spending which would necessarily reduce growth.
But money left in the hands of private citizens would instead be put to uses that bring the highest returns or fill the greatest need for themselves and therefore the overall economy.
Cutting fertilizer subsidies to special interest groups such as landowners and farmers - though politically difficult - has the same effect on the budget as raising the tax to GDP ratio, without the negative effects associated with higher taxes on ordinary citizens.
In a downturn cutting state spending can result in a quick upturn in the economy.
The East European state of Estonia which radically state cut spending with state workers making major sacrifices was among the first to recover and boom from the recent global recession.
Opposition legislator Harsha de Silva an, economist who has spoken out for economic freedoms the people was a lone voice in appreciating efforts by the Treasury to cut current spending in recent years instead of raising more taxes.
He had also advocated raising a gaming levy to levels seen in other Asian nations and re-imposing value added taxes on casinos from which it had been removed.
Meanwhile Mathai said the IMF had concerns over extending the nation building tax to banking which may push up lending rates and voiced concerns over cutting income taxes on 'professionals' to 16 percent.
Analysts say a unlike progressive taxation, a flat tax is more equitable but charging a group of high income earners 14 percent while others are charged 24 percent is an undermining of just rule of law.
Mathai also raised concerns over raising export and import taxes and the trend towards autarky which would hurt economic competiveness, exports and undermine the efficiency of the economy.
Sri Lanka's rulers have charged discriminatory taxes on the people since independence from British rule and until this administration the elected ruling class and state works were exempted from income taxes.
Even now the elected rulers ride on tax free cars, state workers drive tax slashed cars and ordinary people have to pay exorbitant taxes over 200 percent to buy a new car.
IMF welcome budget 2014
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Oleh
Lanka Stocks
