Sri Lanka’s fiscal problem is not that it taxes too much but that too few people pay taxes, Centre for Poverty Analysis Consultant Dr. Roshan Perera said yesterday. She said the tax-to-GDP ratio must be maintained or raised for growth to be sustained.
‘I am going to say something that is not going to be very popular in this room. I think Sri Lanka’s fiscal problem is not that we tax too much. It is that too few people pay tax,’ Dr. Perera said, speaking on a panel at the Sri Lanka Economic and Investment Summit.
She said research she had done with colleagues had identified a growth-maximising tax threshold that Sri Lanka has yet to reach. The ratio would therefore have to be maintained for some time to support a sustainable growth rate.
Dr. Perera said household resilience depends on job creation, which in turn requires growth momentum. She stressed that she was not calling for higher rates but for a wider tax base. That would mean bringing employed professionals, property and other under-taxed areas into the net, and gradually phasing out tax holidays.
She also called for spending to be rationalised. Interest now takes up about 46% of revenue, salaries about 21%, and subsidies, transfers and pensions about 23%. Meanwhile, 84% of expenditure is recurrent and only 16% goes to capital spending.
Her research found that each rupee of public investment raises GDP by nearly Rs. 1.50 on impact, and the effect persists. By contrast, recurrent spending has no effect on GDP and is sometimes negative.
‘If you want growth that lasts and reaches the bottom half, the Government has to increase spending to build two kinds of capital, both physical capital and human capital,’ she said. She added that capital spending should go to carefully selected infrastructure projects that raise productivity and crowd in private investment.
Dr. Perera said Sri Lanka had maintained its primary surplus, the budget balance excluding interest payments, but possibly at the cost of capital spending. Only about 30% of the capital budget had been spent in the first nine months of this year.
She said higher allocations alone would not be enough. She called for reforms in public investment management, project selection based on economic returns and procurement, as well as stronger capacity to implement projects.