Achieving 2021 Government Revenue Targets A Challenge

By Ishara Gamage | Published: 2:00 AM Nov 21 2020
FT Achieving 2021  Government Revenue Targets A Challenge

By Ishara Gamage

Economic and financial sector analysts warn that it will be difficult to meet the expected government revenue and Budget deficit targets for 2021. They say this is mainly due to the negative impact on the economy from the prevailing COVID-19 epidemic.

Commenting on the matter, a top economist said that lower-than-expected economic growth figures could adversely affect these revenue targets. In addition, he says, this will be affected by the reduction in taxes which are a major source of revenue for the government and the concessions given to taxable individuals and institutions.

He added that the government expects major tax revenue from external economic activities at a time when import restrictions are tight. Tax on external trade is set to increase by 31.5% to Rs 530 billion following amendments to import and export duty structures; while Non-tax revenue is forecasted to grow 40.1% YoY to Rs 227 billion.

It is also stated that the government tax revenue has not increased by more than 5 to 10 per cent in other years except 2015/2016 which has brought about a drastic change in the tax structure of the country.  The government expects tax revenue to grow by more than 20 per cent from 2020 in this budget. 

 “There is a greater risk of revenue shortfall in 2021 as witnessed in 2020 due to disruptions in economic activity caused by the COVID-19 pandemic. Hence, with higher expenditure budgeted with a challenging revenue target, achieving a budget deficit of 8.9% of GDP in 2020 will be challenging,” a Colombo based equity research arm of SC securities stated in its post- budget commentary.

Comparatively slow growth in revenue compared to expenditure is set to widen the budget deficit by 23.6% over 2020 to reach Rs 1,565 billion. The Budget deficit as a percentage of GDP is expected to increase to 8.9% in 2021 compared 7.9% estimated for 2020.

According to the budget, deficit financing through foreign borrowing is estimated to be Rs 606 billion; a YoY increase of 86.5% compared to 2020. As a result of debt rollover Rs 507 billion out of this will be used for debt repayment. 

SC securities stated that the budget deficit will be predominantly bridged by way of domestic financing of which 70% would be in the form of non-bank borrowings. Bank borrowings would be as high as Rs 319 billion, a decline compared to Rs 464 billion borrowings in 2020.

From a relatively low revenue base in 2020 (Rs 1,588 billion), Government Revenue and Grants for 2021 is projected to grow by 27.8% Year-on-Year (YOY) to Rs 2,029 billion.

Approximately 85% of total revenue is expected to be raised by way of taxes, while 11.2% in the form of non-tax revenue, and the balance in the form of grants. Given the downward revision in corporate tax rates and the slowdown in consumption, achieving this revenue target would be challenging.

Government Expenditure in 2021 is projected to increase by 25.9% YoY to Rs 3,594 billion. This higher growth is attributable to the low base in 2020. Recurrent expenditure which includes salaries and wages, interest, subsidies and transfers and other goods and services accounts for the bulk of 70.5% of total expenditure, while the remainder is to finance public investment which includes education, health and infrastructure development.

Due to the downward revision in corporate tax rates and slowdown in consumption, Income tax revenue is projected to grow by only 14.5% YoY in 2021.

Tax on Goods and Services will remain the major contributor (40.6% of the total government revenue) with a forecasted growth of 30.4% YoY to reach Rs 823 billion. The government has curtailed recurrent expenditure to a 3.6% annual growth in 2020. As a percentage of GDP it’s set to decline to 14.4% from an average of 15%.

Approximately 25% of recurrent expenditure accounts for the cost of salaries and wages which is set to grow by 7% in 2021. Interest payments accounts for 24%, though it is set to marginally decline in 2021.

Salaries and wages together with interest expenditure, which are unavoidable costs of the government, is set to reduce to 87% of total government revenue and grants in 2020, compared 107.8% in 2020. In the past on average public investment attracts about 25% of the total expenditure. However it is noteworthy that there is a high emphasis on public investment in 2021 amounting to 29% of total expenditure. As a percentage of GDP Public Investments are set to account for 6.1% in 2021 compared to 2.6% in 2020. “This could be considered as an investment in future economic growth,” SC Securities stated in its post budget commentary.

By Ishara Gamage | Published: 2:00 AM Nov 21 2020

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