A low fiscal deficit is vital for economic stability and sustained economic growth. Large fiscal deficits debilitate the economy in diverse ways. Containing the fiscal deficit, reducing the public debt burden and decreasing debt servicing costs are vital for economic stabilisation and long term economic development. Large deficits lead to borrowing and in turn to [...]


Fiscal consolidation imperative for economic stability and growth


A low fiscal deficit is vital for economic stability and sustained economic growth. Large fiscal deficits debilitate the economy in diverse ways. Containing the fiscal deficit, reducing the public debt burden and decreasing debt servicing costs are vital for economic stabilisation and long term economic development.

Large deficits lead to borrowing and in turn to huge debt servicing costs that distort public expenditure priorities, generate inflationary pressures and hamper economic development. Inflationary pressures increase the costs of production and erode the country’s competitiveness in international markets. A large public debt therefore has a serious destabilisation effect.

Economic summit

These issues were brought out very forcefully at the Ceylon Chamber of Commerce Economic Summit on July 10. Dr. Koshy Mathai, the Resident Representative of the IMF, said that Sri Lanka’s loose fiscal position led to higher inflation and higher interest rates and that the high level of public debt stunted growth compared with many other economies, including Sri Lanka’s peers, and put pressure on the banks.

High fiscal deficits 

The high fiscal deficits have been the fundamental flaw that has hampered economic growth. This is well recognised by the Finance Ministry, the Central Bank and the Institute of Policy Studies. International agencies have repeatedly stressed this. Even parliament has acknowledged this and enacted the Fiscal Management (Responsibility) Act No.3 of 2003 to contain the fiscal deficit and public debt.

Despite this, fiscal deficits have been off targets. Although the fiscal deficit has been brought down in recent years, the reduction has been inadequate and less than the targeted deficit. Furthermore, the fiscal deficit has been kept low by passing on items that should be financed by the budget being financed by banks. These are contingent liabilities of the Government and have to be ultimately financed by the Government.

Commitment to reduce deficit 

Finance Secretary P.B.Jayasundera emphasised that the Government was committed to bringing down the deficit to the targeted 5.8 per cent this year at the Economic Summit. He was confident of this as there were measures put in place already and others were those planned in the short to medium term. He adduced several reasons for the feasibility of achieving a lower fiscal deficit: the end of the moratorium on BOI enterprises that began in 1962, full operations of VAT at retail level with a further rationalisation of the exemptions and the normalisation of imports.

Reiterating the commitment to reduce the fiscal deficit, Dr. Jayasundera stressed: “The Government remains committed to the deficit reduction path seen in the post-conflict period … is continued to reach further progress in 2014 and 2015 to bring the deficit to below 5 percent”.

It is true that the deficits have been progressively reduced. Despite mixed performance in terms of managing the fiscal deficit in the first half, Dr. Jayasundera said the Finance Ministry was confident that there would be improvements in the second half of this year over the contraction witnessed during the second half of last year.

“This together with continued moderation in recurrent expenditure, the deficit set for this year at 5.8 per cent is realisable,” he said, adding the medium term target was consistent in accommodating available long-term financing at relatively low rates from foreign development partners and domestic sources while creating an increased space for private borrowing.

Declining trend but difficult

There has been a trend decline in fiscal deficits. The budget deficit declined from 9.9 per cent in 2009 to 6.4 per cent in 2012. The Debt to GDP ratio also declined to 78.5 per cent in 2011, but increased to 79.1 per cent of GDP in 2012. However, the targets of bringing down the deficit were exceeded.

This year’s fiscal performance has once again been adverse with revenue shortfalls and expenditure overruns. According to the Ministry of Finance, the fiscal deficit for the first four months expanded by 20.3 per cent to Rs. 343.5 billion from Rs. 285.5 billion a year ago. The deficit was 3.9 per cent of GDP, marginally up from 3.8 per cent last year. With this outcome in the first four months, it would be exceedingly difficult to achieve the deficit target for the full year of 5.8 percent of GDP.


While the resolve and the commitment of the Finance Ministry are commendable, there are serious difficulties in achieving the target. On the expenditure side, it has been difficult to rein in government expenditure and losses of public enterprises. Though the new pricing policy for electricity is expected to reduce some of the losses of the CEB, it is difficult as there have been little efforts to reform most enterprises, as well as contain wasteful and unproductive expenditures.

On the revenue side, tax revenues at 11 per cent of GDP are woefully inadequate. “Tax dodging through evasion, avoidance and the use of so-called tax planning may undermine the envisaged improvements in taxation,” Dr. Jayasundera said. The inefficiency and lack of integrity of tax gatheyers that Senior Minister pointed out sometime ago are also serious constraints to the collection of due taxes.

It appears that the recommendation of the Presidential Tax Commission, that has not been made known to the public, has not been implemented fully. May be there were measures that could have enhanced tax revenue. A realistic approach to increase tax revenue that recognises the inefficiencies of the administration and the innovativeness of the rich to evade taxes must be put in place so as to increase tax revenue and to reduce the regressive nature of taxation in the country through indirect taxes on basic items of consumption that fall heavily on the poor.

Complex task ahead

Dr. Jayasundera pointed out that the “Management of the fiscal deficit is real and we have to do it in a very complex economic environment. The silver lining, however, is the relatively low defence expenditure and the much stronger security that is prevailing in the country.” Yet it is a challenge that must be accomplished to ensure economic stability and growth.

The containment of the fiscal deficit, decreasing the public debt and reducing debt servicing costs are vital for economic stabilisation and long-term economic development. Curtailment of unproductive and wasteful government expenditure, reduction of losses in public enterprises and prioritisation of government expenditure are vital to reduce government expenditure, as well as to increase expenditure of essential social infrastructure. Equally important are finding means for increasing revenue through a system of effective progressive taxation.

An appreciation of the importance of the objective backed by a political resolve and commitment are essential to achieve a reduction of the fiscal deficit. Drastic reduction of wasteful and unproductive expenditure is a key to achieving it.

Share This Post

comments powered by Disqus

Advertising Rates

Please contact the advertising office on 011 - 2479521 for the advertising rates.