Drastic reduction in expenditure and increase in revenue thanks to progressive taxation crucial for fiscal consolidation | Print edition

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The immediate reduction of the budget deficit and its progressive reduction in the coming years are essential for the economic recovery of the island. It must be achieved both by reducing expenditure and increasing revenue through progressive taxation.

Fiscal consolidation

Minimizing the budget deficit is crucial for economic stability and growth. For many years, the country spent more than its income and these deficits had to be financed by internal and external debt.

Budget deficit

The budget deficit which is currently estimated at 13% of GDP needs to be drastically reduced, a difficult task. It is not an easy task. There are enormous difficulties and significant changes to be undertaken to reduce expenditures and increase revenues.

Such fiscal consolidation is a difficult and challenging task for the government. The budget deficit must be reduced from the current 12% of GDP to around 5% of GDP over the next three years through drastic cuts in public spending and an effective system of progressive taxation.

Strategy

Reducing the budget deficit must go through a dual strategy of improving revenue, on the one hand, and drastically reducing expenditure, on the other. Both strategies are politically unpopular and administratively difficult.

Solve

The government has signaled its willingness to undertake a program of fiscal reform. However, he focused mainly on increasing tax revenue rather than reducing public spending in the interim budget.

Spent

While revenue to GDP is only 8% of GDP, expenditure is estimated at over 20% of GDP. The revenue collected is in fact insufficient to cover even the expenses of salaries, pensions and debt repayment.

Defense expenditure

Distortions and prioritization of public spending are reckless and unproductive. For example, defense spending is the single largest item in the budget and exceeds the proportion spent by many developed countries with large defense needs! Surprisingly, defense spending increased after the three-decade war.

Consequences

This means that other essential expenditures that should be increased to improve the quality of services, such as research, health and education, are deprived of adequate resources. A reform of the structure of public expenditure is necessary. Bold political decisions, difficult but imperative, must be made.

Revenue

Government revenues have gradually declined and represent only 8% of GDP. This is almost the lowest revenue collection rate in the world. Only two countries are at a lower level: Zimbabwe and Bangladesh.

Taxation

Several drastic changes need to be implemented to increase personal and corporate taxes. The income tax threshold has been reduced from a high exemption level of Rs. Two million to Rs. 1.2 million per annum in the interim budget for 2022. However, even this would be insufficient due of widespread tax evasion and evasion.

Tax evasion

There are few taxpayers in the country. Many high-income earners pay little income tax. Income taxes come mainly from public sector and corporate employees and a few professionals who underestimate their income. Some of the highest earners are tax evaders.

Indirect taxes

Obtaining their dues directly is an almost impossible task. It is therefore imperative that indirect taxes that hit the consumption of the rich be adopted. Taxing what the rich own or consume is the pragmatic way forward.

Conspicuous consumption

Expenditure taxes on the conspicuous spending of the wealthy, higher property taxes, increased registration fees, especially on high-value vehicles and other conspicuous consumption, must be put in place to ensure that the wealthy who avoid direct income taxes bear the tax burden.

Not practical

In this context of tax evasion, the establishment of a conventional method of obtaining their tax contributions is impractical and ineffective in its implementation. This is certainly not possible immediately.

It is therefore imperative to adopt indirect taxes that hit the consumption of the rich. Large increases in taxes on property, on luxury consumer items, registration fees on motor cars and other conspicuous consumption should be implemented. A system of taxing expenditures that are the responsibility of the rich and the affluent should be put in place.

Much of the necessary increase in revenue must be sought through direct and indirect taxes, the incidence of which falls on the rich and the well-to-do.

Past reluctance

Either way, the country’s tax history demonstrates a reluctance of successive governments to impose such taxes. There was only a short period in the country’s history when efforts were made to introduce such taxes in the second half of the 1950s.

Much of the necessary increase in revenue must be sought through direct and indirect taxes, the incidence of which falls on the rich and the well-to-do. One way or another, successive governments have hesitated to impose such taxes.

Conclusion

The gradual reduction of budget deficits is imperative for the recovery, recovery and development of the economy. The IMF would insist on a fiscal consolidation program for the Extended Financing Facility (EFF) grant of $2.9 billion over the next four years. Will the government be able to drastically cut spending and sharply increase revenue? If we fail, the country’s economic prospects are bleak.

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