Tuesday, 10 December 2019 03:54

ICRA Lanka predicts long tern fiscal instability due to tax cuts

The Government of Sri Lanka (GoSL) reduced variety of taxes substantially in an attempt to revive the economy, which could possibly cost over LKR 500 Bn according to government’s own estimates.

Whilst acknowledging the potential boost to the aggregate demand and corporate profitability from the fiscal stimulus in the short-run, ICRA Lanka a credit rating agency believes Sri Lanka should broaden the tax base and continue fiscal consolidation to avoid macroeconomic instability to benefit from the tax buoyancy effect.

ICRA Lanka’s interviews with a cross section of top business leaders in the country just before the fiscal stimulus revealed the heightened effective tax rates are one of the main factors impeding the profitability and growth of the corporate and finance sectors.

The key problem faced by the government for past few decades is that its recurrent expenditure has been above the total revenue, thereby leading to accelerated debt formation.

In the process, much needed capital expenditure, which is critical for long term economic growth, has not grown substantially.

Therefore, growth of recurrent expenditure should be curtailed to the maximum extent possible to avoid facing headwinds to economic growth

(LI)

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