Spotlight: Econ Op-eds in Summary (Week ended 20th May'20)
1. Constrained fiscal space for post-COVID-19 reconstruction: Consider postponing costly tax reforms
By: W. A. Wijewardena
· The large economic damage caused by the Covid-19 outbreak in Sri Lanka has been met primarily with Central Bank action in the form of monetary support. While such artificial propping up of demand can protect output in the immediate term, it isn’t backed up by real output beyond this. Continuing this action can therefore lead to inflationary depression.
· In order to support the recovery of the economy without facing such issues, the government will need to get involved with fiscal action. However, recent tax reforms have meant that the government will have very low fiscal space to do this. Revenue losses could reach up to Rs. 9 bn monthly, and combined with weaknesses in the current account, could further worsen in the midst of the pandemic.
· Therefore, in the absence of tax increases, any recovery of the economy will have to depend on foreign borrowings, which would be very risky at a time like this. Unless the government is able to increase tax revenue through increased taxes, the alternative would be to return to the previous tax regime for the short term so as to be able to spend into the economy, so as to see Sri Lanka recover.
(Compiled by: Chayu Damsinghe)
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