Spotlight: Econ Op-eds in Summary (Week ended 11th December '19)
1. Tax cuts - Control the damage before the unconventional stimulus backfires
By: W.A Wijewardena
· While the general public welcomed the tax cuts, business sector and international organisations have been more cautious due to the fiscal and debt sustainability concerns. The rationale for the tax cuts has been to provide additional income to the taxpayers and broaden the tax net while simplifying the tax system.
· While marginal tax rates have reduced and tax-free allowances have increased, income tax brackets have been narrowed in an attempt to recover the government’s revenue shortfall of around Rs. 650-680 bn. Reduction of VAT rates and coverage will be a relief to consumers and proposed exemptions can boost the specified business sectors.
· In such a situation a policy paradox is created where, short term revenue losses should be compensated by borrowing from the market or the Central Bank, leading to conflicts with other government objectives. Abolition of taxes such as PAYE and WHT where such income is now subject to income tax can increase total tax revenue. The success in raising this revenue will depend on the efficiency of the IRD.
2. Laying the foundation for economic development
By Nimal Sanderatne
· Firm economic policies can only be expected once the new government is formed after the parliamentary elections next year. With electoral politics making the implementation of such policies difficult in the interim period. It is more likely that we will witness a slippage in the macroeconomic fundamentals of the economy – due to fiscal loosening. However, what can be achieved in the interim is the setting up of a foundation/institutional framework with which longer term economic policies can be achieved.
· There are several conditions that must be fulfilled in order to achieve the goal of above 5% annual growth. These include peace between communities, reducing corruption, improving administrative efficiency, pursuing pragmatic economic policies, strengthening macroeconomic fundamentals and improving investor confidence.
· The government’s commitment to developing a disciplined, peaceful society, eliminating corruption, and creating a culture of meritocracy – especially in the public sector - could be challenging given the organizational culture which has prevailed in most of the organizations.
(Compiled by: Promodhya Abeysekara, Asel Hettiarachchi & Devon Mallawarachchi)