Spotlight: Econ Op-eds in Summary (Week ended 04th December '19)
1. What the private sector needs more than tax cuts
By: Waruna Singapulli CFA
· The new government has the challenge of working around foreign relations to make sure the country receives economic benefits. The non-aligned policy that the new President has proclaimed is a good step to this end. Receiving economic help from different countries can help Sri Lanka access technology and leapfrog its development significantly.
· While the tax cuts offered by the new regime are positive for consumption and will help revive the slowing economy in the short term, the medium to long term impacts are more negative. If growth in demand happens without a similar growth in supply, the economy could overheat, causing higher inflation and interest rates, that could even materialize near the next presidential election.
· Tax cuts will also be helpful for the IT and KPO sectors, but that alone will not drive growth in the sector. The sector requires more skilled labour in order to grow and compete, and urgent action will be required here in order to see the benefits flow to the country. All this needs to be done before the economy possibly overheats in 2022/2023.
2. Gotabaya’s tax cuts: Case of VAT
By: Sirimewan Dharmaratne
· The public should understand how the recent tax cuts affect the wider economy. In the case of VAT and NBT cuts, these represents over a 50% reduction in tax revenue. Normally tax cuts of this magnitude are phased over several years allowing the economy to adjust without short term shocks.
· These tax cuts are expected to be recovered through a widened tax base from expanded production. For this to happen fully, production should increase by at least 108%. This would impact significant pressures on labour and capital markets. This could include wage increases and impacts on prices as well.
· It is important to do a full ‘scorecard type’ analysis of each policy which covers ‘side-effects’ of the tax cut such as environmental impacts, impacts of income distribution and social costs. This analysis should be objective and free of political influence. The analysis should be of highest quality and open for public scrutiny.
3. Are our sick SOEs beyond redemption
By: Lionel Wijesiri
· State Owned Enterprises (SOEs) around the world are playing an increasingly important economic role, both globally and locally. In such a context, Sri Lanka’s SOEs have been struggling for years, with privatization being seen as the only way of redeeming the ailing SOEs of the country.
· However, global success stories show that privatization is not necessarily the way to go. Instead, it is only sensible to first explore why these businesses have been encountering loss, and to change policies through lessons from the private sector. In such a way, proper and sustainable measures will be more possible.
· Thus, a few steps, including establishing clear roles and responsibilities, appointing qualified persons to SOE boards, making a cultural shift towards efficiency, having formal government agreements and establishing a commission to overlook these SOEs, should be taken to redeem the struggling SOEs.
(Compiled by: Chayu Damsinghe, Promodhya Abeysekara, Asel Hettiarachchi & Devon Mallawarachchi)