Strikes and deficits.

THE government's plan to increase revenues by expanding the tax base has already run into an impasse. Major markets around the country had been shut in response to a strike call given by the leadership of the trader community, and were only just beginning to reopen. What a fortuitous time for the State Bank to release its annual report for the fiscal year 2019. It might sound like it is a dated document seeing as it is coming a full four months after that year ended, but it is actually just in time with some important reminders to bear in mind.

The report gives important context to understand the historic high fiscal deficit that was seen in that year, but more importantly, it sheds light on the fiscal challenges shaping up for the government in this crucial year of economic adjustment. For FY2019, the deficit was recorded at 8.9 per cent of GDP, arguably among the highest ever recorded, but this 'could be partly attributed to factors beyond the control of the fiscal authorities' the report says.

It lays part of the blame on the targets contained in the budget of April 2018, announced by the outgoing government, and another part on the interest rate increases that were the single largest contributor to expenditure overruns. When drawing up the revenue targets for the next fiscal year, a government that was in the final days of its term 'envisaged a sharp increase in tax revenues without specifying any fresh measures to boost collections', leaving behind a tax revenue target of Rs5.336 trillion where actual collection came in at Rs4.473tr instead.

Perhaps the snake has shed its skin, or maybe the government has realised who it is really supposed to serve.

A simple narrative could be built here saying that the new government inherited an unrealistic budget and its performance looked bad because it was unable to meet these targets. But this would be misleading. Two facts are important: first the new government had two occasions to revise the fiscal framework in two separate 'mini-budgets', and second because a substantial chunk of the failure on the revenue front was due to a policy choice made by the government at the time, which was to keep taxes on petroleum products low.

'[T]he entire decline in the single-largest revenue source for the government, ie, sales tax, during FY19 was attributed to lower collections from petroleum' says the report, adding that between lower recoveries from petroleum and the wiping out of State Bank profits, a...