Classical economist B R Shenoy warned Sri Lanka in the 1960s when the country started its first IMF program after printing money (mostly for rural credit re-finance), not to engage in revenue based fiscal consolidation, which he called a ‘statistical alternative of balancing the budget’.
“This alternative is beset with pitfalls,” Shenoy warned in a report commissioned by ex-President J R Jayewardena.
“Past experience in Ceylon, which is in line with experience in virtually all parts of the world, is that in a democratic set up political and other pressures are heavily on the side of more and more spending by the government.
“When Revenues increase, under the weight of these pressures, expenditures too increase to meet, or even exceed, Revenue collections. In Ceylon during the past seven years Revenues rose by 45 per cent and Expenditures charged to Revenues by 48 per cent.”
From December 2014 to November 2019 tax revenues went up 65 percent to 1,612 billion rupees and recurrent spending went up 55 percent to 2,053 billion rupees, before taxes were cut in December to target ‘potential output’.
Revenue based fiscal consolidation, which is in line with a ‘heedless spending’ ideology that emerged among English speaking academics (US ‘progressives’ or post-Keynesians) combined with nationalized central banks, led to a spike in spending to GDP as salaries and subsidies were hiked with no restraint from 2015.
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