Budget undergoes complete overhaul for the first time in history

Sri Lanka’s budget for the first time in history is set for a complete overhaul, covering the entire government sector to ensure full transparency of fiscal planning and other policy interventions, Finance Ministry sources said.

All the previous budgets provided incomplete information on the use of public funds, fiscal policy setting and equally incomplete transparency regarding public revenue and spending, a recent analytical report of the ministry highlighted.

The risk of corruption is aggravated as off-budget funds are typically not subject to standard internal control procedures with limited transparency and do not receive the same level of external oversight as applied to budget entities.

An effective budget process will be implemented to support sound fiscal planning and set the foundation for strict control as well as transparency.

Measures will be taken to realise revenue projections and comply with expenditure limits in its annual budget preventing breaches of existing fiscal rules

A new Macro Fiscal Unit (MFU) has been established at the ministry for enhanced forecasting of economic and fiscal variables as well as the analysis of fiscal risks, an official of the ministry revealed.

In order to fulfil its functions, the new MFU will require enhanced technical capabilities and appropriate systems for revenue forecasting, he added.

Since 2014, total revenue has been overestimated every year, with an average annual forecast error of 16.9 per cent.

It has been observed that primary expenditure exceeded the budget forecast in 2019, 2020 and 2022 by an average of 6.3 per cent, but came within budget estimates in other years since 2014.

This has historically resulted in larger than planned deficits and a larger call on sources of financing. Sri Lanka has not been able to achieve a deficit of less than 5 per cent as required by its fiscal rule.

The consistent overestimation of revenue results in pressure being applied to enhance revenue collections via administrative actions, which can result in deviations from tax policy and collection procedures, creating an environment conducive to subjective actions by tax assessors that raises corruption risk, an IMF report highlighted.

In addition, unrealistic expenditure plans in budgets can create situations whereby payments are rationed by the executive due to a lack of liquidity, creating a situation in which suppliers are required or encouraged to offer bribes in order to have their payments prioritised, it added.