The Political Economy of Long-Term Revenue Decline in Sri Lanka

Abstract

From the 1950s to the 1980s, Sri Lankan governments collected a high proportion of Gross Domestic Product (GDP) in taxes. They spent most of that money on mass provision of health and education services, and subsidised food. Sri Lanka was a model welfare state, with unusually high human development indicators. Contemporary Sri Lankan governments spend very little on their poor citizens. A major reason is that since 1990 the proportion of GDP collected in tax revenue has steadily declined, such that it is now at unusually low levels. Internal conflict, although almost endemic, does not explain declining tax collection. The decline results from a continuous series of policy decisions to exempt wealthier people, businesses, incomes and assets from taxes. This paper analyses the more identifiable political and institutional processes through which the political preferences of the wealthy and powerful were translated into low revenue collection. They are: the declining power of popular forces (notably programmatic political parties and trade unions); the emergence of foreign aid and loans as an alternative to domestic revenue mobilisation; the institutionalisation of pressure to exempt the private sector from taxes; powerful executive presidents who undermined or dispensed with the authority of ministers of finance; and a political and institutional lock-in to a high dependence on taxes levied on a declining sector of the economy – imports – and to the Customs Department that collects them.