Impact of Tax Revenue on Budget Deficit: Evidence from Sri Lanka.

Abstract

The budget deficit is a major economic problem in many countries in the world, Sri Lanka has budget deficit for a long period. The main aim of the study is to identify the impact of tax revenue on the budget deficit of Sri Lanka. Tax revenue and the budget deficit of Sri Lanka were collected from the central bank report from 1991 to 2020. Descriptive and regression analysis was performed in this study. Descriptive analysis reveals that the average budget deficit of Sri Lanka was around 61% of the tax revenue of Sri Lanka during the above period. Further, regression analysis confirms that there is a significant impact of direct and indirect tax revenue on the budget deficit of Sri Lanka, those revenues have 85 percent impact on the budget deficit of Sri Lanka. Especially, direct tax revenue has more impact on the budget deficit of Sri Lanka than indirect tax revenue. According to the findings of the study, tax policymakers and tax authorities of Sri Lanka has to focus on effective and efficient tax policy changes on direct taxes as well as on indirect taxes to increase the tax revenue, which may lead to control and reduce the budget deficit of Sri Lanka. Sri Lanka has a very low level of direct tax collections when compared to other countries, therefore Sri Lanka needs some effective tax policy changes to raise adequate direct tax revenue.