To this day, it is no secret that we, as a society and a country, are in the throes of recession. With a population of 22 million and a stock of foreign debt of US$69 billion, we are experiencing a sharp increase in the prices of goods and services.
In addition to the cost of living, people’s livelihoods are threatened by the taxes already imposed and by some of the measures contained in the tax bill. Although the government’s intention to bail out the coffers is welcomed by the masses, its impact will cripple Sri Lanka’s once-thriving middle class for good.
When you live a certain lifestyle, you get used to it; the main factor that shapes his way of life is income. When purchasing power depreciates, due to rising costs, people invariably cut their consumption habits. No doubt it’s going to be hard and we could all hate it but ultimately we have to adapt to this new reality.
Those who used to come to work in a personal vehicle are turning to public means or traveling as a team by sharing the expenses. If you go on vacation two or three times a year, now you have to reduce your budget. People took pleasure in eating fruits, vegetables, chocolates, imported cheeses and many other luxury products, nothing more.
The most severe blow came with the drastic fall of the LKR. The loss in value of our currency against the strengthening US dollar has halved the real value of provident and savings funds, which have taken years and years to build up. Most retirees, after 30 to 35 years of service, are desperate and feel abandoned as they have no other way to see the rest of the years, after having had such worthy careers.
Another area to watch is “foodflation”, i.e. food inflation. Right now the Central Bank of Sri Lanka (CBSL) says headline inflation is at 70% and from a simple observation we know that general food prices are over the 100 mark %. Both of these indicators will rise further before falling again.
Most middle class people are concentrated in urban and semi-urban geographic areas. Land prices and the housing market in these areas have been on an upward trend and apart from the space occupied by the house, the area left for cultivation is very minimal. Often three or four varieties of vegetables are grown in pots.
Why the SL government should focus on the welfare of the middle class
A simple fact is that they contribute more to the national economy. In the public and private sector, this group can be considered the brains. In many ways, that’s true. The level of education, the ability to innovate, the courage and passion to succeed, the superior state of financial literacy and ICT literacy have created businesses, especially conglomerating millions of jobs as small and medium entrepreneurs.
In addition, this stratum has the largest number of direct taxpayers. Therefore, it is essential for any government of any country to articulate financial and fiscal policies based on its middle class, especially in times of economic malaise such as the one we are currently experiencing. Another meaning of this class is that they tend to believe the formal financial system and banks. These people come to banks for their financial needs. For credit facilities (housing, personnel, working capital, retirement, business, etc.), for leases, current accounts, savings accounts, foreign exchange savings accounts and LCs, to meet many other needs.
Such confidence in the system helps to maintain its stability, to ensure positive growth and lucrative motivation by providing accurate and efficient services using new technologies, which are on par with the world. Since all these transactions take place in the network, the government and the CBSL are able to extract data to develop policies. Due to the economic crisis, most professionals in this category are leaving the country. There is a huge demand for skilled labor in the field of information technology and unfortunately most of them have already fled.
The middle class was at the center of most economic recoveries in the modern world. In 2015, they were three billion in the middle class and had spent 33,000 billion US dollars, or two thirds of global consumer spending.
Let’s see what happened in China. In 2000, the middle class represented only 3% of its population, or 39.1 million. In 2018, the figure exceeded half of the population, 50.8%, up to 707 million. The globally accepted norm for the middle class is people who can spend $10 to $50 a day ($3,650 to $18,250 a year).
To compare with other nations over the same period that had a growing middle class, Russia 28.2% to 71.5%, 62 million people (the only country in Europe to show such a level high), Brazil 30.3% to 51.4%, 54.8 million people and India from 1.2% to 5.7%, 64.8 million people.
The beginning of the Sri Lankan middle class dates back to the 1970s, when the economy opened up to the world. Since then, with the expansion of the economy and per capita income, the midsection has increased. With the increase in disposable income, people demanded modern houses, a personal vehicle, secondary and tertiary education for children, more nutritious food, for entertainment, etc.
A study by the Institute for Professional Studies (IPS) reveals that the number of people entering the middle class per year on average is around 30,000 people. But with the decline in GDP and per capita income (PCI), the middle class has been thinning since 2018. The PCI in 2021 is 3,815 USD, a growth of 3.27% compared to 2020. In 2019, the PCI was 3,858 USD and in 2018 it was 4,059 USD. The International Monetary Fund (IMF) forecast that the Sri Lankan economy would contract by 9.2%; consequently, a fraction of the middle class will sink into the poor section.
With the technological advancements of the Internet and means of transport, the world has become one city (globalization) and we are part of it. As a result, we feel the vibrations of the world no matter how far away we are. On the one hand, the Sri Lankan economic crisis can be identified as a consequence of the global economic collapse. We can find two main reasons for this slowdown; one is the Russian-Ukrainian war and soaring global energy prices. The other is the Zero Covid Policy (ZCP) put in place by the Chinese government to contain the spread of COVID-19. ZEP has shut down provinces in China, with its mass manufacturing centers disrupting global supply chains. Demand exceeded supply, thus increasing prices. Amidst all the constraints, the IMF cut its global economic growth forecast for 2022 and 2023 to around 3.2% and 2.7%. With the economy contracting by 9.2%, this is just bad news.
From a macroeconomic point of view, saving is defined as the balance when we subtract expenses from income in a given period. For a country, these personal savings and tax money play a major role in clearing public spending. With the proposed tax bill and all the hype built into it, the topic has become hot. Let us discuss the matter in detail.
Nobel laureate Milton Friedman made the following remarks in 1978 about fiscal policy and saving. They were quoted by former CBSL Deputy Governor Dr. WA Wijewardena in his series of articles on the Sri Lankan economy in a major Sri Lankan newspaper.
“The tax burden on people is not what they pay to the government as taxes on their income. It is the total government expenditure. Some of this expenditure is funded by current revenues We know that the higher these taxes are, the greater the tax burden on people. However, if the government runs a deficit, that deficit is normally financed by borrowing. When the government borrows from domestic sources, the money saved by people is transferred from the savers to the government.Since it is these savers who are making a sacrifice by giving up what they could do today, we believe that they are the ones bearing the burden of the current borrowings of the However, this loan should be repaid by the government with interest by taxing us in the future.
If the government cuts taxes for its citizens, the government will have to refinance its debt, but this can only be done to a certain extent. There will be a day when they can no longer borrow. By deferring tax payments in the future, we will have to pay more taxes when they are due. This will be a mortal blow to our middle class, given the perilous state of the economy. However, they must put their shoulder to the wheel. To obtain their consent, governments will have to reduce spending and endemic corruption.
In the current inflationary pressure, it is difficult to retain the true value of your investment. Therefore, look for higher returns with security. Do not engage in pyramid investments, which promise higher returns. Always remember that if such investments promise higher returns than formal financial institutes, it is definitely a scam.
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