• Inequality, distribution, and the tax structure

Most people, even political commentators, will have no idea who James Bowler is. The 51-year-old is a life-long British civil servant, now serving as the Permanent Secretary to His Majesty’s Treasury, which is the equivalent of Sri Lanka’s Secretary to the Treasury. 

Those holding such positions within the civil service are neither meant to be household names nor act as political instruments. Instead, it is their job to ensure there is a balance between political and economic imperatives of the government of the day with the need for smooth and orderly functioning of the state and economy.

So it came to pass that amidst rumours of an impending appointment as the secretary to the Treasury, Senior Economic Adviser to the President Duminda Hulangamuwa found himself on a television interview programme being pressed on potential conflicts of interest from such appointments. Hulangamuwa is currently the Country Managing Partner at a leading international accounting and audit firm; he is also the Chairman of the Ceylon Chamber of Commerce (CCC). 

The link between Sri Lanka’s 2022 economic collapse and the degradation of governance and independence of institutions is well established; a practice of political appointments replacing career civil servants has had disastrous impacts on our country’s economy and institutional governance. 

In the early 1990s, former Governor of the Central Bank of Sri Lanka A.S. Jayawardena, a graduate of Harvard University and career civil servant, was the Secretary to the Treasury. However, the period that followed saw a steady deterioration of norms. Charitha Ratwatte, appointed Treasury Secretary by Prime Minister Ranil Wickremesinghe in 2001, was neither an economist nor a civil servant and was known to be a close confidante of Wickremesinghe.  

Dr. P.B. Jayasundera was in fact both a career civil servant and an economist. However, his appointment as Secretary to the Treasury was perhaps most emblematic of the politicisation of the position. 

Having initially been appointed by President Chandrika Bandaranaike Kumaratunga, Dr. Jayasundera was seen to be a close confidante of that Government and his reappointment to the same role during the Mahinda Rajapaksa era, replacing Ratwatte, was seen as a continuation of political appointees to the role. 

Throughout his tenure, Dr. Jayasundera was seen less as a neutral civil servant and more as an enabler or gatekeeper of the Rajapaksa administration. He also held dual roles that were unusual for the Treasury Secretary, simultaneously being a Chief Economic Adviser to the President and a key member of high-level economic committees – quite similar to Hulangamuwa in that respect. 

The Supreme Court found Dr. Jayasundera guilty of misconduct in a procurement case related to Lanka Marine Services Ltd. and John Keells Holdings PLC, barring him from holding any public office; yet he was only to be reinstated by President Mahinda Rajapaksa a year or so later. 

The ‘penny-drop’ moment

Gary Stevenson is a British economist and former financial trader attached to Citibank where he made a fortune by, as he calls it, “betting on the collapse of society”. 

Stevenson, a Mathematics whiz kid from a poor, working class background in East London, earned a full scholarship to study at the prestigious London School of Economics (LSE), from where he won a national maths competition to earn an internship at Citibank. 

Having earned a position on the bank’s trading floor by 2008, around the time of the global financial collapse precipitated by the subprime mortgage crisis in the US, Stevenson was tasked with analysing the movements in interest rates. 

In the US and later in the UK, the collapse or near collapse of major financial institutions led central banks to dramatically cut interest rates. In the US, rates went from 5% in early 2008 to 1% by October 2008 and down to a range between 0% and 0.25% by the end of that year; the UK too reduced interest rates from 5% in October 2008 to 2% in December that year. 

In a February television interview, Stevenson stated: “Bringing rates to zero is like an emergency measure… and the economic theory tells you this should cause a massive economic recovery.” Everybody on his trading desk at Citibank was analysing (and betting) on when the economy would recover; one major barometer for a potential recovery is rising interest rates. 

Stevenson recalled: “We obviously know now, it didn’t happen but at the time, every single year, the economists, the traders, the markets said: ‘Next year rates will go up, which means next year the economy will recover,’ literally every year – 2009, 2010, 2011, all the way until 2020 – and it wasn’t until Covid when they finally said: ‘Okay, rates will stay zero forever,’ and then, of course, rates immediately went to 5%.”

When Stevenson was hired on a permanent basis in 2008, his annual salary was £ 36,000, but his first full-year bonus was £ 400,000. “The way I became a millionaire is, after the financial crisis, I realised that because of a massive growth in inequality, we would basically never come out of that crisis and I started to put massive bets… that the economy would get worse and worse… and within a year of doing that, I became Citibank’s most profitable trader in the world,” he said.

Quantitative Easing (QE) is a process through which central banks inject money into the economy, basically by purchasing government debt in the form of bonds either directly from the government or from the secondary market, i.e. the banks. Stevenson’s analysis suggests that QE has had unexpected consequences because economists and policymakers simply do not consider issues of distribution and inequality. 

Stevenson was incredulous that during this period of monetary expansion, there had barely been any analysis on the distributional impacts of QE: “If you know the government’s given out a trillion pounds and the government is a trillion pounds in debt, which… nobody’s denying… please at least have an understanding of who has a trillion pounds now… There’s this kind of blissful, almost beautiful stupidity in the economics media, how can you not ask that question?”

Stevenson calls this the ‘penny-drop’ moment in his career – the realisation that because the large majority of working-class people were already poor and already struggling to make ends meet, QE would not help them. 

The UK Government utilised a programme from the 2009 crisis called the Asset Purchase Facility (APF), which was used to purchase £ 450 billion worth of Government bonds since the Covid-19 pandemic of 2020. The total currently stands at around £ 650 billion as this includes assets purchased since the 2008 financial collapse; the portfolio peaked at almost £ 900 billion. 

The furlough scheme (officially called the Coronavirus Job Retention Scheme [CJRS]), introduced by the UK Government as a fiscal stimulus programme, subsidised some 80% of company payrolls, allowing companies to avoid mass layoffs and keeping people in their jobs, amounting to £ 70 billion.  

The great redistribution of wealth

Through the APF, the UK Government purchased hundreds of billions of pounds worth of Government debt (bonds) from financial institutions like banks, investment firms, and pension funds. Financial institutions with excess liquidity were supposed to inject that excess liquidity into the market through credit. 

However, banks do not lend simply because they have more liquidity and reserves. A bank’s lending is based on dynamics like risk appetite, profitability, and creditworthiness of borrowers. In the period of the pandemic, there was no major boost in bank lending to households and Small and Medium-sized Enterprises (SMEs); however there was growth in mortgage lending, which led to an increase in house prices. 

Stevenson contended that QE, intended to stimulate the economy, primarily benefited the wealthy by inflating asset prices. Wealthier individuals, who already owned assets like stocks and property, saw substantial gains, while those without such assets did not experience comparable benefits. This dynamic, according to Stevenson, has led to the rich becoming richer, exacerbating economic disparities. 

Through QE, the central bank was printing money and lending it to the government. “The government gives the money out… and it looks like nothing’s changed because you’re still getting your income.” 

However, as Stevenson explained: “It’s not all spending which collapsed during Covid; what collapsed during Covid was non-essential or luxury spending. So if you’re a poor, ordinary family and most of your expenditure is rent, mortgage, food, bills, you still have those expenditures. The expenditures which disappeared are luxury expenditures, and who has the luxury expenditures? It’s the rich, so basically… it was inevitable from the very beginning, that we would have a £ 800 billion transfer from the government to the rich, and I think anyone who bothered to look at this would have seen this.”

Stevenson views the rise in house prices in the broader context of all asset prices having seen a surge in value: equities (FTSE Index, S&P), corporate bonds, gold, venture capital – all signs of wealth and prosperity in a context of governments with rising debt and societies with collapsing living standards. 

“Everyone thinks that house prices are going up because of bad planning, over-population, inadequate supply, etc. But house prices are rising in a context of all other asset classes also rising… My dad lived in an era of house price two times income. I live in house price 20 times income; my kids will live in 40 times income,” he added.

Stevenson’s critique of the economics establishment is based on the emphasis on so-called Representative Agent Models (RAM), which assume an average economic agent, the average person, while paying no attention to the vast difference in distribution, i.e. inequality and the impacts of said inequality. This leads to the so-called ‘paycheque-to-paycheque’ reality for most people in the UK’s working class and, increasingly, its middle class. 

Stevenson stresses that in reality, the rich save and invest, while the poor spend everything they earn just to survive. Economic models over-emphasise aggregates, such as average consumption or average savings, which says little about the real distribution within the economy. Policymakers misjudge real effects of policy due to this blindspot in their formation.

The establishment strikes back

This is the danger of orthodoxy, in many ways; it entrenches the same mistakes. 

If we return to the issue of Hulangamuwa and zoom out, this once again represents an appointment of a business figure familiar to the policy-planning establishment. There have been suggestions that Hulangamuwa, through his leadership of the CCC, was guilty of cheerleading the tax cuts of the Gotabaya Rajapaksa administration; indeed he was one of the leading economic advisers of that administration as well.

The Sri Lankan policy establishment, led by the Ranil Wickremesinghe administration, negotiated an International Monetary Fund (IMF) programme that only required a revenue target, tax-to-GDP of 15%, far below what is generally necessary for a country to ensure adequate fiscal space for investing in public services and social assistance. 

This target is likely the result of some Thatcherite adherence to fiscal conservatism and the fact that the National People’s Power (NPP) Government has explicitly chosen this framing underlines the dominance of the establishment, even over this supposedly ‘Left-progressive’ administration. 

The fact is, one-third of the 23% increase in revenue projected in the Budget for 2025 is to be generated from Value-Added Tax (VAT), which is a regressive consumption tax. The Government’s own projections reveal a complete lack of ambition to raise income taxes; out of an estimated revenue growth of Rs. 922 billion, only Rs. 141 billion or 15% is projected to be generated from income taxes. 

Sri Lanka’s corporate tax-to-GDP has only been 1.5% for the past 10 years before increasing to 2% in 2024. Excise duty and taxes on international trade, together with VAT, account for Rs. 694 billion, which is 75% of the total increase in projected revenue for 2025. 

Far from introducing comprehensive wealth taxes on the ultra-wealthy, this Government has maintained roughly the same tax structure as the Wickremesinghe Government – no top marginal income tax rate for the highest earners; the slabs are structured in such a manner that it applies the top tax rate of 36% on the highest income earners as well as somebody earning just over Rs. 300,000 per month. 

This means that whether you earn Rs. 500,000 a month, Rs. 3 million a month, or Rs. 6 million a month, your tax rate remains the same. Does this make any sense? This goes against even the most orthodox economic sentiments that trace its roots to Adam Smith in ‘The Wealth of Nations,’ Book V, Chapter II, Part II: “The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities.”

The very fact of a discussion on appointing somebody with the profile of Hulangamuwa raises two different points – one about the potential conflicts of interest and the other about perpetuating an orthodox economic policy regime, one that perhaps requires more diversity of thought and experience. 

Policy orthodoxy has meant that even three years into a revenue-based fiscal consolidation, brought on by a collapse precipitated by tax cuts amounting to some Rs. 900 billion, there has been no broad instrument to reclaim some of the windfall profits accumulated by Sri Lanka’s largest and most profitable companies and wealthier individuals. For the same reason, there is no conversation about additional taxation on the financial sector – those banks that will receive extraordinary returns on their bond holdings as a result of being excluded from the Domestic Debt Optimisation (DDO). 

Even as Sri Lankan poverty virtually doubled, the Government failed to meet the IMF-prescribed minimal target for social assistance expenditure. Recent studies and reports indicate that Sri Lanka’s middle class has contracted and its standard of living has declined significantly in recent years; peak inflation of 70% significantly eroded purchasing power and living standards, particularly affecting middle-income households. 

The World Bank’s ‘Sri Lanka Development Update’ reports that poverty rates have risen for four consecutive years, with an estimated 25.9% of Sri Lankans living below the poverty line in 2023. This increase suggests a contraction of the middle class as more individuals fall into poverty. 

The demand for luxury vehicles persists. A Land Rover Range Rover costs, on average, Rs. 147 million per vehicle; the main agent for the British brand announced pre-bookings of around 130 units of the premium SUV – that is Rs. 19 billion worth of vehicles, amounting to around $ 65 million. A single SUV, a depreciating asset, costs as much as a luxury apartment in central Colombo. These are undeniable signs of rampant concentrations of wealth.  

Through QE, the British Government has injected nearly a trillion pounds into the economy since around 2010. Stevenson stated this was roughly £ 20,000 per adult in the UK: “I think this is a really interesting thing that happened during Covid, which is that the government gave out a trillion pounds… Most people managed to accumulate two or three or four grand and they thought they were winning… At the same time, because the average person gets 20 grand… the rich are getting 100 grand or 200 grand…

“The key thing to understand, money is not a real resource; money is a relative resource, money is a competitive resource. So if you get a bit more money and somebody else gets a lot more money, you will end up with less real resources… This is why distribution matters.”

(The writer has 15 years of experience in the financial and corporate sectors after completing a degree in Accounting and Finance at the University of Kent [UK] and also holds a Master’s in International Relations from the University of Colombo. He is a media presenter, resource person, political commentator, and foreign affairs analyst. He is also a member of the Working Committee of the Samagi Jana Balawegaya [SJB]. He can be contacted via email: kusumw@gmail.com and X: @kusumw)