By Rusiripala Tennekoon –

Lessons from Ancient Statecraft and the Responsibilities of Modern Governments; Taxation is an instrument of governance, not an entitlement to extract.

Among the many  expectations placed on a national Budget , taxation policy occupies a particularly important position. This consideration assumes even greater significance in a country where the prevailing tax rates are already relatively  high, placing a considerable burden on individuals, households and business alike.

The legitimacy of taxation rests not merely on the authority of a government to impose taxes, but on the reasoning, fairness and public purpose behind such decisions.

Governments require revenue to maintain public services, protect citizens, develop infrastructure and fulfil their responsibilities. No responsible society can dispute that necessity. However, the more important question is whether the methods adopted to raise revenue are economically sensible, socially equitable and consistent with the long-term interests of the nation.

This is a question that deserves particular attention in modern economies, where governments increasingly rely on taxation, borrowing and elaborate budgetary projections to finance their commitments.

The wisdom of ancient statecraft

It is interesting to revisit the principles advocated by Kautilya, also known as Chanakya, the celebrated Indian strategist and author of the Arthashastra.

Kautilya recognized the importance of a strong treasury as an essential foundation of state power. Yet his approach to revenue collection was not simply one of maximizing the State’s income.

He emphasized that taxation should be administered with prudence and should not undermine the productive capacity of the people. His analogy of collecting the fruits of a garden when they ripen, rather than taking them prematurely, illustrates a principle of enduring economic relevance. The more common version is comparing it to a bee gathering honey from a flower without molesting it.

The underlying message is particularly important: a ruler must not weaken the very economic foundation from which public revenue is generated.

The same principle can be applied to modern taxation. Excessive or poorly designed taxation can discourage investment, reduce consumption, weaken enterprise, drive economic activity into informality and ultimately erode the very tax base that the government seeks to expand.

A government must therefore understand the difference between collecting more revenue and creating greater national wealth.

Fairness must be the foundation

Taxation should be guided by the ability-to-pay principle, economic capacity and the equitable distribution of the national burden.

Those with greater financial capacity may reasonably be expected to contribute more. However, fairness cannot be measured simply by the nominal tax rate imposed on different categories of taxpayers.

The combined impact of direct taxes, indirect taxes, levies and other charges must also be considered.

A salaried employee paying income tax, a small entrepreneur struggling with operating costs, and a low-income household paying consumption taxes experience the tax system in very different ways.

Indirect taxation can be particularly burdensome on ordinary households because a greater proportion of their limited income is spent on essential goods and services.

It is therefore insufficient to claim that a tax system is equitable merely because it applies the same rate to everyone within a particular category.

The real test is whether the overall burden is reasonable, proportionate and sensitive to the economic circumstances of those who bear it.

The modern budget: Estimates, assumptions and realities

The preparation of a national budget is an exercise in economic planning and financial discipline. It should be based on realistic revenue estimates, clearly identified expenditure requirements, credible economic projections and an honest assessment of the country’s capacity to finance its commitments.

Yet modern budget-making can sometimes become excessively dependent on projections and assumptions.

Expected increases in revenue, anticipated improvements in economic activity, projected investment inflows and estimated savings are often incorporated into financial plans before their actual realization.

There is nothing inherently wrong with forecasting. Every budget must look ahead. The danger arises when optimistic assumptions are treated as dependable financial resources and expenditure commitments are built around them.

A budget should distinguish clearly between revenue already secured, revenue reasonably expected and revenue that remains conditional upon future economic developments.

Where the assumptions fail to materialise, the consequences cannot simply be transferred to the public through additional taxation or indiscriminate borrowing.

Borrowing is not revenue

One of the most important distinctions in responsible public finance is the difference between revenue and borrowed money.

Tax revenue represents a contribution collected by the State under law. Borrowing, on the other hand, creates an obligation that must ultimately be serviced and repaid, or refinanced at a future cost.

Borrowing is not necessarily undesirable. Governments may legitimately borrow to finance economically productive infrastructure, investments that generate future returns, or extraordinary circumstances requiring temporary financial support.

However, borrowing to sustain recurring expenditure, meet unrealistic budgetary commitments or compensate indefinitely for deficiencies in revenue generation is a fundamentally different proposition.

The danger is that governments may create the appearance of financial capacity by continuously adding liabilities to the public purse.

There is no unlimited reservoir of borrowing. Every additional liability carries interest costs, repayment obligations, exchange-rate exposure where foreign currency is involved, and a corresponding reduction in the fiscal room available to future governments.

A budget cannot be considered balanced in any meaningful economic sense merely because a financing gap has been filled through additional borrowing.

The danger of hypothetical balancing

A particularly important issue is the manner in which governments reconcile their expenditure commitments with anticipated revenue and borrowing requirements.

If projected revenue is uncertain, expenditure estimates are insufficiently disciplined and the resulting deficit is covered through borrowing, the apparent financial equilibrium may be more a product of accounting assumptions than genuine economic strength.

The question is not simply whether the Treasury can raise the required funds today. It is whether the economy can sustain the resulting obligations tomorrow.

Responsible budget-making must therefore incorporate alternative scenarios, sensitivity analysis, debt-servicing capacity and an assessment of the risks associated with revenue shortfalls.

The International Monetary Fund’s principles of fiscal transparency similarly emphasise realistic budgets, medium-term fiscal frameworks and disclosure of fiscal risks.

Sri Lanka’s particular responsibility

Sri Lanka’s recent economic experience makes these principles especially relevant.

The country has undergone a severe economic and debt crisis, followed by difficult fiscal adjustments, revenue-enhancement measures and debt restructuring.

The Public Financial Management Act, No. 44 of 2024, and the Public Debt Management Act, No. 33 of 2024, establish important institutional and legal frameworks for fiscal accountability and debt management. The Economic Transformation Act, No. 45 of 2024, also provides statutory fiscal objectives.

These measures recognize that public finance cannot be managed indefinitely through discretionary decisions and short-term budgetary expedients.

Nevertheless, legislation and numerical targets alone cannot guarantee responsible financial management. Their effectiveness ultimately depends on the quality of the assumptions, the discipline exercised in implementing them, transparency in reporting and the willingness to correct policies when circumstances change.

Sri Lanka must also recognize that fiscal consolidation cannot be viewed exclusively through the revenue collected by the Treasury. The ability of households to sustain consumption, businesses to invest, industries to expand and exporters to compete is equally important.

An economy cannot tax its way into prosperity if the productive capacity required to generate future income and employment is weakened in the process.

The responsibility of government

The responsibility of a government is not simply to balance the figures presented in an annual budget. It is to protect and expand the nation’s economic capacity while ensuring that the burden of financing the State is distributed fairly.

Every major tax measure should therefore be examined against several fundamental questions:

Is there a clearly established public necessity for the tax?

Is the burden proportionate to the capacity of those who pay it?

Has its effect on investment, employment, production and household purchasing power been assessed?

Are the revenue estimates realistic and independently scrutinized?

Are borrowed funds being directed towards purposes that justify the future liabilities?

Is the public receiving transparent information on the actual results achieved?

These are not unreasonable demands from taxpayers. They are essential requirements of accountable government.

Conclusion: Protecting the roots of national prosperity

The wisdom of ancient statecraft and the principles of modern public finance converge on one fundamental truth: the strength of a State ultimately depends on the strength of its people and the productive economy that sustains them.

Taxation must not destroy the capacity to create wealth. Borrowing must not become a permanent substitute for financial discipline. Budgets must not be built on hypothetical expectations while actual obligations are passed on to future generations.

A government should collect what is reasonably necessary, spend what it can responsibly afford, borrow for defensible purposes and account openly for every major financial decision.

The true measure of a successful fiscal policy is not how much money a government manages to collect or borrow, but how effectively it converts public resources into national prosperity, economic opportunity and social well-being.