The Role of Taxation in Driving GDP Growth in Sri Lanka: ARDL Bound Test

Abstract

This study examines the relationship between taxation and economic growth in Sri Lanka over the period 1991 2023, with a particular focus on both short-run dynamics and long-run equilibrium effects. Employing the Autoregressive Distributed Lag (ARDL) bounds testing approach and an Error Correction Model (ECM), the analysis captures the distinct temporal impacts of tax revenue, inflation, monetary expansion, and trade openness on GDP growth. The results reveal that tax revenue exerts a statistically significant positive effect on economic growth in the long run, underscoring the importance of efficient revenue mobilization and productive public expenditure. Inflation, by contrast, shows a persistent negative association with long-run growth, highlighting the necessity of maintaining price stability. Monetary expansion is found to stimulate growth in the short run but exerts a dampening effect over the long term when excessive liquidity persists. Trade openness contributes positively to long-run growth, although adjustment costs are evident in the short run. Policy recommendations emerging from the findings include broadening the tax base, enhancing tax administration efficiency, adopting a low and stable inflation framework, maintaining a balanced monetary stance, and pursuing export diversification with strengthened domestic value chains. Institutional reforms to reduce leakages and improve compliance are also emphasized. Overall, the study demonstrates that harmonizing fiscal, monetary, and trade policies is essential findings provide empirical insights for policymakers aiming to optimize tax policy as a lever for long-term economic resilience