The most exciting proposal from yesterday's budget speech was the prospect of locally-sourced lamb biriyani.
The rest of the budget wasn’t as spicy. I can’t complain, however, as I'm on record last year describing my ideal budget as boring. Boring in the sense of there being continuity, especially when it came to taxes. We’ve had enough surprises on that front.
But in my defence, I also said that it couldn’t be all bland.
Boldness is required too. Basically, doing the stuff that governments like to put off till the next election, including the biggest taboo of them all — public sector reform.
In any case, preamble aside, my final verdict: this year’s budget is much like last year’s, both boring (good) and timid (bad). That it's boring is really a given. A budget firmly within the IMF programme conditions is a prerequisite for the next tranche of funding. So the government had to stay the course on collecting more taxes and rationalising spending.
Tax rates didn’t change much. Given the press speculation in the run-up to the budget, it's safe to say the public is disappointed. The expectation was raising the personal income tax threshold to 2.4 million rupees, in line with the NPP's manifesto. As with the last budget, the government decided to err on the side of caution; the threshold rose to 1.95 million rupees, just 195,000 rupees up from the current 1.8 million rupees.
Compromise is notorious for leaving everyone unhappy. After staying the course on taxes, however, the fiscal consolidation camp should be less displeased than its opponents. The few VAT concessions, like on books, are unlikely to placate those calling for VAT reductions.
Nor should you run to Sarasavi just yet in hopes of lower prices. Last year manufacturers of locally-produced liquid milk and yoghurt didn’t fully pass on the removal of the VAT to consumers. Prices should have fallen by 15% but fell only by 6%. At least we can look forward to cuts on some import taxes, which could spur competition.
Who will bell the cat?
President Anura Kumara Dissanayake’s speech suggests the government is planning for another IMF programme. As long as we want their seal of approval, the budget has to be largely mild. But there’s nothing stopping it from being a little exciting too. Even a hint at public sector reform would’ve shown that the government gets the gravity of the problem. None of the major economic challenges we face can be fixed without fixing the public sector.
Let’s start with taxes. Lower rates are only possible in the long term if Sri Lanka solves fundamental issues in the Inland Revenue Department and Customs. The rallying cry of budget forums small and large is broadening the tax base. The IMF’s latest report explains why these cries never translate to action: weak public sector capacity.
The Inland Revenue Department and Customs share similar problems. First, their staff don’t have the skills. Many, if not most, haven’t studied accounting, finance, or other money fields at university.
Second, leadership continuity is elusive. The public sector relies almost entirely on seniority for promotion, so those manning the top posts leave within a year, sometimes a few months, of being appointed. They don’t have the time to see reforms through. And in their sunset years, they’re rarely inclined to lead radical reforms through the cumbersome bureaucracy.
Put your money where your CapEx is
Every time budget season comes along, there is a hue and cry about unspent capital expenditure. This year the number was estimated at more than 70% by September 2026. To the casual observer this may not seem like a big problem. The government is spending less — what’s wrong with that?
The issue is that unspent capital expenditure doesn’t mean a government is saving money, it means it’s not spending on infrastructure critical for growing the economy. Only 8% of the 500 billion rupees in Cyclone Ditwah’s reconstruction budget was spent as of end-June. By then, less than half of the Rs. 100 billion Middle East war relief package, mostly spent on fuel subsidies, had been disbursed.
Here again the challenge is getting the public sector machinery working. Fixing project selection and procurement is not rocket science. Though the government acknowledges the problem, the only clarity on the expected procurement guideline revisions was in reference to digital solutions. We will have to wait and see if next year the government is able to move the needle.
In better news, public transport can rejoice at the prominence afforded to Lanka Metro Transit and our much neglected railways. But spending the allocated 80 billion rupees (around $280 million) for railway electrification may be a tall order — even for Bimal Rathyanake who has proved himself one of the more capable ministers.
The Railway Department suffers from the same structural problems that ail the rest of the public service. There’s every reason to think Lanka Metro Transit, however, set-up under a corporate structure, will be able to build on its breakthroughs — increasing frequencies and routes, and expanding into other provinces.
System no change
My leading disappointment, three budgets into this government’s tenure, is public sector reform. Even a whiff of it would have shown that the government understands the gravity of the problem. But other than the reiteration of the last two years' promise for a holding company to manage some state-owned enterprises, an idea that has surfaced in many budgets before, the elephant in the room is still shunned.
The only real mentions of the public sector are the 110 billion rupees set aside for the final phase of the promised salary revision, and money for filling 110,000 vacancies in the already approved cadre. Paying people fairly is perfectly defensible but it doesn't tackle the fundamental problems of having too many people in all the wrong places and not enough qualified, capable people in the right ones.
Sometimes you cannot just cut the Gordian Knot. But you can at least begin untying it. That demands boldness I am yet to see in an NPP budget. Any public sector reform has a few prerequisites, political willingness to push through it being the first. The second would be to have the support of the electorate.
This is perhaps the trickier one, since over one million public sector workers and their families form a key voter base in any national election. No one is asking them to stomach what Georgians did after their bloodless revolution in 2003 — mass police force dismissals and a phasing out of tax and Customs officers. All I’m asking is that the government start chipping away.
If they don’t start now, they are setting themselves, and by extension the entire country, up for failure. Wastage and corruption have enjoyed a significant place in our own public discourse, but largely limited to the political class, it unfortunately isn’t our only problem.
Then there are the unsigned documents, unmade decisions, and unawarded tenders. These are the results of decades of public sector capacity erosion and politicisation. Digitalisation alone cannot fix this.
A government elected on the promise of system change has so far shied away from spending its political capital on something actually radical. The stability story is done. Poverty alleviation, investment promotion, trade expansion, and tax relief ultimately rely on having a public sector that can deliver.
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