By Asoka S. Seneviratne –

Prof. Asoka.S. Seneviratne

“The person who says it cannot be done should not interrupt the person who is doing it.” – Chinese Proverb

The inaugural budget of the AKD/NPP government was presented to the parliament on 17 February 2025 by President Anura Kumara Dissanayake (AKD) as the Minister of Finance. I wrote an article for the Colombo Telegraph on 12^th February 2025 under “The Great Train Robbery In The 21^st Century By The Corrupt SLPP Politicians”. In this article, I concluded that amidst the Great Train Robbery in the 21^st century by the SLPP culprits or the den of corrupt politicians of SLPP, the AKD/NPP government is batting well based on the people’s mandate.” The inaugural budget by President AKD provides further concrete evidence for my conclusion.

Purpose of Government Budget

The government budget is an annual expenditure and revenue plan. Both revenue and spending plans are equally important. Among many, a government budget aims to fund development goals such as eradicating poverty, improving access to basic needs like education and health care, tackling environmental issues, and promoting economic growth inclusively. A budget helps distribute resources equally among relevant sectors and areas to ensure a fair share based on needs and priorities. A budget allows a stable, sustainable, and durable economy by coordinating monetary policy with the budget’s financing, ensuring economic growth targets are met. Finally, the macroeconomic policy of the budget is aimed at influencing overall performance in terms of inflation, unemployment, and balance of payment. Regarding the above, political and economic factors force challenges, which is the reality in Sri Lanka as well.

Regarding political factors, Sri Lanka is fortunate to have a stable AKD/NPP government with 159 parliamentary seats out of 225 or 2 two-thirds majority in the parliament. It has been the most vigorous government since 1948 for many reasons. AKD/NPP is a unique and powerful political entity, rising from 3 parliamentary seats to 159, like a volcanic eruption. It is totally corrupt-free and down to earth in many ways. Regarding the economic factors, the AKD/NPP government is the people’s choice due to the mounting hardships they have faced since 1948. In 2022, the people’s struggle or Aragalaya chased away the powerful Gotabaya or the TRIO government. After declaring bankruptcy on 12 April 2022 after running precariously low on dollar reserves, it could not afford essentials such as fuel, medicine, and cooking gas. AKD/NPP government has vowed that people will not face burning economic problems in the future, which is a massive commitment and undertaking towards a Thriving Nation and a Beautiful Life.

The AKD government or 2025 budget has to work with the economy according to the IMF bailout program or the parameters of the IMF for economic recovery and progress. Given the above, the 2025 budget stands at a defining juncture in meeting people’s expectations while adhering to the IMF program and its parameters. In short, the IMF program aims to support and assist the economic recovery from bankruptcy and gradually progress toward a stable economy where people meet their expectations. Furthermore, unless economic recovery and gradual progress are not made for a stable economy, the country can’t go along with about US$105 billion debt repayment. In short, there is a massive debt burden that the people in the country are committed to paying back, which is the reality on the ground. So, the budget aims to transform the crisis-hit economy to resume debt prepayments from 2028, which is a massive challenge for the government. Given the above, President AKD presented its inaugural budget with policies and programs to meet the people’s expectations and commitment to work with a massive debt burden. Both are equally important and are gigantic and delicate balancing tasks. I will not write in detail about the remarks of the opposition leader Sajith Premadasa, and National List MP Narmal Rajapaksa about the budget. Once, I referred to them as coconut husks that floated to the Diyawanna after the political Tsunami. According to their remarks about the AKD budget, they are not worth a coconut husk, of which the value is remarkable. Sagara Kariyawasam stated that Mahinda Rajapaksa presented a perfect budget. If so, why was he sent home, and the SC in 2023 determined the TRIO as culprits? The corrupt TRIO promised massively but delivered only excuses for broken promises. The surprise is that the same corrupt and failed rulers since 1948 are now offering advice to the AKD government. As the opposition is bankrupt, it is good if the opposition follows the AKD government and learns if they have a bit of hope for the future.

Fiscal consolidation

The inaugural 2025 budget is key to recovery from a severe financial crisis in the long run; hence, fiscal consolidation is the foundation. Given the above, the budget aligns with the targets set under the IMF US$2.9 billion 4-year bailout program. The government’s primary expenditure (expenditure excluding interest payments) is 12.9% of GDP, which is in line with the 13% limit outlined in the Public Financial Management Act 2024 No 44, in which the framework emphasizes accountability, transparency, and efficiency. Accordingly, the IMF’s preferred 2.3% primary account surplus goal has been met. Total expenditure is 21.8% (Rs. 7,190 billion) of GDP (estimated Rs. 33 trillion). The total revenue of Rs. 4,990 billion is 15.1% of GDP. It is with the IMF target. IMF’s preferred target for the overall budget deficit 2025 is 5.2% of GDP. But it is 6.7% of GDP. However, it is less than 6.8% in 2024. Along with the IMF’s preferred target, the budget gap is slightly high, which is a concern, and I will address this later with revenue mobilization and tax administration. The president expects growth to be facilitated by a strong export sector, transforming the economy to achieve and sustain 5% economic growth.  

Furthermore, the Debt to GDP for 2025 is 93%, which is less than 94% in 2024. This will cement sustainable debt management, which is vital. Based on the primary surplus of 2.3% and revenue target of 15.1% in 2025, the AKD’s budget is along with the expected fiscal consolidation. It should be mentioned that during the first four months of the AKD/NPP government, it worked along with the IMF program (i.e., a cautious approach). Hence, the recovery was quicker and more stable, which was remarkable and can be compared with the 4 months of the regime of RW.  The above helped private sector business confidence and investment for a sustainable recovery. Given all the above, the 2025 budget continues the same cautious approach, making it exceedingly ambitious and hugely forward-looking.

Meeting the people’s expectations or Election Promises

The other challenging task of the AKD/NPP government is meeting election promises. Based on the 54 essential and priority areas (Annexure iii of the budget), Rs. 7,190 billion has been allocated in the 2025 budget. Along with the above, the AKD government directs more resources towards (i) salary/wage increases – Rs.110 billion (ii) welfare and various subsidy increases – Rs. 128 billion (iii) finance tax concessions, and (iv) capital expenditure -Rs. 498 billion among many. Along with the 50% rupee depreciation during the financial crisis, the AKD/NPP government has raised the public sector basic salaries from Rs. 24,250 to Rs. 40,000. The total cost for the above is Rs. 110 billion. Also, the private sector minimum basic salary has been requested to be Rs 27,000. The public sector salary increase was a key promise of the government servants who supported the elections. Rs. 500 million has been allocated for the Aswesuma benefits program. Also, Social Security allowances to orphanage children and pension recipients have been allocated Rs. 1,000 million and 10,000 million, respectively. Regarding the unemployed,   new staff have been allocated Rs. 10,000 million. It is essential to indicate massive allocations for health and education. The above are a few examples of the government expenditure proposals 2025 for welfare development. Above all, it goes with the purpose of the government budget, as I wrote at the beginning.

Another aspect is capital expenditure, which spurs economic growth. Based on the 54 areas mentioned above, government expenditure can be divided into two sub-sectors. First, it is welfare, subsidy, and development assistance to 44 programs as indicated by Annexure Vii of the budget. All 44 programs line with the election promises. Only a few who lack knowledge and understanding of the ground reality, suggesting the absence of VAT reduction. The point is that VAT revenue is a key source financing the 44 welfare and subsidy programs and others. Any VAT reduction impacts the 44 welfare development programs, which is counterproductive.  In short, the AKD/NPP has done its best to help the people and the country without risking the future, adhering to the preferred goals set by the IMF and revenue generation without introducing new taxes. Indeed, the latter is remarkable.

The second subsector is the investment or capital formation for key development projects essential for economic growth and development. As per Annexure vii, there are 37 development projects, of which the Central Expressway Kadawatha-Meerigama section (Rs, 81,300 million), maintenance, widening, and improvement of the road network and connected bridges (Rs. 47, 800 million) and Central Expressway Pothuhera-Rabukkana section (Rs, 34,000 million) rank at the top. Given that those expenditures are well targeted, the priority sectors have a high degree of strategic potential, and projects are transparent and corruption-free. The Clean Sri Lanka and digitalization programs are capital development programs. 4% of GDP has been allocated for capital development projects, almost doubled compared to 2024. Regarding the two sub-sector groups, there is a challenge and delicate balance of expenditure allocation for economic welfare and economic growth and development. However, AKD/NNP has drawn the line in the right direction, which is historic in many ways. It is worth mentioning that I wrote an article for Colombo Telegraph on 13 October 2024 under “AKD/NPP and IMF: Response to Critics” and indicated that given the still fragile nature of the economy and the expectations of the people and the country, the immense task of the president is like “Eating curd with a shaving knife.” It is still valid, but the government is doing well and going in the right direction.   

Achieving the expected outcome & revenue mobilization

To meet the total expenditure of Rs. 7,190 billion, the expected total tax revenue of Rs. 4,590 billion is critical due to the slightly high budget deficit mentioned above. There are three types of tax revenue: (i) Income tax, Rs.1167 billion, an increase of Rs. 141 billion or 14% from 2024 (ii) Taxes on Goods and Services, Rs. 2,772 billion, an increase of Rs. 571 billion or 26% from 2024 and (iii) Taxes on External Trade, Rs. 651 billion, an increase of Rs.174 billion or 37% from 2024. The total revenue expectation for the 2025 budget is Rs 4,990 billion, an increase of Rs. 899 billion or 22% from 2024, including tax revenue, nontax revenue, and grants.

Regarding the expected tax revenue of Rs. 4,590 billion, revenue embolization endeavors/proposals can be grouped into 12 categories. According to AICPA & CIMA (i.e. Sri Lanka, Budget 2025 Proposal), the tax-to-GDP ratio remains below potential due to inefficiencies in tax administration and significant revenue leakages. Despite efforts to broaden the tax base, the informal economy and reliance on cash transactions limit compliance and progress. High leakage rates in sectors such as alcohol and tobacco reduce the effectiveness of tax measures. Regarding the above, it is worth mentioning the proposal by AICPA/CIMA as follows: (i) Digitize tax administration by linking tax files with EPF/ETF registrations and implementing digital national IDs to improve tracking and compliance (ii) Address tax evasion through stricter enforcement measures and monitoring mechanisms, especially for high-leakage sectors like alcohol, tobacco, and imports (iii) Incentivize digital payments by introducing targeted taxes on large cash withdrawals, as successfully demonstrated in countries like India (iv) Streamline the tax code to minimize complexity and reduce opportunities for evasion while ensuring efficient administration. Finally, (v) Support economic growth in key sectors (e.g., SMEs and agriculture) to organically grow tax revenue through higher VAT collection.

In addition to the above, the proposed 11 legal reforms will promote rapid economic growth, good governance, effective public service delivery, and value for each rupee spent. At the same time, it is mentioned that a slightly high budget deficit can be mitigated substantially by following the revenue mobilization and tax administration indicated above. This means that government borrowing can be curtailed.

Conclusion

The inaugural budget of the AKD/NPP government is committed to continuing with the progress achieved since the establishment of the government by strengthening trust in investment and transforming the economy for a steady and sustainable economic growth path with a vision and commitment to ensure no repetition of the financial crisis in 2022. The 2025 budget is historical and carved on rock, so it has met the people’s expectations in the right direction. The preferred fiscal consolation of the IMF program has been met. There is no doubt that the revenue mobilization targets can be met based on the revenue mobilization proposals. The proposed 11 legal reforms will promote rapid economic growth, good governance, effective public service delivery, and value for each rupee spent. The massive task and immense responsibility of the AKD/NPP government in the still weak economy are like “Eating curd with a shaving knife.” But the government is doing well and going in the right direction. Given all the above, it can be concluded that the AKD/NPP government is batting well in the right direction, along with massive support from the people.

*The writer, among many, worked as the Special Advisor to the Office of the President of Namibia for 5 years and was a Senior Consultant with UNDP for 20 years. He worked as a Senior Economist with the Central Bank of Sri Lanka (1972-1993) before he migrated to New Zealand due to a family tragedy. The author can be contacted: asoka.seneviratne@gmail.com