-LeN Economic Affairs Correspondent
(Lanka-e-News -07.Nov.2025, 11.00 PM) When President Anura Kumara Dissanayake rose before Parliament to deliver his first full-year budget, the atmosphere was less theatrical than historic. For the first time in decades, Sri Lanka’s fiscal blueprint bore the imprint not of political expediency, but of an ideological commitment to structural equity. Dubbed the People’s Budget 2026, the document signals the consolidation of the National People’s Power (NPP) government’s economic vision: an attempt to reconcile social welfare with fiscal discipline in a nation still recovering from its most devastating financial crisis since independence.
The Citizen Budget 2026 begins by acknowledging a reality that cannot be romanticised — a nation burdened by unsustainable debt, weakened institutions, and structural dependency on imports. Yet, the government’s tone departs from the customary fatalism of previous administrations. President Dissanayake’s fiscal narrative is one of pragmatic optimism: that social transformation and macroeconomic consolidation need not be contradictory forces.
The 2026 Budget situates itself within the framework of Sri Lanka’s ongoing debt restructuring programme with the IMF and bilateral creditors. The government commits to maintaining the primary surplus target agreed under the IMF’s Extended Fund Facility, but unlike the austerity budgets of the past decade, it anchors that commitment within a redistributive fiscal philosophy. Expenditure is redirected from unproductive capital inflows and politically motivated subsidies to investments in productivity, education, and local enterprise.
The Budget’s first pillar is fiscal recovery through enhanced revenue mobilisation. Tax-to-GDP, which collapsed to 8.3 per cent in 2020, is projected to rise to nearly 12.5 per cent in 2026 and 14 per cent by 2028. The administration’s approach departs from mere tax hikes; it restructures the composition of taxation to favour progressivity and compliance.
A new Income Tax Code rationalises exemptions, eliminates sector-specific loopholes, and introduces a simplified rate structure for SMEs. Corporate tax rates remain at 30 per cent but are tiered with investment-linked deductions to stimulate productivity-enhancing industries. Personal income tax brackets have been revised to protect lower and middle-income earners, while luxury consumption is targeted through excise adjustments.
Equally significant is the emphasis on tax administration reform. The establishment of a Revenue Authority — a semi-autonomous body modeled after regional best practices — is expected to unify the Inland Revenue Department, Customs, and the Excise Department under a single digital framework. The objective is to increase efficiency, reduce evasion, and integrate AI-based auditing systems by 2027.
The administration’s faith in digitalisation as a fiscal instrument reflects a wider reorientation toward state capacity building. Where previous governments relied on debt to mask inefficiency, the NPP government aims to rebuild the fiscal state through compliance, technology, and accountability.
The second pillar of the Budget — expenditure rationalisation — signals a philosophical departure from Sri Lanka’s historical patronage-based fiscal culture. Recurrent expenditure will remain high in 2026, at approximately 16 per cent of GDP, largely due to public sector salaries and social welfare commitments. Yet, the composition of that expenditure is shifting markedly.
The People’s Budget allocates unprecedented funding for education (5.5% of GDP) and healthcare (4% of GDP) — surpassing regional comparators in South Asia. The government’s rationale is clear: social investment is not merely welfare expenditure, but a productivity multiplier. A new Education and Skills Fund is to be established to support technical and vocational training, focusing on digital literacy, renewable energy, logistics, and agritech sectors.
Similarly, public health is reframed as an economic foundation rather than a social cost. The National Health Infrastructure Modernisation Programme targets rural hospitals, telemedicine, and pharmaceutical production to reduce foreign exchange leakage through imports.
Capital expenditure, projected at 5.8 per cent of GDP, is focused on productive public investment — energy transition, transport connectivity, and digital infrastructure. However, the Budget places strong emphasis on project evaluation and fiscal transparency. The introduction of Public Investment Management Guidelines (PIMG 2026) aims to eliminate cost overruns and politically motivated projects that plagued the Rajapaksa and Wickremesinghe eras.
The government’s welfare strategy is the most politically salient component of the People’s Budget 2026. Rather than expanding traditional subsidies, the NPP has chosen to redesign welfare delivery around equity, inclusion, and efficiency.
The introduction of the Integrated Social Protection Registry (ISPR) represents a structural reform of welfare targeting. For decades, Sri Lanka’s Samurdhi system was mired in political clientelism, with limited correlation between poverty status and benefit distribution. The ISPR uses data triangulation — income, consumption, and household surveys — to identify and support the most vulnerable households.
The People’s Income Support Programme (PISP) replaces the Samurdhi Allowance, offering direct cash transfers indexed to inflation. By integrating welfare payments with the National Identity and Banking System, the government aims to reduce leakages and improve accountability. Complementing this is the Nutrition Assistance Initiative, designed to address malnutrition and food insecurity among children and pregnant women — issues aggravated during the post-crisis inflationary surge.
President Dissanayake’s administration thus frames welfare not as a charity but as a social contract between citizen and state. The underlying philosophy reflects the Scandinavian model: social protection as an investment in human capital that enhances labour productivity and long-term fiscal sustainability.
Perhaps the most critical — and least glamorous — dimension of the People’s Budget 2026 lies in its approach to debt management. As of 2025, Sri Lanka’s public debt-to-GDP ratio stood at approximately 120 per cent, even after partial restructuring. The government’s medium-term fiscal framework targets a gradual reduction to 90 per cent by 2029 through a mix of primary surplus generation, real GDP growth of 3.5–4 per cent, and reduced interest costs.
Crucially, the administration has rejected the short-term austerity model favoured by earlier IMF-supported regimes. Instead, it advocates a growth-oriented consolidation strategy: maintaining fiscal prudence while preserving productive spending. The Fiscal Responsibility (Amendment) Bill 2026 introduces a legally binding debt anchor and expenditure ceiling, accompanied by an independent Fiscal Council tasked with publishing quarterly assessments.
Debt restructuring negotiations with external creditors — particularly bilateral partners and Eurobond holders — have also been framed within principles of transparency and intergenerational equity. The government commits to publishing all debt agreements and engaging civil society in oversight. These measures, while administrative in appearance, signal a profound shift in fiscal ethics: transparency as a macroeconomic stabiliser.
While the People’s Budget presents a technocratic narrative, its political implications are far from neutral. For decades, Sri Lankan budgets have been exercises in populist arithmetic — designed to appease rather than to reform. President Dissanayake’s fiscal rhetoric subverts this tradition.
The NPP’s ideological foundation — rooted in left-progressive politics — historically evoked skepticism among the private sector. Yet, the 2026 Budget takes deliberate steps to reassure investors. The emphasis on rule-based governance, streamlined regulation, and digital tax reform seeks to project fiscal predictability. The introduction of a National Productivity Commission and a Competitiveness Strategy for SMEs underlines the government’s intention to mobilise the domestic private sector rather than antagonise it.
Nevertheless, the fiscal reforms will inevitably generate social and political friction. Tax rationalisation and subsidy restructuring may encounter resistance from entrenched bureaucratic elites and rent-seeking industries. However, the government’s communication strategy — notably the Citizen Budget publication — represents a deliberate effort to democratise fiscal literacy. By translating budgetary data into accessible formats, the administration seeks to build public ownership of reform — a novel approach in a country where budget debates have historically been confined to Parliament and policy elites.
The People’s Budget introduces a forward-looking industrial and investment framework under the banner of “Productive Nation 2030.” It identifies five priority clusters: renewable energy, value-added agriculture, logistics and maritime services, tourism diversification, and digital services.
In energy, the government commits to achieving 70 per cent renewable generation by 2030, with public-private partnerships (PPPs) facilitating solar and offshore wind development. Tax incentives are extended to domestic firms engaged in renewable energy equipment manufacturing, signalling an intent to build indigenous capacity rather than import dependence.
In agriculture, the Budget promotes the Agro-Economy Modernisation Scheme, allocating funds for irrigation, organic fertiliser production, and post-harvest storage. These reforms are coupled with the introduction of a Farmers’ Insurance and Credit Guarantee Facility aimed at reducing rural vulnerability.
The Maritime and Logistics Development Fund positions Sri Lanka as a regional logistics hub, leveraging its geostrategic location. Infrastructure upgrades at Colombo, Trincomalee, and Hambantota ports are planned with environmental safeguards, signalling a pragmatic rather than ideological stance toward Chinese and Indian investments.
Tourism policy shifts toward sustainability and cultural heritage, targeting high-value, low-impact markets. Meanwhile, digital services are prioritised through the Smart Nation Initiative 2026, which funds startups and enhances digital infrastructure in provincial cities — part of a broader strategy to decentralise growth beyond Colombo.
On the macroeconomic front, inflation management remains a delicate balancing act. The People’s Budget supports the Central Bank’s inflation-targeting framework while cautioning against premature monetary tightening that could undermine recovery. Inflation, which peaked at over 50 per cent in 2022, is projected to stabilise at 7–8 per cent by 2026, supported by improved supply chains, domestic production, and moderated import dependency.
The government’s coordinated fiscal-monetary approach — a rarity in previous administrations — seeks to align interest rate policy with fiscal objectives. The reintroduction of Development Bonds and Retail Treasury Products aims to absorb excess liquidity while providing citizens with secure investment instruments.
Beyond the numbers, the People’s Budget 2026 situates itself as a moral corrective to decades of opaque fiscal management. The Budget mandates the establishment of an Open Budget Data Portal to ensure real-time publication of revenue and expenditure flows.
Public procurement, historically a locus of corruption, is subject to new transparency rules under the Public Finance Management (Transparency and Accountability) Act 2026. All tenders exceeding LKR 500 million must be published online with full contract details. The National Audit Office is empowered with prosecutorial referral powers — a significant institutional innovation aimed at curbing systemic leakages.
This focus on fiscal ethics reflects President Dissanayake’s broader political project: the moral reconstruction of the state. As he emphasised in his budget speech, “A fair economy requires not only fair taxation, but fair governance.”
From a human development perspective, the People’s Budget represents a decisive shift toward rights-based policy design. The allocation for education and health, combined with targeted social protection and gender budgeting, reflects a multi-dimensional approach to inclusion.
The National Gender Equality Framework introduces gender-responsive budgeting across ministries, requiring all departments to publish impact assessments on women and youth. The Youth Enterprise Guarantee Scheme and Women in Business Fund provide low-interest financing for start-ups, aligning gender empowerment with economic productivity.
Similarly, the Green Jobs Programme integrates employment generation with environmental objectives, targeting 200,000 new positions in renewable energy, waste management, and sustainable agriculture over five years.
Internationally, the People’s Budget has drawn cautious praise from multilateral institutions and investor circles. The IMF described the budget as “consistent with medium-term fiscal sustainability goals,” while noting the challenge of maintaining revenue growth amid political transition. The Asian Development Bank highlighted the government’s “commitment to fiscal transparency and pro-poor growth.”
However, credit rating agencies remain watchful. While Fitch upgraded Sri Lanka’s outlook from restricted default to stable, sustained improvement will depend on the government’s ability to deliver fiscal targets amid social expectations.
For foreign investors, the Budget’s commitment to legal predictability and contract enforcement is a critical signal. The Investment Facilitation Authority (IFA) established under the budget aims to serve as a one-stop agency to streamline approvals and mitigate bureaucratic friction.
Despite its ambitious design, the People’s Budget 2026 faces formidable constraints. Fiscal space remains narrow, and debt servicing will continue to absorb over 40 per cent of government revenue in the near term. Global commodity volatility and domestic political resistance could also undermine reform momentum.
Moreover, the success of the revenue mobilisation strategy depends not only on policy design but on institutional execution — an area where Sri Lanka’s administrative machinery has historically underperformed. The digitalisation agenda, while promising, requires substantial investment in human capital and cyber-governance frameworks.
Ultimately, the People’s Budget 2026 is both a fiscal document and a political manifesto. It attempts to redefine the social contract between state and citizen — replacing patronage with participation, and debt-financed populism with rights-based governance.
For President Anura Dissanayake, the stakes are existential. The budget embodies the NPP’s attempt to institutionalise left-progressive governance within a market economy — a delicate balance between equity and efficiency. Success will depend on whether the administration can sustain reform credibility while preserving public trust.
As one Colombo-based economist observed: “This budget will not be judged by its spreadsheets, but by whether the farmer, the teacher, and the small entrepreneur feel that the state is finally working for them.”
In that sense, the People’s Budget 2026 is not merely a policy exercise. It is the blueprint for a new political economy — one that dares to imagine a fiscally disciplined yet socially just Sri Lanka.
-LeN Economic Affairs Correspondent
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