Challenging revenue targets for 2026 amid rigid spending and weak welfare coverage: Economist

• Dr. Roshan Perera urges continued fiscal discipline beyond IMF program

Economist Dr. Roshan Perera yesterday cautioned that the country’s revenue targets may be difficult to achieve amid limited new tax measures, rigid recurrent spending and a still fragile post-crisis recovery where poverty remains above 20%.

Speaking at the Daily FT–Colombo University Alumni Association post-Budget forum panel discussion, former Central Banker commended the 2026 Budget’s continuation of macroeconomic stability measures, but warned that maintaining fiscal prudence after the IMF program ends will be the real test of policy credibility.

“Given Sri Lanka’s past experience with IMF programs, new Government’s often relax their fiscal discipline once the program ends. Thus continuing this framework is a commendable achievement, but we must ensure the commitment remains even after phasing out of the IMF arrangement,” she stressed. 

Dr. Perera noted that Sri Lanka has rarely recorded primary surpluses in its post-independence history, with only a handful of instances in the 1950s, 1992, 2017, and 2018.

In recent years, however, the country has recorded three consecutive primary surpluses and is Budgeting for another in 2026, which she described as “a positive signal of renewed fiscal discipline.”

“It’s interesting that in almost every instance where we achieved a primary surplus, Sri Lanka was either under an IMF program or had just come out of one. That tells you how contingent this fiscal discipline is on external oversight,” she observed.

She insisted on the need to sustain primary surpluses till debt becomes truly sustainable, urging policymakers not to relax consolidation efforts prematurely.

Dr. Perera took a slightly more cautious view than other panellists on the Budget’s revenue targets, noting that while maintaining a revenue-to-GDP ratio of 15% or above is critical for the Government to function effectively, the 2026 projections appear “ambitious.”

“There are very few new tax measures in the Budget 2026 apart from the reduction in VAT and SCL thresholds, which broadens the tax base and is welcome but we don’t have clarity on the expected revenue yield,” she pointed out.

She also questioned the sustainability of import-based tax revenue, noting that a large share of the 2025 revenue boost came from vehicle imports, which may not repeat in 2026 due to policy curbs. “These include the Special Excise Levies (SSEL) on car imports and loan-to-value (LTV) restrictions imposed by the Central Bank on vehicle financing, which could constrain demand,” she added.

As a result, she said revenue gains must come primarily from improved tax administration, not new taxes.

Dr. Perera welcomed the Government’s plans to implement a national e-invoicing system and upgrade the RAMIS 3.0 tax administration platform, but cautioned against overestimating near-term benefits.

“Malaysia took nearly two years to roll out e-invoicing and even now, it’s mainly used for data collection rather than tax assessments. Sri Lanka’s implementation will require both the IRD and companies to adapt, so we should be realistic about timelines and outcomes,” she explained. 

The economist also expressed concern that the Budget continues to rely heavily on indirect taxes, despite policy intentions to rebalance the tax mix from the current 25:75 ratio (direct to indirect) toward 40:60.

“Even with the latest measures, this imbalance will persist. Heavy reliance on indirect taxes burdens low-income households disproportionately,” she said, warning that any future revenue shortfalls will likely come at the cost of reduced capital expenditure, further dampening growth prospects.

On the expenditure side, Dr. Perera urged a rethink of the composition and efficiency of Government spending.

She acknowledged that interest payments offer limited flexibility, but stressed the need to contain the wage bill, which continues to rise as a share of GDP—3.6% in 2024, 3.8% in 2025 and projected to remain at 3.8% in 2026.

Against the backdrop, she pointed that the 2026 Budget also envisages recruiting 75,000 new public servants, with 10,000 being made permanent. “While some sectors may require additional staff, we must rationalise Government employment. We already have around 1.4 to 1.5 million civil servants excluding the Defence forces accounting for roughly 15% of the workforce. With digitalisation underway, we must ask whether such expansion is necessary,” she argued.

In terms of welfare and inclusivity, Dr. Perera noted that while macroeconomic stabilisation has been achieved, the benefits have not yet reached ordinary citizens. “Growth remains weak, poverty exceeds 20%, and real wages have not recovered to pre-crisis levels due to high inflation,” she said.

She pointed out that even with the Aswesuma social welfare program, total social transfers account for less than 1% of GDP, underscoring limited fiscal prioritisation for vulnerable groups. “If we want the public to support ongoing reforms, we must ensure that no one is left behind. Strengthening targeted welfare programs is essential to sustain political and social backing for reforms,” she urged. 

Dr. Perera stressed the importance of institutionalising fiscal discipline beyond the IMF program’s duration. “The true test will come once IMF oversight ends. If we can maintain fiscal prudence, strengthen tax enforcement and rationalise spending while supporting vulnerable households, then we can finally build a foundation for sustainable growth,” she said.