Budget 2026: Reforming public sector

President Anura Kumara Disanayake on Friday presented what seemed at first glance a pragmatic and forward‐looking Budget 2026 with strong emphasis on rebuilding, modernisation, and restoring investor and public confidence. This Budget of the socialist leaning Government has allayed fears, at least for the moment, of any radical left-wing change to the outlook of the economy. It is commendable that the Government seeks to reform public sector enterprises, increase revenue by broadening the tax base and has not undertaken vanity projects at the cost of the public coffers. 

Yet, there is room for improvement, especially with regard to the projected Budget deficit.

On the positive side, the 2026 Budget allocates over Rs 30 billion for digital initiatives which will provide a unique digital identity to the citizens, an e-Grama Niladhari platform, and a digital economy advancement program. These are necessary initiatives that will make administration and the delivery of services more efficient.

The announcement that there would be a recruitment of nearly 75,000 new public sector personnel is a point of concern as Sri Lanka’s public sector is already bloated. As long as these recruitment as technical officers, law enforcement, revenue officers etc., remain within the essential services of the State while reducing the redundant sectors in which the State is involved, there could be a balancing of the public sector expenditure. If not, it would further contribute to the pressures on the public coffers that resulted in the 2022 economic collapse.

According to the President, the country’s publicly guaranteed debt-to-GDP ratio is expected to reduce from approximately 104% to 96.8% next year and is projected to reduce to 87% by 2030. This trend is in the right direction, and it would require sustained, long term fiscal discipline to ensure that debt, especially external debt is brought within a manageable range, allowing for investments in critical services such as education and health, and much needed physical infrastructure.

The Government must also be cautious and realistic towards its projections. The President says the plan is to achieve 7% GDP growth in the medium term from 4-5% at present. While this is commendable it needs recalling that Sri Lanka is yet to see the rates of growth that were seen prior to 2022 and the economy has yet to recover from the losses made as the result of the meltdown. It is wiser to make projections, especially on financing debt, on a lower growth rate in order to avoid further economic strain in the future.

While there has been an increase in revenue, the revenue base in the country still remains small. The widening the tax net with Value Added Tax (VAT) and social security contribution levy (SSCL) threshold being reduced to Rs. 36 million from Rs. 60 million at present is a necessity but which needs to be done with caution to prevent stagnation on re-investments.

The President and the Government must realise that the enormous mandate it has been given by the people. The overwhelming majority in Parliament and the popularity of the President has opened a rare opportunity for unpopular yet necessary decisions. This window will more likely close as time goes on and it is necessary for the Government to undertake bold reforms, especially in the public sector while it is able to carry the electorate along with them. It is hoped that the administration will tackle these essential reforms and reduce the burden of the public sector that would in turn reduce the vulnerabilities of the economy.