ECONOMYNEXT – Sri Lanka’s 2025 budget is a true budget where the parliament has been given the full disclosure of spending and without a large reserve to be spent at the discretion of the executive, Labour Minister and Deputy Minister of Economic Development Anil Jayantha said.
Large volumes of money were set aside as ‘contingent’ or allocations by macro-economists who ran budgets under the Rajapaksa regimes which could be spent with total discretion without first getting permission from parliament. The practice then became a habit.
Activists who petitioned the Supreme Court also failed to check the practice.
Instead, the parliament was informed of how the rulers spent the money after the fact, in a rubber-stamping move, despite the parliament supposed to be having control of public finance.
One of the most important aspects of a budget was to project expenses accurately, Minister Jayantha said.
A Symbolic Sham
But for many years in Sri Lanka the budget was a symbolic document for which parliament approval was sought, he said.
“Past governments took the legal permission from the parliament and spent money as they wished,” Minister Jayantha said.
“Instead of taking some symbolic approval from parliament, this is budget where the money of the public is subject to the prudent management and accountability.”
Government usually kept some funds for unexpected emergencies. Under the new Public Finance Management Law, the allocation for unplanned spending is called the ‘Budget Reserve’.
In recent budgets such allocations were made under a heading called ‘contingencies’.
No Unplanned Spending In Good budgets
“In a good budget there cannot be a lot of money for unexpected expenditure,” Minister Jayantha said.
“But our earlier experience was that large amounts of money was allocated and ministers misused them.”
“In the 2024 budget for contingencies there were 200 billion rupees for recurrent expenditure. For capital expenditure there was 100 billion rupees.
After the economic crisis, following discussions with the IMF, the Public Finance Management Act was brought.
Under the law, the discretionary spending under the budget reserve was limited to 2 percent of primary expenditure.
Out of 4,285 billion in primary expenditure 2 percent was about 85 billion rupees.
“We could have kept the contingency or budget reserve at 85 billion rupees. But we by keeping fiscal discipline, by allocating to specific line items we kept the budget reserve at 38 billion rupees only.”
There was a total of 7,190 billion rupees of spending in 2025, Minister Jayantha said.
It would be financed with 4,990 billion in tax, non-tax revenues and grants.
The overall deficit was 2,200 or which was about 6.7 percent of gross domestic product.
Zero Inflationary Financing
“We have not moved to fill this gap with inflationary ways or money printing,” Minister Jayantha told parliament.
“We are planning to raise 2,125 domestically through non-inflationary means. Foreign financing is 75 million dollars.
Gross repayments of loans were 1,600 billion rupees. The gap between the face value of and discounts of bonds was 200 billion rupees.
Sri Lanka managed to beat the deficit forecast in 2024, amid low inflation generated by the central bank. But 5 percent inflation is threatened in 2025.
“Inflation is essentially antidemocratic,” explained classical economist Ludwig von Mises.
“Democratic control is budgetary control. the government has but one source of revenue— taxes. No taxation is legal without parliamentary consent”.
“If war becomes unavoidable, a genuinely democratic government is forced to tell the country the truth. It must say: “We are compelled to fight for our independence. You citizens must carry the burden. You must pay higher taxes and therefore restrict your consumption.”
“But if the ruling party does not want to imperil its popularity by heavy taxation, it takes recourse to inflation.
Deliberate Inflation
In Sri Lanka however it is not politicians who want inflation but macro-economists who believe it is required for growth.
Analysts say particularly in the 1980s budgets became impossible to run for finance ministers as macroeconomists in the central bank printed money and depreciated the currency.
Then President J R Jayewardene who eliminated food and commodity subsidies after the Great Inflation of the 1970s and the 1978 devaluation also restricted the salary bill, triggering a strikes as macro-economists further depreciated the currency with unanchored money.
Budgetary control became impossible as supplementary estimate after supplementary estimate came as the central bank generated high levels of inflation, analysts say.
There are winners and losers as money supply is inflated. Stocks and food prices can zoom, but wages lag behind them.
“These people profiteer by virtue of their fortunate position,” Mises explained. “For them inflation is good business. Their gains are derived from the losses of other sections of the population.
“The losers are those in the unhappy situation of selling services and commodities whose prices have not yet risen at all or not in the same degree as the prices of things they buy for their own consumption.
The inflation first leads to credit boom and balance of payments crisis and loss of confidence in the currency.
The entire economy then has to be shrunk in a ‘stabilization crisis’ to stabilize the money monopoly. In the stabilization crisis, restore confidence in the currency, stocks can collapse and businesses go bust.
After a 30-year civil war ended in 2009, the central bank triggered serial currency crises in the pursuit of a high inflation target of 5 percent in 2012, 2018, 2018 and 2020, eventually leading to sovereign default.
In 2024 the central bank undershot its inflation target, bringing monetary stability to the country. (Colombo/Feb25/2025)
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