• An analysis of Sri Lanka’s 2026 Budget

The 2026 Budget marks a defining moment in Sri Lanka’s post-crisis economic trajectory – one that reveals the Government’s firm ideological shift towards neoliberalism. 

While the rhetoric of reform, modernisation, and fiscal discipline dominates official discourse, a closer examination exposes an economic agenda heavily skewed towards large conglomerates, financial elites, and external creditors. 

The Budget’s underlying philosophy places market efficiency and investor confidence above social welfare and equity, threatening to dismantle what remains of the country’s already fragile Small and Medium-sized Enterprise (SME) base and public welfare system.

A neoliberal blueprint

This appears to be the most neoliberal and Right-wing budget Sri Lanka has witnessed in recent history. At its core, the fiscal strategy prioritises deregulation, privatisation, and the minimisation of State intervention in economic affairs — all hallmarks of neoliberal orthodoxy. 

The Government’s commitment to achieving a primary surplus, maintaining tight monetary discipline, and cutting back public expenditure is celebrated as a mark of responsibility. Yet these measures come at a heavy social cost, shifting the burden of adjustment onto ordinary citizens and smaller businesses.

Neoliberal budgets often present themselves as pragmatic solutions to fiscal challenges, but their deeper purpose is ideological: to reshape the economy around the interests of capital rather than society. 

The 2026 Budget follows this pattern. Instead of addressing the structural inequalities that intensified during Sri Lanka’s recent economic crisis, it institutionalises them, effectively rewarding financial power while eroding social safety nets.

Structural bias against SMEs

One of the most alarming aspects of this Budget is the way it reshapes the legal and economic framework to favour large conglomerates and mega businesses. 

Under the proposed tax and regulatory regime, enterprises with monthly sales of Rs. 3 million are treated on par with those generating Rs. 300 million or more. This uniformity in taxation erases the critical distinctions between business scales – distinctions that historically provided SMEs with the flexibility and breathing room needed to survive and grow.

SMEs are not only a cornerstone of Sri Lanka’s economy but also vital for employment generation and regional development. When fiscal and regulatory policies treat small traders and large corporations equally, the result is a disproportionate burden on the former. 

Without differentiated tax structures, smaller firms face reduced competitiveness, shrinking profit margins, and limited access to capital. Over time, this dynamic will force many local enterprises out of business, increase unemployment, and accelerate market concentration in favour of large conglomerates. 

The inevitable consequence will be higher prices, reduced consumer choice, and a deeper entrenchment of monopoly capitalism.

Widening inequality and wealth concentration

At a macroeconomic level, the Budget’s provisions overwhelmingly benefit the wealthiest 1% of the population, who already control a significant share of the nation’s wealth. 

Tax concessions, relaxed import conditions, and reduced capital gains burdens disproportionately advantage corporate elites and high-net-worth individuals. Instead of redistributing income or providing support to struggling households, the 2026 Budget amplifies wealth concentration, accelerating the widening gap between the affluent and the working class.

Such inequality is not merely a moral issue; it undermines the very foundation of sustainable economic growth. 

When wealth accumulates at the top, aggregate demand weakens because the rich tend to save rather than spend. The working and middle classes, who are the real drivers of consumption, face stagnant wages and higher living costs. This imbalance suppresses domestic demand, discourages investment in productive sectors, and pushes the economy into a low-growth, high-inequality trap.

The human cost: Brain drain and social strain

The continued neglect of social equity and welfare has significant demographic implications. As the cost of living rises and opportunities shrink, the pressure on skilled professionals will intensify. 

Sri Lanka has already been experiencing an unprecedented wave of emigration, with doctors, engineers, academics, and IT professionals seeking better prospects abroad. The 2026 Budget, far from reversing this trend, is likely to accelerate it. A brain drain of this scale erodes the nation’s human capital base and undermines its long-term development potential.

When a government’s fiscal framework alienates its educated and skilled citizens, the damage extends beyond economics; it strikes at the social and institutional fabric of the country. The departure of skilled labour diminishes innovation, weakens public institutions, and depletes the tax base, forcing the remaining population to bear an even greater share of the fiscal burden.

Curtailing public investment and the privatisation trend

Another key flaw lies in the Government’s decision to scale back capital expenditure and underutilise allocated funds. The 5% growth achieved in 2024 was largely the result of renewed public projects initiated under President Ranil Wickremesinghe’s administration. 

Empirical evidence clearly illustrates that state-led investment has a decisive role in driving economic expansion, particularly during recovery periods; for example, investments in Mahaweli in the 1980s and post-war investments in the 2010s recorded the highest growth rates in the country, besides the 2024 period.

As the Government reduces capital expenditure, privatisation starts to take over public infrastructure. The latest victim appears to be the National Water Supply and Drainage Board. This trend of privatising public utilities poses a great danger to national sovereignty.

Moreover, by cutting capital spending, the Government effectively constrains the most potent engines of growth. Infrastructure development, education, healthcare, and research are not mere expenditures; they are long-term investments that reduce living costs, multiply productivity, and enhance social welfare. 

The obsession with fiscal consolidation, in contrast, risks locking the economy into a prolonged stagnation cycle. Short-term savings on capital projects today will translate into slower growth, weaker job creation, and higher inequality and poverty levels tomorrow.

The double burden of local taxation

The reduction of transfers to Local Governments introduces yet another regressive element to this Budget. With fewer central funds, local councils will be forced to raise their own revenue through local taxes and levies. The result is a double burden on citizens, who will now face rising taxes from both central and local authorities.

This two-tiered taxation system disproportionately affects middle- and low-income households, whose disposable incomes are already eroded by rupee depreciation, trade-related corruption, and higher interest and debt repayment costs. It also risks regional development, as revenue extracted from poorer districts reduces infrastructure quality, discourages investment, and further entrenches poverty, undoing years of regional development efforts.

In essence, the Central Government’s pursuit of fiscal balance is being achieved by shifting responsibility — and pain — downwards to local administrations and ordinary citizens.

Empty promises of digitisation and AI

A recurring theme in the 2026 Budget speech is the emphasis on digitisation and Artificial Intelligence (AI). 

On the surface, these initiatives sound forward-looking and aligned with global economic trends. However, the absence of detailed implementation plans, foreign funding allocations, or institutional capacity-building measures makes these promises ring hollow. To accommodate this superficial development, the Government is proposing capital investments, land reforms, and tax breaks.

While the Government is delivering these empty promises, it has completely ignored the development of fundamental pillars in the political economy such as food sovereignty, energy independence, and free health and education. Without these fundamental economic pillars, advanced development remains a mirage.

These initiatives serve more as rhetorical devices to signal modernisation to the public and investors than as genuine policy commitments. At most, these proposals may result in digital utilities designed to extract taxes, levies, and fees from citizens more efficiently. 

Furthermore, a truly digital transformation requires years of massive investment in education, infrastructure, and digital literacy — areas where the Budget remains conspicuously silent. Without addressing these foundational needs, talk of AI and digitisation is superficial at best and deceptive at worst.

Neglect of public health and human security

Perhaps the most glaring omission in the 2026 Budget is its failure to address the ongoing crisis in Sri Lanka’s public healthcare system. 

The free healthcare model, once a cornerstone of national pride, is now crippled by shortages of medicine, equipment, and personnel. Hospitals struggle to maintain even basic services, and patients increasingly turn to expensive private care. Yet, despite the magnitude of this crisis, the Budget allocates no substantial resources or reforms to strengthen the healthcare system.

This neglect exposes a dangerous trend: the gradual erosion of universal healthcare as a public good. By allowing systemic decay to continue, the Government is effectively paving the way for the privatisation of healthcare — another step in the neoliberal playbook. The same applies to education and welfare programmes, which face similar underfunding and neglect.

Private debt and the illusion of fiscal stability

While the Government boasts of achieving a primary surplus, this stability is largely illusory. The surplus is indirectly financed by private-sector deficit spending — in other words, by households and businesses taking on more debt. 

The recent surge of over Rs. 1 trillion in auto loans for vehicle imports is a case in point. Such borrowing temporarily boosts tax revenue but leaves the private sector more indebted and vulnerable to shocks. This gives no strength to the State balance sheet, as the rupee has zero value in international financial markets, nor does it give any additional capacity for Government spending, since the State has no technical constraints on expanding its sovereign currency.

This dynamic reflects a broader pattern of financialisation, where credit expansion substitutes for real income growth. It creates an economy dependent on debt-driven consumption and speculative investments, which is unsustainable in the long run. 

This trend is highly vulnerable to uncertainty in the neoliberal economic system; evidence from the Global Financial Crisis suggests that as interest rates fluctuate and repayment burdens rise, defaults will increase, straining the banking system and depressing demand.

Broader implications of the fiscal trap

Overall, the measures outlined in the 2026 Budget will likely elevate the cost of living, depress incomes, increase unemployment, and deepen poverty and inequality. By reducing public expenditure and relying on regressive taxation, the Government is effectively constraining domestic demand — another engine of economic growth. This is not a budget designed for recovery; it is a blueprint for austerity.

Moreover, the document reads less like a people-centred fiscal plan and more like a balance sheet prepared by a bank executive. It prioritises creditor confidence and political campaign financing over the economic well-being of ordinary citizens. The implicit message is clear: fiscal discipline for the poor, flexibility for the rich. 

Additionally, there is no evidence of a constructive plan to boost foreign reserves, which is the only pragmatic way to defend against uncertainty. No foreign supplier will accept rupees as payment. Consequently, these policies will lead to a foreign debt trap, increasing dependency on foreign creditors while further diluting sovereignty.

If this trajectory continues, Sri Lanka risks entering a period of prolonged economic stagnation, marked by low investment, rising inequality, and social unrest. The 2026 Budget, therefore, is not just a fiscal plan; it is a political statement about whose interests the State serves. Unfortunately, that answer appears clear: neither the people’s nor the sovereignty’s.

(The writer is a graduate of Monash University, Melbourne, Australia; an entrepreneur; and the author of the book ‘Wikalpa Maga – De-Dollarization’)

(The views and opinions expressed in this article are those of the writer and do not necessarily reflect the official position of this publication)