- Lessons for Sri Lanka in a changing world
“Every rupee borrowed today must be repaid tomorrow. Fiscal citizenship means holding leaders accountable and sharing responsibility for the nation’s future.”
The moment people hear ‘fiscal policy,’ taxes are usually what come to mind. Some picture government debt or the annual budget speech that dominates headlines. But fiscal policy is much more than numbers on a page. It is about how a government manages money to provide services, build roads and schools, create jobs, and maintain a stable economy.
Economists around the world agree that fiscal policy rests on three main pillars: taxation, spending, and borrowing. How a country balances these pillars determines whether it thrives or struggles. For Sri Lanka, emerging from one of the worst financial crises in its history, understanding these principles and learning from global experience is more urgent than ever.
Without reliable revenue, no government can maintain schools, hospitals, roads, or public safety. But taxation is not only about raising money, it is also about fairness and trust.
Different countries approach it differently. Nordic countries like Denmark and Sweden rely on high taxes to fund generous welfare systems. Citizens accept the cost because they see the returns: free healthcare, quality education, and strong safety nets. Taxes don’t feel like a burden when every rupee is returned in visible services. Trust is high, and with it, compliance comes naturally.
In contrast, Singapore and Hong Kong keep taxes low as a strategy to attract investment and boost private enterprise. Their success is not due to high revenue but to governments that spend carefully, avoid waste, and enforce strict financial discipline.
Larger economies such as the United States and Germany follow a different path, using moderate tax rates alongside progressive systems that ensure the wealthy contribute more. This approach balances fairness with opportunities for growth.
Addressing misdirected spending
Sri Lanka is at a critical moment in its economic journey. After years of financial challenges, the country is now seeing a steady rise in tax revenue, signalling a potential shift towards greater fiscal stability.
In 2024, Government revenue reached 13.7% of Gross Domestic Product (GDP), a significant increase from 8.3% in 2021. While encouraging, it remains far below the global average of 33-34%, highlighting the need for further reforms.
The challenge goes beyond collecting taxes. The real test is ensuring that every rupee spent delivers tangible benefits. Effective fiscal policy means investing money strategically to support long-term growth.
During the 2008 financial crisis, countries like the US and China implemented large infrastructure and stimulus programmes to revive their economies. Brazil’s Bolsa Família programme, which provides direct cash transfers to the poorest families, reduced poverty and demonstrated that well-designed social spending empowers citizens rather than fostering dependency.
By contrast, Sri Lanka’s past spending has often been misdirected. Funds flowed into loss-making State-Owned Enterprises, politically motivated subsidies, and flashy projects that offered short-term popularity but little lasting value. These choices strained the national budget and eroded public trust, making it harder to encourage voluntary compliance and civic participation.
Looking ahead, Sri Lanka must prioritise investments that generate lasting benefits. Education, healthcare, and renewable energy should be top priorities, as these sectors enhance productivity, competitiveness, and overall national growth. Transparent budgeting, technology-driven monitoring, and institutional accountability are equally important to ensure public funds are used efficiently and fairly.
By aligning fiscal policy with fairness, accountability, and strategic investment, Sri Lanka can build a resilient and prosperous economy. This approach will restore public confidence, improve compliance, and support sustainable growth that benefits citizens across all segments of society. With careful planning and disciplined execution, past challenges can become the foundation for long-term stability and prosperity.
The power of balance
Almost every country borrows, but results depend on management. The US carries high debt, yet the dollar’s global status ensures continued lending. Germany enforces strict debt limits, while China channels borrowing into infrastructure and exports. Japan sustains high debt because it is mostly domestic and invested in industry.
Sri Lanka’s debt situation is critical. By 2024, debt had climbed to roughly 116% of GDP, driven by borrowing for consumption and prestige projects rather than productive investments. This pattern contributed to the historic sovereign default in April 2022, when Sri Lanka failed to meet its foreign debt obligations for the first time.
Borrowing is not inherently bad, but it must generate future income. Sri Lanka must borrow less, spend wisely, and maintain full transparency. Fiscal rules like debt limits, caps on foreign loans, and mandatory reporting can prevent past mistakes from repeating.
When taxes, spending, and borrowing are balanced, economies flourish. Too little tax pushes governments into heavy debt, wasteful spending drains resources, and careless borrowing mortgages the future.
Estonia demonstrates the power of balance. After rebuilding from Soviet rule, it implemented digital taxation, prudent spending, and disciplined borrowing. Transparency and accountability built trust, strengthening the economy. In contrast, Argentina repeatedly faces crises due to weak taxes, short-term spending, and uncontrolled borrowing. Despite natural wealth, poor management keeps it trapped.
Sri Lanka faces a similar choice. Fiscal policy touches everyday life: the tax you pay at the grocery store, the quality of your child’s school, the medicines available at hospitals, the stability of the rupee, and even the price of fuel. Fiscal policy is not distant, it shapes how we live.
The principle is clear: collect taxes fairly, spend wisely with the future in mind, and borrow responsibly to support growth. Following these principles can help Sri Lanka break free from recurring crises and move towards lasting prosperity.
Creating a resilient economy
Government action alone is not enough. Citizens must become partners in fiscal responsibility. Paying taxes honestly, demanding transparency, and supporting disciplined policies are everyone’s duties.
Fiscal citizenship means seeing taxes as contributions to a stronger, fairer society, recognising that borrowed money today must be repaid by future generations, and expecting leaders to manage public funds as carefully as their own household budgets.
The world is changing fast. Digital economies, green investments, and global competition are redefining opportunity. Countries that master the three pillars of fiscal policy – taxation, spending, and borrowing – will not merely survive; they will thrive.
For Sri Lanka, fiscal policy is more than a tool for survival; it is the foundation for transformation. How the nation collects, spends, and borrows will determine whether it achieves sustainable growth, shared opportunity, and prosperity for all. Balanced, disciplined, and transparent management of these pillars is the key to turning challenges into lasting success.
There is a need to build a culture where fiscal responsibility meets innovation. Citizens, businesses, and institutions must become active partners in shaping the economy, through transparent reporting, digital tax compliance, and collaborative oversight of public projects.
By fostering this culture alongside strategic fiscal management, Sri Lanka can transform challenges into opportunities, creating a resilient economy that delivers tangible benefits today and ensures stability and shared prosperity for generations to come.
(The writer is an independent researcher)
(The views and opinions expressed in this article are those of the writer and do not necessarily reflect the official position of this publication)