Government welfare expenditure has increased in recent years; the 2025 Budget has allocated Rs. 1,290 billion for subsidies and transfers, which constitutes a significant amount.
In an interview with The Sunday Morning Business, University of Peradeniya (UOP) Department of Economics and Statistics Professor Wasantha Athukorala noted the requirement to lower the expenditure on welfare and divert more funds for investment.
Following are excerpts:
How has the overall share of Government expenditure on welfare evolved in recent years as a percentage of GDP and total spending?
The welfare expenditure in the country has been increasing significantly over the last few years. Government expenditure comprises four main categories, which are interest payments, subsidies and transfers, salaries and wages, and goods and services. In addition to that, there is public investment as well.
Out of these, the 2025 Budget has allocated Rs. 1,290 billion for subsidies and transfers, a significant amount that is approximately 18% of the total Government expenditure. In 2012, Sri Lanka’s subsidy and transfer bill was only Rs. 408 billion, but it increased gradually. By 2020, the Government allocation for subsidies and transfers was Rs. 561 billion, which increased to Rs. 1,005 billion in 2023.
However, when compared with the most important aspect, which is investment expenditure, the Government allocation in 2025 is Rs. 1,315 billion, which is rather similar to the subsidy and transfer bill. In addition to these, the Government spends significantly on aspects such as education and public health, which are market-driven commodities in most countries and in which their governments play a minimal role.
Even historically, Sri Lanka has maintained a highly subsidised economy and society, adding a significant burden to taxpayers and leading to other emerging economic impacts. For example, a large subsidy bill means that the Government expenditure increases, leading to borrowing and subsequently to increasing the interest bill.
Therefore, at the moment, as an economist, I believe that we do not need to maintain such a large subsidy and transfer bill for the country. We can reduce this by at least Rs. 300-400 billion and allocate that money for investment, since it should be the main target of a Government. Alongside this, many employment and job opportunities can be created, and people should benefit through those avenues rather than receiving direct cash transfers.
How do Government welfare programmes impact fiscal sustainability in the long term?
Government welfare programmes are a significant challenge to fiscal sustainability in the country and disturb the ability to maintain a market economy. The subsidies constitute direct household transfers such as the former ‘Samurdhi’ programme and the current ‘Aswesuma’ programme. In addition, there is also an increase in pension expenditure and fertiliser subsidies, as well as in various subsidies for cultivation.
Providing subsidies to farmers or any other segment of society affects the market, while certain subsidies directly benefit foreign buyers. Subsidies for export crops reduce the cost of production, which are then exported. Likewise, there is an additional burden on our society by providing these subsidies. The Government should not provide direct subsidies of this nature in the long run.
There is a trend among the public to rely on Government subsidies, which directly impacts the labour market as Government-provided cash transfers disincentivise individuals who are capable of working from seeking employment. As a result, this poses a significant challenge to maintaining fiscal sustainability.
The 2025 Budget projections indicate a further increase in this subsidy bill for 2026 and 2027, as the provided figures clearly demonstrate that our subsidy bill will continue to rise. For instance, the transfer bill for 2026 is projected at Rs. 1,511 billion, a substantial and significantly increasing amount, reaching Rs. 1,586 billion in 2027.
As previously stated, an escalating subsidy bill compromises the Government’s ability to maintain fiscal sustainability. This requires increased Government borrowing, which, in turn, drives up the interest bill. Currently, the interest bill stands at Rs. 2,950 billion, representing 41% of the total expenditure – a significant component. This means 41% of the total expenditure is annually allocated to interest payments, equating to Rs. 8 billion daily.
What about the current model that guides Sri Lanka’s social safety net? Is there a specific model? Are we doing targeted transfers or is it a hybrid model?
Among various types of subsidies and transfers, the ‘Samurdhi’ and ‘Aswesuma’ programmes are notable.
The number of recipients in the country has drastically increased over time. In 2013, 1.47 million households received support, which rose to 1.8 million households by 2019, before marginally decreasing to 1.75 million households by 2022.
Considering that Sri Lanka has 5.7 million households, the Government’s provision of cash transfers to 1.75 million households under the ‘Samurdhi’ scheme means that 30% of households in the country receive these transfers.
As the country recently experienced a major economic crisis, it led to increased poverty and widespread income loss. Consequently, the Government introduced ‘Aswesuma’ during that period.
While official figures on the exact number of ‘Aswesuma’ recipients are not available, most Government media releases indicate coverage for approximately 2.4 million people. This figure represents about 42% of the country’s total 5.7 million households. World Bank data suggests that only around 25-26% of households in the country are below the poverty line, indicating a significant discrepancy in coverage.
A simple calculation reveals that, on average, 171 households per Grama Niladhari (GN) division receive ‘Aswesuma,’ given approximately 14,015 GN divisions nationwide. Considering the average number of households in a typical GN division is about 406, the fact that 171 receive direct cash transfers is implausible. A typical GN division might realistically have only 30-50 households genuinely lacking a proper income source, and therefore, 171 is an excessively high number.
The Government spends approximately Rs. 11 billion monthly on the ‘Aswesuma’ programme’s payments. However, the selection process for these recipients has been inadequate. There are evident issues of both exclusion (households that should receive ‘Aswesuma’ but are not included) and inclusion (individuals with substantial incomes who are erroneously included).
For instance, some beneficiaries with earnings from cultivation or small businesses, despite not having a formal monthly income from the Government or private sector, have been included in the ‘Aswesuma’ programme.
These widespread inclusion and exclusion issues within the Government’s welfare programme have placed a significant burden on the economy. Ultimately, these funds are sourced from taxpayers, whose money is used to support these beneficiaries. Hence, I observe several serious issues within the current Government welfare programme.
What other systemic weaknesses do you observe in welfare distribution, particularly administrative or political inefficiencies?
There are several issues. Under the ‘Aswesuma’ programme, to my understanding, extremely poor households receive Rs. 15,000 per month, poor households receive Rs. 7,500, vulnerable groups receive Rs. 5,000, and transitional groups receive Rs. 2,500 per month. This is the Government’s classification system.
To genuinely empower these individuals, accurate identification is crucial. While the Government has established certain criteria for selecting recipients, these technical criteria are proving ineffective, especially with many individuals altering their financial circumstances to demonstrate eligibility.
There are, however, simpler solutions for this identification challenge. At the village level, for instance, Sri Lanka has approximately 14,000 GN divisions, each served by typically five to six Government officers providing services. The Government should instruct these officers to collaborate with village households to identify who should receive ‘Aswesuma,’ as villagers are well informed.
Furthermore, for those who lack sufficient income but are capable of working, the Government could mandate participation in community work – such as cleaning public areas in the village or GN division, or cultivating underutilised lands – in order to receive ‘Aswesuma.’
If mandated, some individuals with good incomes would likely choose not to accept ‘Aswesuma,’ opting out voluntarily instead. This would be beneficial for the Government. Moreover, if beneficiaries engage in work, they contribute to GDP and help maintain cleanliness. It is important to empower these individuals through such approaches.
Government subsidies and cash transfers can disincentivise certain individuals from seeking employment. Changing this mindset will be a gradual process and presents a political challenge, as governments may be reluctant to reduce beneficiary numbers for fear of losing votes. Our increasing welfare spending should prioritise the empowerment of people.
When welfare spending increases, are there any necessary trade-offs in public spending? Are there aspects that could be significantly impacted, such as education, infrastructure, or even health?
Currently, I believe most sectors, including education and health, do not face a funding issue. However, efficiency in fund utilisation remains a concern.
There is a more significant issue regarding investment. The Government has two primary roles the first of which involves increasing investment, ideally in collaboration with the private sector. For example, the Sri Lankan transport sector could be significantly developed with private sector assistance.
Currently, Government allocation for major infrastructure development is limited due to extensive spending on subsidies and transfers. It is important to reduce these subsidies and divert those funds to develop infrastructure. We currently spend $ 4-5 billion annually on energy imports, largely because our transport system is inefficient.
As for its second primary role, the Government should also act more as a facilitator for small, medium, and micro industries. Funds should be diverted to provide facilities such as market access, rather than solely offering cash transfers.
Even for exports and digitalisation, the Government should redirect more funds so that the country can develop more effectively. Allocating funds to digitalise the Government sector would significantly reduce costs currently incurred due to manual procedures and additional expenses.
In light of International Monetary Fund (IMF) requirements for fiscal consolidation and strengthening the social security network, how can Sri Lanka manage this balancing act?
The IMF has provided us with macro-level targets that we must achieve. For instance, revenue and grants are projected to be 15.1% of GDP in 2025, 15.3% in 2026, and 15.4% in 2027. Expenditure targets are set at 20.3% of GDP in 2025, 19.9% in 2026, 19.5% in 2027, and 19.2% in 2028. Primary balance and Government debt targets have also been provided.
The issue is not with the IMF or multilateral organisations but with Sri Lanka’s internal policies for proper identification and long-term empowerment. Additionally, although we receive grants and loans from the World Bank and other organisations for social safety nets, these are primarily loans that must be repaid.
Certain households, such as those including individuals with chronic illnesses, the elderly, or disabled individuals, genuinely require support. The Government should have a clear plan to correctly identify these individuals and provide appropriate transfers. For those capable of working, ‘Aswesuma’ should be a temporary measure, with a requirement to engage in work after a specified period.
What structural reforms are necessary to transition from a relief-based welfare system and to avoid an increase in dependency risk?
Last year, Sri Lanka achieved 5% GDP growth and the Government projects a similar rate for this year, although some forecasts are lower, at 3.5-4%. Despite this, sectoral issues persist, such as negative growth in the agricultural sector.
The industrial sector also faces challenges and businesses are not expanding. While the service sector contributes 57.5% to GDP, its growth has been modest at 2.4%. The industrial sector contributes 25% and is growing. Agriculture contributes 8.3%, but a significant 26% of the labour force (two million people) is employed in this sector, yet productivity remains very low.
Existing welfare programmes and agricultural subsidies, such as paddy purchasing and fertiliser subsidies, are not proving productive. Therefore, structural reforms are necessary.
Empowering the vulnerable should be a major component of these reforms, enabling them to contribute to the economy. As the debt payment burden is expected to increase by 2027-’28, it is necessary to maintain higher growth, reduce poverty, and instigate a change in societal attitudes.
Currently, some households receiving ‘Aswesuma’ perceive it as a significant achievement, which it is not. Radical structural reforms are essential to move away from a subsidy mentality and societal dependence towards productivity and self-reliance. Without such reforms, the economy risks stagnation.