The Government has introduced several subsidy and social welfare measures during its tenure thus far, some of which had also been approved by the previous administration. However, concerns have been raised about the affordability and sustainability of these measures in relation to fiscal performance.
Notable subsidies include those directed at farmers and fishermen, as well as the distribution of pension allowances. While economists acknowledge the space for subsidy and welfare measures, facilitated by increased Government revenue, they also caution against excessive subsidies without matching revenue generation to maintain fiscal sustainability.
Speaking to The Sunday Morning, First Capital Chief Research and Strategy Officer Dimantha Mathew addressed the sustainability of current subsidies, noting certain subsidies, such as kerosene for fishermen, may not have a substantial financial impact as the amount was not material in comparison to the revenue.
However, Mathew highlighted a key concern regarding the fiscal outlook for the coming year. “At the moment, the country’s revenue is generated somewhat comfortably, with revenues broadly in line and sometimes slightly above target for this year. However, next year will be critical,” he said, pointing out that potential revenue from vehicle imports could play a significant role if the Government opened up this sector.
Addressing the broader issue of the budget deficit, Mathew stressed that further subsidies would strain Government finances. “Allocating subsidies when running a high budget deficit cannot be done,” he added, noting that although revenues were on target, the expected budget deficit for this year was around 7%, a figure that should ideally be brought below 5%.
“We are still on the path to recovery, but there is much more to be done in terms of cutting costs than increasing revenue. We are not at the level of performance expected in certain areas and based on that, technically, the subsidies given can be described as unaffordable,” Mathew added.
He further emphasised the importance of pushing for economic reforms to increase the Gross Domestic Product (GDP), which in turn would help manage the country’s debt levels, stating that once the GDP started growing again, revenues would naturally move up.
Boosting revenue key to sustaining subsidies
Similarly, Advocata Institute Chief Executive Officer (CEO) Dhananath Fernando commented on the difficulty of sustaining subsidies and welfare measures without a corresponding increase in revenue. “Currently, around 50% of the country’s expenditure goes toward interest payments, which is a significant portion of our income,” he explained.
Fernando acknowledged that while a responsible government could not ignore high poverty rates, focusing solely on direct subsidies was not the solution. “Rather than providing handouts, it is essential to strengthen the social safety net with proper targeting, ensuring the most vulnerable are supported,” he said, adding that reducing the size of the Government was a necessary step in lowering overall expenditure.
On the revenue side, Fernando stressed the need to broaden the tax base, as increasing tax rates would be difficult under the current circumstances. “The primary revenue source for the Government is taxation. If the country continues subsidies or welfare measures without increasing revenue, there will be a requirement to borrow more, which will weaken the fiscal position further,” he noted.
He added that borrowing from the Central Bank of Sri Lanka (CBSL) could also lead to inflation, disproportionately affecting the poorest segments of the population, noting that while there was no immediate solution, the best course of action would be to initiate long-term reforms.
While acknowledging that subsidies were sometimes used to stimulate growth in specific sectors, Fernando stated that they could become difficult to roll back, with recipients viewing them as entitlements.
“Subsidies can act as a disincentive for competitive and hardworking individuals while encouraging less productive behaviour,” he said. However, he also recognised the need to maintain certain welfare programmes for vulnerable groups, such as individuals with disabilities and disabled veterans, balancing economic reforms with social responsibility.
Economics of subsidy and social welfare measures
Addressing a recent press conference, Cabinet Spokesperson Minister Vijitha Herath announced that the Cabinet of Ministers had approved a fuel subsidy for fishermen, providing Rs. 25 per litre of diesel up to 300,000 litres per month. This subsidy will be made available on a monthly basis for both multi-day and one-day fishing vessels with the aim of reducing production costs and supporting the fishing industry.
In addition to the diesel subsidy, fishermen will receive Rs. 25 per litre of kerosene, up to 15 litres a day and for 25 days a month, under a maximum limit of Rs. 9,375.
The Minister further stated that Rs. 5.5 million had been allocated for this subsidy for six months and that the Election Commission (EC) had approved this measure. This decision allows fishermen to benefit from concessions of 7.5% on diesel and 12.5% on kerosene in terms of market value.
On the agricultural front, the Government has introduced an allowance of Rs. 25,000 per hectare for paddy farmers for the Maha season of 2024/’25. Speaking at another press conference, Minister Herath explained that this subsidy, initially suspended by the EC, had been permitted following requests from various factions and farmers.
The subsidy will be delivered in two phases – Rs. 15,000 in the first phase and Rs. 10,000 in the second. According to Herath, Rs. 2 billion has been sent to various regions already, with the remainder soon to follow.
Moreover, Ministry of Agriculture Secretary M.P.N.M. Wickramasinghe, also commenting at a press conference, outlined plans to cultivate 800,000 hectares during this Maha season. Accordingly, with the Government allocating Rs. 25,000 per hectare, the total cost of this programme is expected to reach Rs. 20 billion, an amount that is to be allocated by the Treasury.
Additionally, the Government has approved the distribution of a Rs. 3,000 interim pension allowance for pensioners. Under the current Government, Rs. 2,021 million has been released for 679,960 pensioners. If continued for the rest of 2024 at the same pace, this allowance will cost over Rs. 4 million for the next two months.
As of 2023, total Public Services Pension (PSP) payments amounted to Rs. 372.3 billion, representing 7.9% of the Government’s recurrent expenditure and 12.1% of its revenue. Total pension payments increased by 20.5% in 2023, mainly due to the net increase in the number of pensioners by 4.2%, with around 700,000 public sector pensioners in total.
However, an analysis by the Institute of Policy Studies of Sri Lanka (IPS) indicated that 50% of PSP benefits went to individuals in the top 20% income bracket, while only 11% reached the bottom 40%, highlighting the need for better targeting and sustainable mechanisms in social welfare programmes.
Addressing public needs while managing fiscal responsibility
Meanwhile, speaking to The Sunday Morning, University of Colombo (UOC) Department of Economics Lecturer Umesh Moramudali underscored the balance the Government must maintain between providing welfare support and managing the fiscal sustainability of the country. According to Moramudali, Sri Lanka is still in recovery and the Government is mainly tasked with addressing two aspects of the issue.
“On one hand, we have many people struggling to make ends meet and it is the Government’s responsibility to provide support. On the other hand, the fiscal aspect of the Government must be managed, ensuring that we don’t excessively borrow or exceed the targets stipulated by the International Monetary Fund (IMF) programme,” he explained.
Moramudali noted that the Government’s revenue performance in the first half of the year had been strong, and in fact, revenue collection had been stronger than expected under the IMF agreement.
He also observed that there was some room, from a fiscal perspective, to provide relief to those in need, adding that small measures, such as pensions for farmers and fuel subsidies, also approved by the previous Government, were currently feasible within the fiscal framework. However, he noted the difficulty of continuous increases in subsidies, stressing that these measures must align with the Government’s revenue targets.
Moramudali added that the key factor in determining whether such payments were sustainable lay in the Government’s ability to maintain strong revenue performance. “Assuming revenue continues to pick up next year and in the years to follow, these kinds of payments could be sustainable. But the Government will need to match its revenue targets with its subsidy measures,” he said.
He further emphasised that while welfare programmes were necessary, they must be approached with revenue aspects in mind.
“While the Government has a duty to provide support, in doing so, it must also consider the revenue generation aspects. If it deviates from the current revenue path, none of these measures will be sustainable. Revenue has increased in recent years due to higher tax rates; further tax hikes may not be sustainable in the long term,” he noted.
He also highlighted the issue of revenue leakage, stating that strict enforcement of laws and an increase in administrative capacity were crucial for maximising collection.
“If the country can strengthen administration and avoid significant deviations from current tax policies, maintaining revenue growth will be possible,” he said, adding that while minor changes to tax brackets may occur, any major deviations would pose a significant risk.
Moramudali also addressed the importance of targeting welfare measures to ensure that they reached the people who needed them the most. “For some, welfare measures like ‘Aswesuma’ are their sole income. These programmes are important, but targeting must improve to ensure that the right people benefit,” he noted.
He also highlighted the importance of revitalising struggling industries to stimulate growth. “Reviving these sectors is critical to increasing incomes, reducing poverty, and boosting overall economic growth. It’s important to bring these communities into the fold, so they can participate in and benefit from economic growth.”