2026 Budget Cuts Mask Fiscal Stress as Taxes Squeeze Sri Lankans Hard

Sri Lanka’s 2026 Budget, presented as a blueprint for stability, conceals a harsher truth: government revenue is increasingly extracted from ordinary citizens, while deep cuts to capital expenditure raise questions about transparency and long-term development priorities.

Of the projected Rs. 4,910 billion in tax revenue for 2026, a staggering Rs. 3,056 billion is derived from indirect taxes on goods and services levies that ultimately hit consumers regardless of income. Even the Rs. 544 billion collected from international trade, much of it from import-related taxes, is passed on to retail prices, pushing households deeper into cost-of-living pressures.

Direct taxes tell a similar story. Out of Rs. 1,120 billion expected from direct sources, salary earners contribute Rs. 215 billion, while Rs. 185 billion comes from withholding taxes on bank depositsprimarily borne by middle-income savers. Yet, capital-owning industries continue to receive extensive concessions. In the first six months of 2025 alone, BOI-registered companies received Rs. 120.6 billion in tax exemptions, effectively reducing their fiscal contribution.

While citizens shoulder rising tax burdens, the Government is simultaneously paring down capital expenditure, creating fiscal space that masks the severity of the country’s financial stress. In 2025, nearly 30% of the capital budget is expected to go unspent, diverted back to the Treasury as a cost-saving maneuver.

This redirection occurs even as ministries struggle with dwindling resources. The Ministry of Health, for instance, has already diverted 60% of its capital funds, worsening shortages of medicines, equipment and staff.

The 2026 budget continues this pattern of contraction.

Education: Capital spending for school education drops from Rs. 99.3 billion to Rs. 98.9 billion. Funding for printing school textbooks sees a Rs. 500 million cut, while support for Grade 5 scholarship recipients is reduced by Rs. 45 million. Even nutritional meal allocations for sports school students are trimmed by Rs. 80 million.

Higher education: State university funding falls from Rs. 134.5 billion to Rs. 131.3 billion, yet Rs. 7.5 billion is earmarked for the private Kotelawala Defence University signaling an emerging shift in the public university model.

Infrastructure and key ministries: Transport, Highways and Civil Aviation capital allocations fall from Rs. 435 billion to Rs. 390 billion. Agriculture, livestock and irrigation lose Rs. 3 billion. Agencies responsible for industries, entrepreneurship, women’s affairs, housing, and labour also face notable reductions.

These reductions coincide with soaring debt obligations. Out of the Rs. 8,980 billion total expenditure for 2026, a massive Rs. 4,495 billion over half is interest payments alone. The fiscal strategy is clear: raise more rupees through taxes, convert them into dollars, and meet foreign debt commitments.

Yet Sri Lanka’s reserve position remains fragile. As of September 2025, reserves stood at USD 6,243 million, only USD 152 million higher than nine months earlier. To reach the Government’s stated year-end target of USD 7,174 million, nearly USD 1 billion must be found in just three months—a near impossibility without further borrowing.

Crucially, only about USD 1,014 million of the reserves are genuinely usable; the remainder consists of Chinese, Indian and IMF loans, plus short-term bank borrowings. To sustain the illusion of stability, the Government purchased USD 177 million in September alone.

Behind the budget’s carefully crafted narrative is an unavoidable reality: the public is being asked to bear the full weight of the economic adjustment while essential services face relentless cuts. For many households, 2026 may mark another year of tightening belts, rising prices and shrinking public investmentan economic recovery built on the sacrifices of ordinary Sri Lankans.

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