MONETABRIEF – Sri Lanka is planning to allocate two trillion rupees in the 2027 budget for capital expenditure and offer some tax concessions, President Anura Kumara Dissanayake said.
"In the budget we have drawn up there will be 1,750 billion in capital and 250 billion in Ditwah capital spending which will take the total to 2,000 billion rupees," President Dissanayake told a rally in Akuressa, Sunday.
"That is 2,000 billion we have allocated for roads, bridges, electricity. That will be the highest in history."
Sri Lanka increased the capital expenditure allocation in 2026 to 1,729 billion rupees from an original 1,369 billion rupees, after the Ditwah cyclone.
Among the outlays would be 80 billion rupees to electrify railways, President Dissanayake said.
The total cost of electrifying railways was estimated at 600 billion rupees.
After macro-economists busted the rupee, nominal capex cost has risen sharply, amplifying the effect of the Middle East war on the budget.
Bracket Creep
As the central bank met its controversial 7 percent inflation target a rise in the income tax threshold negotiated with the International Monetary Fund by the current administration was also shattered.
Inflation reduces the disposable incomes of wage earners leaving less money to pay income tax while more VAT is also paid as a share of wages further reducing disposable income.
Rising inflation which hit 8 percent, has also sabotaged an increase in tax threshold given the lowest earning income taxpayers, while rising food prices from the depreciation hits all.
"We know that there is a burden from some taxes," President Dissanayake said. "In the upcoming budget I hope to give relief on some taxes."
He did not specify which taxes would be changed and how the relief will come.
But Deputy Finance Minister Anil Jayantha told MonetaBrief earlier this month that income taxes were one of the measures being considered as the tax threshold rise given by the government was robbed by inflation.
Any salary hikes or inflation adjustments given by employers to staff to counter the central bank's inflation target, can also push workers to a higher tax bracket.
The phenomenon known as bracket creep was widely seen in the 1970s as macro-economists busted the Bretton Woods printing money to create 'full employment' or growth.
Sri Lanka defaulted in 2022 after aggressive 'policy support' to close an 'output gap' involving rate and tax cuts.
Sri Lanka's central bank is also insisting on pushing up the cost of living by 7 percent a year, in the hope of boosting growth, a spurious doctrine that was promoted by John Maynard Keynes, when he revived debunked Mercantilism after the Great Depression.
Economic Rejected for Full Employment/Potential Output
Keynes praised Mercantilists for "remaining faithful to the ancient doctrine" and dismissed the advantages that came from self-adjusting balance of payments and sound money without a policy rate that made free trade and the division of labour possible, in one fell swoop.
"The majority of statesmen and practical men in most countries, and nearly half of them even in Great Britain, the home of the opposite view, have remained faithful to the ancient doctrine," Keynes said in Chapter 23 of his magnum opus in a sweeping rehabilitation of Mercantilists.
"…[W]hereas almost all economic theorists have held that anxiety concerning such matters is absolutely groundless except on a very short view, since the mechanism of foreign trade is self-adjusting and attempts to interfere with it are not only futile, but greatly impoverish those who practise them because they forfeit the advantages of the international division of labour," he added dismissing almost two centuries of economics in one sentence.
"Generally speaking, modern economists have maintained not merely that there is, as a rule, a balance of gain from the international division of labour sufficient to outweigh such advantages as mercantilist practice can fairly claim, but that the Mercantilist argument is based, from start to finish, on an intellectual confusion."
He then swept aside laws of nature discovered and practiced (price-specie-flow mechanism) that had made London the financial capital of the world with free flow of capital.
"Under the influence of this faulty theory the City of London gradually devised the most dangerous technique for the maintenance of equilibrium which can possibly be imagined, namely, the technique of bank rate coupled with a rigid parity of the foreign exchanges," Keynes said.
"For this meant that the objective of maintaining a domestic rate of interest consistent with full employment was wholly ruled out.
"Since, in practice, it is impossible to neglect the balance of payments, a means of controlling it was evolved which, instead of protecting the domestic rate of interest, sacrificed it to the operation of blind forces."
Sri Lanka had to hike rates post-haste in 2026 respecting the 'blind forces' as the rupee collapsed from rate cuts and dishonored excess liquidity.
Exchange and trade controls were also tightened again in 2026, reversing recent reforms.
(Colombo/Sept21/2026)