Total revenues grew 7.2 percent to 305.5 billion rupees up to April 2012 from a year earlier, while current spending raced ahead at 23.4 percent to 445.3 billion rupees with fertilizer subsidies doubling, a mid-year fiscal report said.

Current Track

Interest expenses had shot up to 173.6 billion rupees from 142.2 billion rupees.

A fertilizer subsidy had more than doubled to 13.0 billion rupees 5.6 billion rupees, in the first four months from with rulers deciding to handouts from the tax-payer to sectors which could previously stand on their own feet.

Tax revenues grew 10.7 percent to 276.4 billion rupees and non-tax revenues fell 17.5 percent from a year earlier to 29.0 billion rupees.

The revenue deficit or the gap between total revenues and current expenses rose 86 percent to 139.8 billion rupees equal to 1.8 percent of projected gross domestic product, when an ambitious budget had projected a balancing of the current budget.

The budget for 2012 hoped to extract a trillion rupees in taxes from the people, up 23.6 percent from a year earlier.

Analysts experience in recent years has shown that budget that project a surplus or a balancing of the current account deficit has shown a tendency to go way off track, than more pragmatic ones, a red flag that was missed by most analysts.

The finance ministry had also stepped up net capital expenditure by 46 percent to 143.8 billion rupees pushing the overall budget deficit to 285.8 billion rupees or 3.81 percent of GDP excluding grants. Grants were only 2.0 billion rupees.

Expectations

The finance ministry said capital expenditure was donor financed and overall spending is expected to slow down going forward.

Donor financed projects do not put much pressure on the domestic monetary system or the exchange rate, except for the counterparty funds component, though they expand the trade deficit.

With falling commodity prices including oil, rulers have also jacked up protectionist taxes.

"The first four months outcome reflects the impact of revenue lags and expenditure leads and higher revenue and moderation of expenditure is expected in the second half of the year," the finance ministry said.

"Hence, the fiscal operations in the year as a whole are expected to remain consistent with the targeted deficit of 6.2 percent of GDP."

The finance ministry said taxes on foods like milk powder, sugar have been raised to "safeguard" the local economy which is "conducive for fiscal consolidation."

Bank Borrowing

Extracting more money as taxes from the people will reduce ruler reliance on bank financing for spending, helping stabilize the exchange rate and inflation.

The remarkable deterioration in Sri Lanka's public finances in the first part of the yuear coincided with the depreciation of the rupee from 114 to around 133 rupees to the US dollars, with rulers digging deep into the banking system to finance their spending.

Out of 198 billion rupees in domestic financing of the budget gap, 131.9 billion rupees came from banks. Non-bank financing fell in nominal terms to 66.8 billion rupees from 90.4 billion rupees, a year earlier in a remarkable reversal.

Out of 33 billion rupees of non-tax revenues 10 billion rupees had come from a Central Bank profit transfer, which is effectively printed money that puts further pressure on the rupee.

From August 2011 to the first quarter of 2012 the Central Bank bought up over 200 billion rupees in Treasuries printing and injecting rupees in the banking system, driving up credit, imports and the current account deficit of the balance of payments to unsustainable levels.