A cost-of-living allowance of 750 rupees a month will be paid from January 2013 to all public servants, he said.
The balance will be given in stages through a five percent raise in the basic pay with a minimum of 750 rupees and a maximum of 2,500 rupees as an additional allowance to all public servants.
To contain "inflationary pressure" stemming from such increases, Rajapaksa said he proposed to give half of the planned five percent pay hike from May 2013 and the balance from September 2013.
All those in "staff" categories will be given 50 percent of the pay hike from July 2013 and the balance in October 2013.Rajapaksa also proposed raising allowances given to judges, university academic staff and doctors and other special categories "within affordable limits" in the budget, with half of the raise being given from January 2013 and the rest from next July.
The government now employs 1.3 million people, Rajapaksa said.
"This is twice the size in 2005," he said. "The engagement of such a large number of people is done by spending 366 billion rupees for wages alone. This was 139 billion rupees in 2005."
In addition, the government spends 112 billion rupees to pay the pensions of half-a-million retired public servants, Rajapaksa said.
The 2013 budget also proposed a special allowance of 750 rupees a month to those public officials who retired before 2004 and 500 rupees a month to those who retired between 2005 and 2006.
Half this increase will be given from January 2013 and the balance from next July.
Rajapaksa also plans to increase the cost-of-living allowance of pensioners by 500 rupees a month from next January.