President Mahinda Rajapakse, who is also the country’s Finance Minister, unveiled the 2006 budget granting salary increases to public servants and duty-free allowances to help professionals who return from abroad, to start up their own business.
The budget deficit for 2006 was estimated at Rs. 197 billion, up from Rs. 168 billion this year.
The deficit would widen to 7.1 percent of gross domestic product from an estimated 8.5 percent this year, he said.
Rajapakse estimated next year’s total revenue at Rs. 484 billion, up Rs. 7 billion from the Nov. 8 budget estimates.
Next year’s total spending is estimated at Rs. 731 billion, up by Rs. 10 billion from the budget proposals presented a month ago.
The government has also cut its domestic borrowings plan by Rs. 1.0 billion to Rs. 122.9 billion from the previous estimates.
However, foreign borrowings are expected to increase by Rs. 6.9 billion from a month ago. Total net foreign borrowings for 2006 have been estimated at Rs. 66.4 billion.
He said the thrust of government’s programme is to increase economic growth to eight percent in the medium-term and spend on poverty alleviation, health, education and infrastructure projects.
A large chunk of government expenditure for 2006, will go towards incentives for agriculture sector, higher fertilizer subsidy for farmers and subsidies on construction imports.
A further billion rupees will be splashed to hire 10,000 new civil servants next year.
Power supply will be subsidized for those living near upcoming coal power projects.
“The electricity will be provided at half rate to the people living in the districts where new coal power plants are installed,” he said. “Religious places in those districts will be given electricity free of charge.”
The bulk of his welfare heavy spending plans will be funded through an overseas bond issue and higher taxes.
Higher excise duties on alcohol and tobacco are expected to generate an additional Rs. 4.7 billion next year.
The budget raised the overall corporate tax to 35 percent, while tax for newly quoted companies has been hiked to 33.3 percent.
Value-added tax on financial services will be increased to 20 percent from the present 15 percent.
Personal income tax rate for the high-income group will also go up to 35 percent from 30 percent.
Rajapakse also announced that Standard & Poor had given Sri Lanka a B+ sovereign rating and Fitch a BB-.
Financial analysts expect the government to use the credit ratings to sell its maiden bonds in the international markets next year and also set a benchmark for local companies.
-Mel Gunasekera: mel@vanguardlk.com