More than 50 per cent of budgeted expenditure is defence spending (Rs 230 billion/ $2.1 billion, up from Rs. 215 billion this year) and debt servicing (Rs.914 billion). The military budget has seen a nearly 7 percent increase.

The budget has made imports dear. Yet, the president made it clear there will be new levies besides increased borrowings and foreign aid to bridge the deficit.

The wage freeze, imposed since 2006, will continue as a part of austerity drive. Some monetary compensation will be offered to the government employees and pensioners. Welfare payments of Rs. 250 to 750 for poor families will continue. Fertilizer subsidy is retained though subsidy is seen by sections of economists as a burden on the exchequer.

President told Parliament that he was targeting a 20 per cent hike in revenues to Rupees 1.1 trillion through a slew of taxes. The pre-budget season saw petrol, diesel and cooking gas become dear by about 10 percent.

Import of dried fish, wheat flour, coriander, onions and saffron will attract a higher customs levy both as a revenue measure and as a protection to local industries.  Phone calls, domestic as well as international, will cost 25 per cent more. Annual vehicle licence fee is doubled from 25 to 50 percent for cars, bikes and three-wheelers.

Turning to the big industry, President reduced taxes on profits in the banking and finance sector by 7 or 8 percentage points and in export industries and tourism by between 12 and 15 percentage points. Foreign and local investors will enjoy tax holidays of 4 to 12 years for investments ranging between Rs. 50 and 2,500 million.

The Ceylon Chamber of Commerce (CCC) has welcomed the incentives to promote investments and hoped that the trend of falling FDI would be reversed. FDI last year was just $500 million, short of the government’s target of $1 billion.

The Rajapakse budget has the imprint of the International Monetary Fund (IMF) which is sending a team to Colombo in January. The global soft lender’s residential representative in Colombo, Koshy Mathai said the budget was broadly consistent with the articulated plans of Rajapakse government, and was therefore in line with IMF views. He felt the exchange-rate adjustment is ‘a step in the right direction’.

Colombo received a $2.6 billion loan from the IMF in July 2009 to avoid a balance of payments (BOP) crisis after the Eelam war, which drained the economy.

In recent months the government was reluctant to devalue the rupee as IMF suggested. This prompted the IMF to halt its last two loan instalments amounting to $800 million. The lender was unhappy at the deficit shooting up the target. In his budget speech, President Rajapakse projected fiscal deficit at 7 percent for this year and 6.2 percent next year —well above the IMF’s targets.

The first eight months of the year (2011) saw the trade deficit peak by 88 per cent to $ 6 billion. By the time 2011 ends, it could reach $9 billion mark.

MILITARY BUDGET
The President justified the continued military spending.  Speaking at the Defence University after the budget, he claimed there was “no end to the challenges confronted by Sri Lanka despite the obliteration of LTTE terrorism two years ago.” 

Observers, however, see the hiked military expenditure as the government’s way of keeping the 200,000 –strong war machinery fighting fit to handle ‘social wars’ – unrest by people adversely affected by deep financial crisis and the IMF prescriptions.

Military expenditure is almost double the combined budget on health (Rs 74 billion) and education (Rs. 57 billion), which together constitute 5.8 per cent of the total budget.

Every year the government routinely increases military expenditure above the budgeted allocation. The 2011 allocation was supplemented by Rs 5 billion making the Lanka military outlay one of the largest per capita in the world.

The army has opened new camps in North and East of the country, where the ethnic Tamil minority lives. It is the area where many Chinese ventures are coming up.  The defence ministry has been renamed as the ministry of defence and urban development.to undertake slum development in particular.

Capital Colombo itself has shanties in the heart of the city. Over 75,000 families need to be evicted for the beautification of Colombo. So, the government can be said to be readying for a military type slum clearance operation.