How we are being misled by fiscal illusion in Sri Lanka

PRESENTLY, Sri Lanka is on a recovery journey from the deepest economic downturn in its history. The unhealthy fiscal policies of successive Governments have already been recognised as one of the major causes of this poor performance. Fiscal policy encompasses various decisions related to the national budget. Therefore, it is crucial to closely monitor budgetary behaviour and related decisions to ensure the economy moves in the right direction.

- By Dhananjaya Madusanka Dissanayaka

Fiscal illusion is a term originally introduced by the Italian economist Amilcare Puviani in 1903 and later developed and popularised by modern public choice economists¹. It is often used to explain how governments and fiscal policymakers navigate budgets in ways that mislead voters, helping them gain and maintain popularity. Let’s take a closer look at the behaviour of Sri Lanka’s fiscal policy in the recent past to understand how this concept plays out in our own context.

Changing pattern in total public expenditure

In Sri Lanka, the role and size of the Government have often been subjects of public debate. However, especially in the aftermath of the economic crisis, many believe that the expansion of the public sector should be avoided unless absolutely necessary. For instance, public sector recruitment was nearly frozen for several years and, even today, new hiring occurs only after thorough evaluation. Moreover, the writer himself has listened to several speeches by current leaders emphasising the need to restructure loss-making and low-value-adding public enterprises in the country.