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Popular expectations from the budget for 2026 and the challenges it faces to stabilise the economy and promote growth are divergent objectives. There is a large divergence between the people’s expectations and the economic objectives of the budget. In fact, the government itself has to prepare a budget within the framework of the IMF’s Extended Fund Facility (EFF) agreement. This is good for fiscal discipline but is a setback to popular expectations from the budget.

We will know by next Sunday to what extent the Budget 2026 to be presented on Friday, November 7, would meet the popular expectations and economic challenges we discuss today.

Divergent

The plain truth is that there is a large divergence between the people’s expectations and the economic objectives of the budget. Therein lies a vast gap in the evaluation of the budget.

Insofar as the economy is concerned, the containment of the fiscal deficit and mobilising adequate revenue are fiscal policy imperatives.

Popular expectations

People’s expectations of the Budget 2026, and indeed of all budgets, are the reduction of prices of consumer items, increases in wages and reduced taxes. These are the expectations from the budget that will be presented next week. The government too would like to reduce prices of consumer items, increase wages and reduce taxes. These are the expectations with every budget, and every budget panders to these to some extent.

Misconceptions

These expectations are due to several popular misconceptions.

The popular perception of government finances is that the government has inexhaustible resources that it could dole out to people. This misconception was aptly captured by Singaporean Prime Minister Lee Kuan Yew when he described our elections as an auction of non-existent resources.

From rich to poor

Complementing this perception is the view that the government could take from the rich and give to the poor. However, there are limits to this.

Economics

These popular perceptions render the formulation of an economically sound budget difficult. On the other hand, the government faces the challenge of finding the revenue to minimise the budget deficit and, if possible, generate a budget surplus.

Fiscal objectives

The required fiscal objectives have to be achieved while finding the finances to meet the mandatory high debt servicing costs, a huge payment of salaries and pensions of a bloated public service and increased expenditure on health, education and welfare payments.

Critical issue

The critical issue is how the government could enhance its revenue to meet the large public expenditure. What are the ways and means of enhancing its revenue?

Taxes

The prospect of increasing income taxes appears unlikely. In fact, there is an expectation of the lower tax bracket being increased from its current Rs.150,000 per month to Rs.200,000 a month. Will the government opt to increase taxes for the higher incomes, and will these bring in higher revenue? We have to see whether the budget would change the income tax structure by giving relief to the lower-income earners and imposing higher rates of taxes at the upper end.

Speculation

There has been speculation that the government would impose new property and wealth taxes. This is very likely, as it is a means of reducing the large amount of tax avoidance that results in a low income tax/GDP ratio.

Consequently, the country depends on indirect taxes that are regressive. The incidence of indirect taxes falls mostly on low-income earners.

Indirect taxes

The country depends very much on indirect taxes. About 70 per cent of revenue is from them. These are considered repressive taxes, as their incidence falls on lower-income consumers.

New taxes

The popular expectation is that the VAT and other taxes that fall on commonly consumed goods would be reduced or eliminated. If this were to be done, there would be a need to impose higher taxes on non-essential or conspicuous spending.

Expenditure and property taxes are the means by which revenue could be collected from the rich and tax evaders.

Car import duties

The government liberalised car imports as a means of increasing revenue in 2025. As we discussed in last Sunday’s column, this is very contentious.

The liberalisation of vehicle imports

In this context, having to accumulate reserves to repay the massive foreign debt is controversial. The expenditure of US$1.5 billion is a significant outflow of foreign funds, given our external financial liability.

Contentious reasoning

Whether increased revenue for the government is a good economic case for imports is contentious. Should the government have depleted the country’s foreign reserves that are inadequate to meet its debt obligations to enhance its revenue? Aren’t there other taxation measures that fall on conspicuous spending that could have enhanced revenue?

Economic objectives

The objectives of the Budget 2026 should stabilise the economy and stimulate growth. It should aim for sustainable growth while ensuring fiscal discipline. In fact, the budget has to ensure that it conforms with the conditions agreed with the IMF framework and focuses on adequate revenue mobilisation to ensure a low fiscal deficit. Since government expenditure on the public services, health, education and debt servicing is high, the popular expectations of benefits are difficult.

Concluding reflection

The popular expectations of next Wednesday’s budget are of lesser taxes on essential commodities and lower income taxes. These pose challenges for the government. Achieving these desirable goals and increasing expenditure on health, education and welfare while containing the budget deficit in 2026 is challenging.

Reducing wasteful expenditure, higher taxes on the rich and reducing tax evasion through property and expenditure taxes would hopefully achieve the fiscal objectives. The government’s fiscal strategy that will be disclosed in the budget will be of paramount importance for the country far beyond the popular expectations.