Cost of a free lunch
View(s):It struck me that we seldom hear about the challenges of maintaining a welfare state. The very subject felt like a challenge in itself.
For decades, we have grown accustomed to enjoying its benefits—almost like a free lunch—hearing only the positive side. We rarely stop to ask how much it costs, who pays for it, or what accountability it demands. Instead, we simply enjoy it without reflection.
File picture of the Passport Office. The high cost of living is what compels Sri Lankans to find foreign jobs.
From birth to death
In a welfare state the government takes the responsibility of ensuring the basic social and economic security of its citizens – healthcare, education, pensions, housing, subsidies, cash transfers, food rations, community services, income support and other.
The concept rests on three key principles: 1. Equal opportunity, meaning everyone should have a fair chance to succeed;
2. Equitable distribution of wealth, achieved through taxation and transfers to reduce inequality; 3. Public responsibility, where the government supports those unable to meet essential needs on their own.
Sri Lankan citizens are said to benefit from more than 50 welfare measures ‘from birth to death.’ In childhood, these include nutrition programmes, maternal and child health services, free education, textbooks, uniforms, and school meals.
As they grow, citizens are entitled to free healthcare, vocational training, cash transfers, fertiliser subsidies, housing schemes, and subsidised public transport. In old age, there are elderly assistance programs, public service pensions, social pensions for low‑income seniors, and government support for chronic illnesses and disabilities.
In aggregate, government welfare spending is substantial, though it may be smaller at individual level. As of 2024, more than one‑fifth of total government expenditure goes directly to households—through pensions, Aswesuma, fertiliser subsidies, and other transfers. This figure does not include the country’s major welfare services such as education, healthcare, and transport, which citizens receive free or at subsidised rates.
Borrowing from the West
The welfare state is largely a Western concept, borrowed by Sri Lanka from the British. While the term is often used to describe Western European and Scandinavian countries, it carries less weight when applied to East and Southeast Asia.
The distinction is important. Western welfare states emphasise universal coverage and redistribution, whereas East and Southeast Asian models are more work‑oriented, insurance‑based, and family‑dependent. These structural differences extend to taxation and spending patterns.
In Europe and Scandinavia, government expenditure typically ranges between 40–55 per cent of GDP, supported by equally high tax‑to‑GDP ratios. This reflects expansive welfare states where governments play a central role in providing services, redistributing income, and maintaining infrastructure.
By contrast, East and Southeast Asian economies operate with leaner fiscal profiles: government spending is often just 15–25 per cent of GDP, with correspondingly lower tax revenues.
Recipe for disaster
The contrast between Western and Eastern welfare models reflects two philosophies of state involvement. Europe emphasises broad social protection and collective welfare, while East Asia leans toward restrained government, market‑driven growth, and limited redistribution.
The result is structural: European systems prioritise equity and security, whereas Asian models stress efficiency, competitiveness, and fiscal prudence.
Sri Lanka attempted to blend the two—adopting Western‑style welfare promises but relying on Eastern‑style low taxation. Successive governments pledged heavy spending even as tax revenue fell below 10 per cent of GDP, while expenditure hovered near 20 per cent. The inevitable gap was filled with borrowing and money printing, leading to a debt pile so large that Sri Lanka declared default in April 2022.
Even after three years of fiscal consolidation, the burden remains crushing. By 2025, interest payments alone consumed 56 per cent of tax revenue, while total debt service reached 95 per cent. In fact, debt service had exceeded tax revenue for many years before the crisis, underscoring the unsustainable mismatch between promises and resources.
Welfare history
Although we have inherited the welfare model from the West, its diversification and expansion after Independence appears to be not necessarily a carefully planned policy agenda. Otherwise, the government’s extensive and expansive welfare programme would have been a manageable one with available resources.
It was a result of an action-reaction cycle among the left, centre-left and centre-right political parties that engaged in fierce competition for political power. This has continued to-date, although all traditional political parties have failed. At the end of the day, they all appeared to have lost their competition to one-another pushing the economy towards a disaster.
In good times, government increased spending, but in bad times reversing that spending was impossible. American Economist, Donald Snodgrass noted this pattern of public spending in his 1966 book, “Ceylon: An Export Economy in Transition”. Sri Lanka’s good times and bad times were shaped largely by fluctuations in world market prices for its traditional exports—tea, rubber, and coconut.
In referring to the welfare pressure from the working class movement at the time, British Economist, Joan Robison during her visit to Sri Lanka noted that “Ceylon has tasted the fruit before she has planted the tree”. She wrote this in one of her academic papers, after witnessing the trade union struggle against the government in the second half of the 1950s.
Challenge of the baby boom
A massive tsunami of welfare demand was silently emerging in Sri Lanka—the baby boom from the 1940s to the 1970s. During this period, population growth averaged 2.5 per cent per year, driven by higher fertility and lower death rates, themselves outcomes of the expanding welfare state. Inevitably, this surge required greater spending on healthcare, education, consumer subsidies, and other welfare services.
Now, those babies of the mid‑20th century are ageing as we enter the second quarter of the 21st century, creating a new welfare challenge. Already, 18 per cent of Sri Lanka’s 21 million people are over 60, and this share is projected to rise to 25 per cent in the coming years. The country must therefore support a disproportionately large elderly population through its welfare system, financed by the earnings of a smaller workforce.
This demographic shift means, on the other hand, a shrinking share of working‑age citizens. Sri Lanka’s labour force participation is unusually low for other reasons too.
Out of 21 million people, only 8.5 million are in the labour force, compared with a country like the Netherlands, which has 10 million work force out of a population of 18 million.
In Sri Lanka, long years of schooling and limited female participation compound the problem, alongside ageing. While long years of schooling demands for education reforms, limited female participation demands for labour reforms.
Core issues
There is no question that a traditional welfare state requires high tax revenue to match high spending. A country cannot run Western-style welfare state with Eastern-style tax system without getting into a debt crisis, as confirmed by the Sri Lankan welfare state.
A broader tax base, higher tax compliance, and strong fiscal buffers, as well as industrialisation and export growth that generate sound tax revenue are fundamental requirements of a welfare state.
Sri Lanka’s welfare state has, however, reached a critical juncture. On one hand, the country must honour its extensive past commitments by meeting forthcoming debt obligations. This also includes external debts that have been deferred to the future. On the other, the country needs to strengthen its fiscal resilience through state-owned enterprise reforms and cost-reflective utility pricing.
The painful adjustments required to build these buffers should not be undermined by the introduction of new spending measures. In the past, similar fiscal discipline was often eroded when governments expanded subsidies or welfare programmes, leaving the economy more vulnerable to external shocks.
(The writer is Emeritus Professor at the University of Colombo and Executive Director of the Centre for Poverty Analysis (CEPA) and can be reached at sirimal@econ.cmb.ac.lk and follow on Twitter @SirimalAshoka).
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