Debt Begets Debt: The Sri Lankan Welfare State and Fiscal Sustainability

Tilak Abeysinghe

Asian Economic Journal, 2021, vol. 35, issue 4, 363-389

Abstract: Universal free education, healthcare and food subsidy and land (and housing) for the landless were the key features of the Sri Lankan welfare state. In the 1960s and 1970s, Sri Lanka was an outlier among developing countries in that it had high human development indicators for a low‐income country. Sri Lanka cannot make the same claims today. Many developing countries have surpassed Sri Lanka. Insufficient economic growth and perpetual budget deficits have resulted in an unsustainable build‐up of public debt. A segmented trend analysis of the debt‐to‐GDP ratio shows that social welfare programs are not the main drivers of unsustainable debt trends at present. It is debt servicing that perpetuates the debt burden. In fact, the fiscal constraints of the country have taken a heavy toll on the quality of the social programs. The debt burden resulting from an aging population, although largely offset at present by the declining proportion of young people in the population, is bound to increase further. Interestingly, apart from higher GDP growth, a quality‐adjusted road network seems to contribute to lowering the debt burden through indirect growth effects. By implication, essential infrastructure development increases the debt burden in the short run but reduces the debt burden in the long run when the growth effects start to kick in.

Date: 2021
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