The report traces the decline to the late 1970s, when tax-revenues began shrinking as a share of GDP and successive governments increasingly relied on indirect taxes and broad corporate tax exemptions.
A newly released report by Human Rights Watch (HRW) argues that decades of tax cuts and incentive-driven corporate giveaways left Sri Lanka with one of the lowest tax-to-GDP ratios in the world and sent its public finances into crisis. At the heart of the crisis lies a sharp drop in the government’s capacity to fund essential public services such as education, health and social protection.
The report traces the decline to the late 1970s, when tax-revenues began shrinking as a share of GDP and successive governments increasingly relied on indirect taxes and broad corporate tax exemptions. By March 2022, the tax-to-GDP ratio had slumped to 7.4 per cent – among the very bottom for any country at Sri Lanka’s income level.
The consequences were dramatic when the economy collapsed in April 2022: foreign reserves tumbled to around US$1.9 billion; debt‐to‐GDP soared to 114 per cent. As the government scrambled under a bailout with the International Monetary Fund (IMF) and austerity loomed, spending on public services was squeezed even further.
Education under strain
The tax collapse has had cascading effects on the country’s once-strong education system. Though public education is free in law, in practice students and families are still paying – via “development” fees, exam fees and levies for basic supplies – because government funding is insufficient.
In 2022, education spending was only about 1.5 per cent of GDP – placing Sri Lanka third lowest globally (behind only Laos and Haiti). HRW warns that such low investment is incompatible with international benchmarks, which suggest 4-6 per cent of GDP for education is required to meet human-rights obligations.
The shortfall shows up in classrooms: teachers say labs, smart boards and other infrastructure often rely on fees or alumni donations rather than government budget lines. A teacher in Colombo noted: “The government isn’t providing this, it’s paid for by alumni donations and fees.” Meanwhile, a surge in private tuition classes is emerging – driven in part by gaps in public schooling capacity.
Compounding the problem, the budget for the Ministry of Education, Higher Education and Vocational Training rose by only 3.5 per cent in 2025 compared to 2024 – a modest increase in the face of pledges to lift spending to 6 per cent of GDP.
Budget moment of truth
As the government prepares a new budget, HRW calls this a “make-or-break” moment for Sri Lanka’s education sector. The organisation emphasises that the budget must reverse years of neglect, ensure progressive tax measures and prioritise spending on rights‐essential services.
A key task ahead: curbing the sweeping corporate tax incentives that cost the state an estimated US$2.7 billion in 2022 alone – equivalent to nearly three times the education budget. HRW urges the government to shift away from regressive consumption taxation (such as VAT hikes on food staples and school-stationery) and instead raise revenues through direct taxes on income, assets and wealth of high earners.
For children, families and teachers across Sri Lanka the stakes are clear: without robust funding the country risks losing decades of hard-won education gains. According to the report, the gap in learning outcomes between wealthier and poorer students is widening – even as the nation slips in its global standings.
In this context the coming budget is not just a line in the fiscal calendar – it may determine whether Sri Lanka restores its promise of equal access to quality education or continues on a path of under-resourcing and inequality.
According to the HRW report, the government has a historic opportunity – to move tax policy from giveaways and exemptions to fairness and adequacy – and to align public spending with the fundamental right of every child to learn.
Image: www.globalpartnership.org
