Last week, the Sunday Times Business reported that SriLankan Airlines received Rs. 25.2 billion in December 2025 through a government capital infusion. This is hardly new — such bailouts have been a recurring feature throughout the airline’s history.
According to the airline’s 2024/25 annual report, accumulated losses had reached Rs. 379.5 billion. On top of this, the company carried heavy bank debt and unpaid international bonds, with interest obligations of about US$ 211.6 million (roughly Rs. 65 billion at current exchange rates).
The Rs. 25.2 billion infusion was used mainly to clear outstanding state bank debt as part of a restructuring package. Yet the broader debt burden and massive accumulated losses remain. Unless the airline begins generating profits and absorbs these liabilities internally, the government — and ultimately taxpayers — will continue to shoulder this burden in the future.
After reading the news, I was reminded of what Singapore’s late Prime Minister Lee Kuan Yew once said about his 1978 conversation with Sri Lanka’s President J.R. Jayewardene regarding the country’s national carrier:
“He (President J.R. Jayewardene) wanted to start an airline because he believed it was a symbol of progress. Singapore Airlines employed a good Sri Lankan captain. Would I release him? Of course, but how could an airline pilot run an airline? He wanted Singapore Airline to help. We did. I advised him an alrline should not be his priority because it required too many talented and good administrators to get an airline off the ground when he needed them for irrigation, agriculture, housing, industrial promotion and development and so many other proiects. An airline was a glamour proiect, not of great value for developing Sri Lanka.” [From Third World to First: The Singapore Story, p.464]
Simple economics
I did not intend to talk about SriLankan Airlines or the 400 state-owned enterprises (SOEs) that have existed since 1977 without restructuring. My focus is on the issue of government expenditure — especially in the case of a “big government”. By big, I mean governments that take on many activities, interfere heavily in the economy, and employ large numbers of people or control vast assets.
Among the critics of large governments, I admire the American economist Milton Friedman. He argued that big, interventionist governments often create more problems than they solve. Many analysts including some economists dismiss him for being not only “neoclassical” but also too simplistic in presenting — but that “simplicity” is exactly what makes his ideas powerful.
One of Friedman’s important contributions is the idea of the “public choice” problem. He pointed out that governments, represented by politicians and bureaucrats, often act in their own self-interest. This leads to short-term policies that serve special interest groups rather than long-term policies that benefit society as a whole.
Public choice theory applies economic reasoning to politics. It assumes that politicians, bureaucrats, and even voters act out of self-interest. This is not very different from markets: producers sell goods to make a profit, not to be kind to buyers; buyers purchase goods to satisfy their needs, not to help producers. In the same way, governments also operate on self-interest, shaping policies of their own self-interest with economic reasoning.
Spending money
Friedman, in his book ‘Free to Choose (1980)’, detailed four ways of spending money:
1. You spend your own money on yourself: When you buy something for yourself with your own money — say, a new shirt — you naturally pay attention to both the price and the quality. You don’t want to waste money, and you also want something that looks good and lasts. Because you’re balancing cost and quality at the same time, your spending tends to be the most efficient: you get the best value for your money.
2. You spend your own money on someone else: When you buy something for someone else — like a birthday gift for a friend — you are spending your own money, so you still care about how much it costs. But you are not the one using it, so that not in every case as such spending this is as same as the first case above. That means the spending is only partly efficient.
3. You spend someone else’s money on yourself: When you use a company expense to pay for a dinner or government’s money to pay for your hotel, you are not spending your own money. Because of that, you do not have to worry much about the cost — you are happy to order something nice since you will enjoy the quality, but the bill is not really your concern. This often leads to wasteful spending, because the incentive to keep costs low disappears. You get the benefit while someone else (the company) bears the expense.
4. You spend someone else’s money on someone else: When the government spends tax money — whether on extending welfare programmes, covering losses of the national carrier, or paying part of plantation wages — the decision-makers do not spend from their own pocket. At the same time, the recipients too have little say in how the money is used. Because neither side is directly accountable for cost or quality, spending often becomes inefficient. The result is waste or misallocation: resources may not reach the people or projects that need them most, and the outcomes may fall short of the value of the money spent.
Government’s spending
Government spending naturally falls into the fourth category – the worse type of spending, according to Friedman. In this case, incentives for efficiency are weakest. Governments, represented by politicians and bureaucrats, allocate tax money without the same discipline that individuals apply when spending their own money. This, Friedman argued, explains why government programmes often become bloated, inefficient, and misaligned with actual needs.
Government spending ultimately comes from taxpayers’ money, that people pay directly from income (income taxes, corporate taxes and other) and indirectly from expenses (VAT, import duties and other). When the tax revenue is inadequate to meet government expenditure, then the governments borrow from either domestic or foreign sources – asking taxpayers to repay the loans with interests with their future tax payments.
Last year 2025, the interest payments alone amounted to 56 per cent of the total tax revenue (which was Rs. 4,725 billion). When the loan principal is also accounted for, total debt repayment was 95 per cent of the tax revenue.
When tax revenues fall short of covering debt repayments, governments resort to borrowing anew simply to service existing loans. This perpetuates a vicious debt cycle. Friedman’s fourth category of spending — using someone else’s money for someone else’s benefit — captures the essence of this dynamic. It highlights how public borrowing often shifts the burden across generations, fuelling expenditures without direct accountability and deepening the spiral of indebtedness.
Circular tax trap
A country’s poverty is often driven and sustained by government policies that deny people’s access to their basic needs. When high domestic taxes and import controls are imposed on essentials — food, clothing, building materials — the immediate effect is their higher prices.
This is usually justified as “supporting local production”. In reality, it hurts the poor more than the rich, reducing access to nutrition, shelter, and clothing, and trapping vulnerable groups in poverty and malnutrition.
To ease this hardship by reducing poverty, governments then introduce social protection programmes — cash transfers, food subsidies, housing support. Yet these are corrective measures for a problem created by taxation itself. And maintaining such programmes requires resources: either more taxes, which burden consumers and producers, or borrowing, which deepens public debt.
The state ends up in a cycle — taxing essentials increases poverty, subsidies try to offset the damage, and financing those subsidies strains the budget further.
Worse still, when governments tax essentials and restrict imports under the banner of “supporting local production”, they often create monopolies. Wealth then accumulates not through innovation or entrepreneurship, but through protected markets. Business tycoons thrive on state-sanctioned privilege, while ordinary citizens pay the price of their luxury.
Friedman’s lens
These examples illustrate Friedman’s fourth case of “spending someone else’s money on someone else”. Accountability erodes because the government, as spender, is shielded from the true cost. Recipients have little control over how resources are allocated. And taxpayers — who ultimately foot the bill — are left with minimal influence.
This disconnect breeds waste, dependency, and distorted incentives. It is exactly the inefficiency Friedman warned against: when governments stretch beyond their core functions, public finance risks becoming a cycle of misaligned responsibility and diminishing returns.
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