From 2004 the government had hired more than 40,000 unemployed graduates into the public service, fulfilling an election promise to give state jobs to all unemployed graduates who either lack the skills or the willingness to work in tough private sector jobs where the hours are long and their salaries are taxed.

Biggest Item

"Expenditure on salaries and wages increased by 26.3 per cent to 175 rupees billion mainly due to the increase of public sector salaries in 2006, correction of salary anomalies, introduction of a monthly cost of living allowance for public servants, new recruitment of nurses, clerical staff, technical staff and home guards and the full impact of recruitment of over 40,000 graduates to the public service," Sri Lanka's Central Bank said in its annual report.

"It was the highest single expenditure item, which accounted for 32 per cent of the total recurrent expenditure. Correction of pension anomalies and the increase granted in 2006 were attributed for the increase in pension payments by 24 per cent to 58 billion rupees."

According to the last budget speech, government wages and pensions are expected to cost 264.9 billion in 2007, compared to projected tax revenues of 540 billion rupees for 2007 or 49 cents out of every tax rupee collected.

But analysts say the number may worsen because revenues usually undershoot targets while expenditures overshoot.

Government officials receive largely tax free salaries and pensions, while private sector workers and corporation employees' salaries are taxed and their pension fund, the Employee's Provident Fund (EPF), is also taxed.

EPF Tax

Last year, the EPF, which collects the pensions contributions of some two million private sector and corporation workers each year, had to pay 2.7 billion rupees in income taxes, while its returns fell far below inflation because it invested the proceeds at low rates in government securities in an environment of financial repression.

Sri Lanka is believed to have over one million government sector workers though the exact number has not been made public.

Director General of Statistics Suranjana Vidyaratne said the exact number could not be revealed because the military strength was a state secret, but unemployment had fallen to 6.5 percent in 2006.

Deputy finance minister Ranjith Siyambalapitiya said last month that some 18,000 vacancies had been identified in the public service.

“The government hopes to give employment to 20,000 graduates this year,” he told a news conference. “So there’s no need for anyone to agitate.”

He was referring to demonstrations by unemployed graduates who are demanding jobs in the state sector.

Free Jobs

The graduates have been egged on by Sri Lanka's Marxist-nationalist Janatha Vimukthi Peramuna, which has a strong base in state universities where tertiary education is given free of charge.

Clashes and politically-led strike action in the universities result in frequent closures and delays in graduations.

The island’s public service is large seen by a long-suffering citizenry as over-staffed by under-performing officials who enjoy government pensions without contributing to a pension fund.

Siyambalapitiya also said the government had already hired 1,000 graduates into the Inland Revenue Department, a key government organisation that had suffered staff shortages.

The government is reforming the department in an effort to improve the efficiency of tax collection and increase government revenue.

Last year, the department collected 80.4 billion rupees in income taxes and 165.5 billion in value-added taxes totaling 245.9 billion rupees which was enough to meet the salary and pension bill of 233 billion rupees..

The government has also announced that 20,000 cars would be offered to government servants at a fraction of the duty paid by private citizens who have to cough up over 200 percent in taxes to buy a car.