Kerala Budget 2026: Despite white paper warning, no plan to cut committed expenditure

The new United Democratic Front (UDF) government on Thursday presented its first budget after releasing “Kerala’s Fiscal Health – A Situation Report” (white paper), which raised serious concerns over the State’s rising debt burden while strongly criticizing the previous Left government for alleged fiscal mismanagement.

The budget estimates the debt/GDP ratio to fall marginally to 33.5% in 2026-27; this rate is 34.87% (actuals, 2024-25) or 34.26% (revised estimates, 2025-26).

This is not because debt is expected to fall (the budget actually projects total outstanding debt to rise by 11.6% from Rs 4.89 lakh crore to Rs 5.46 lakh crore) but because of its optimistic outlook that GDP will grow by 14.15% in nominal terms and revenue receipts by 23.8%.

Even if the government’s optimistic predictions come true, Kerala will arguably remain among the states with the highest debt burden. According to data from the Reserve Bank of India (RBI), the debt to GDP ratio of all states stood at 27.01% in 2024-25. The chart below shows the ten States with the highest debt to GDP ratio in 2024-25.

However, a rather unique Kerala phenomenon highlighted prominently in the white paper is the “structural” issue of high share of “committed expenditure”; This not only leaves little or no room for capital expenditure, but also contributes to widening revenue shortfalls.

Committed expenses have three main components: salaries, pensions and interest payments on previously received loans. The three together account for nearly 78% of the state’s revenue receipts, according to RBI’s data for 2024-25. This share is only 45.4% at the all-India level (excluding Union Territories).

The budget projects 72.14% for 2026-27, which would still be the second highest in the country after Punjab, whose economy is just two-thirds the size of Kerala’s. The chart below shows the committed expenditure as a share of revenue receipts in States with a GSDP of at least Rs 5 lakh crore in 2024-25.

Of the total committed expenditures, salaries and pensions alone constitute more than half of the State’s revenues. The budget estimates salary and pension expenditure at ₹88,000 crore in 2026-27; this is around 52% of the estimated ₹ 1.7 lakh crore revenue revenue.

The chart below shows how this trend remains almost the same in Kerala. The share of committed expenditures in total revenue receipts peaked at 81.2% in 2021-22, when the previous government cleared some backlogs on salaries and pensions and introduced some one-off relief measures related to COVID-19.

On committed spending being a crucial issue, the white paper noted: “The most direct structural explanation for Kerala’s treasury stress is the pre-allocated share of revenue before any discretionary decisions.”

The statement also said, “The state spends almost 80 percent of its resources on salaries, pensions and interest, which is much more than many other states. It is not right to collect taxes from the public and spend most of them on salaries and pensions… Now is the time for tough political decisions,” adding that measures such as raising the retirement age and limiting salary commission revisions to once every 10 years should be taken into consideration.

But while the budget speech announced the intention or measures to address many of the problems highlighted by the white paper, it was conspicuously silent on measures to address this “structural problem”; blocked the government’s announcement that it would renew the National Pension Scheme after reviewing “uncertainties” in the Secure Pension Scheme announced by the previous government.

The silence is perhaps a recognition of the difficulty of tackling the problem and the importance of such high allocations to wages and pensions in ensuring the significant progress the state has made in human development indicators.

Economist R. Ramakumar cautioned against interpreting the figures merely as evidence of financial distress. “If you want to sustain the idea of ​​a welfare state, the welfare state needs welfare workers,” he said, noting that Kerala employs significantly more teachers, nurses and other public sector workers than most states.

“Kerala’s achievements are due to such salaries paid by you,” he said.

He also said that although the figure above 75% highlighted in the white paper had “shock value”, a better parameter would be the share of committed expenditure in the total revenue expenditure of the State rather than revenue receipts, which would come down to around 58-60%.

Meanwhile, economist Lekha Chakraborty said this reflects the rigidity in public spending. “Given the determined nature of spending, all we can do is a periodic (sectoral) spending squeeze. While the state has demonstrated revenue buoyancy without meaningful public expenditure reforms, this model risks continuing revenue shortfalls and constraining Kerala’s ability to sustain its social model,” he added.

As the chart below shows, SOTR and overall revenue revenues have indeed shown remarkable growth. However, SOTR fell short of promised spending. Moreover, the respective compound annual growth rates (CAGRs) between 2015-16 and 2026-27 (budget estimates) show that committed expenditure is growing faster than the other two.

Meanwhile, the viability of the tax has diminished in the last few years. The graph below shows the SOTR buoyancy calculated as the ratio between the growth of SOTR and the growth of GSDP. While a value above one indicates good vitality, a value below one indicates that the State cannot increase its tax revenues in proportion to economic growth.

The budget speech and forecasts for 2026-27 show that the new UDF government is banking on a rapid turnaround in tax relief and GDP growth to help the State emerge from fiscal distress, while acknowledging that committed spending on salaries and pensions cannot be reduced, at least in the near future.

It was published – 20 June 2026 08:13 IST