The populist budget comes after Mahinda Rajapakse won the November 17 presidential election with the support of Marxist and Buddhist nationalist parties who support his call for a review of the peace process with separatist Tamil rebels.

"I wanted to present a new budget which could allocate money for the welfare measures promised in my (campaign) manifesto," he told parliament while also raising taxes on cigarettes, liquor and gambling.

He said the thrust of new government spending next year would be to boost the rural economy, health, education, information technology and infrastructure in the island nation of 19.6 million people.

Rajapakse forecast the budget would help the economy grow 8.0 percent in 2006, compared to an estimate of 5.4 percent for 2005.

The details of the scope of the tax increases will be outlined in a separate government notice to be released later.

Among the proposals, Rajapakse said he would fulfill a campaign promise to the Budhhist clergy to evict casinos aimed at overseas tourists from the capital within three years.

However, he stopped short of outlawing gambling, but said taxes on betting centres would be doubled while liquor licences would also cost twice as much starting in 2006.

Rajapakse said the tax increases would fund new susbsidies such as cheaper fertilzer for farmers, tax breaks for public servants on car purchases and more government jobs.

Public servants would now pay a 25 percent tax to buy cars, compared to more than 150 percent for the public while taxes on motorcycles would be abolished, he said.

The total budget deficit for 2006 was estimated at 197 billion rupeesbillion dollars), up from 168 billion rupees (1.68 billion dollars) in 2005.

The deficit for 2006 is estimated at 7.3 percent of the 20 billion dollar economy with tsunami reconstruction costs excluded and 9.1 percent with the extra spending needed to rebuild coastal areas.

The deficit was to be funded partly by borrowing locally and abroad, Rajapakse said.

Last month, the government said it planned to spend 23 percent more on defence next year at 700 million dollars despite a ceasefire in place with Tamil separatists since 2002.

The Liberation Tigers of Tamil Eelam have been fighting for a separate homeland since 1972 in a conflict that has claimed more than 60,000 lives.

But in the previous budget, Finance Secretary P. B. Jayasundera said defence spending estimates did not take into account the violence in the northern and eastern regions where government figures showed that 29 people, including 17 army soldiers were killed, since Saturday.

Diplomats and analysts have expressed concern the violence could lead to a renewal of hostilities.

"This budget is presented not based on war," Jayasundera told reporters here Wednesday. "It is based on the assumption that there will be peace and tsunami reconstruction in the north-east as well as everywhere else in the country."

Earlier Thursday, Fitch Ratings assigned Sri Lanka's first sovereign rating Thursday with a BB-minus, carrying a high "speculative" risk, while Standard and Poor assigned a slightly lower B+, or below investment grade.

Paul Rawkins, senior director for Fitch's sovereign team said Sri Lanka's debt servicing record was "impeccable," but the country's security situation was worrying.

"Peace and politics hold the key to Sri Lanka's future," Rawkins said. "The ceasefire agreement has produced tangible benefits in the shape of an improved economic and business climate, but the absence of an enduring peace continues to hang over the country."

All rights reserved. � 2005 Agence France-Presse. Sections of the information displayed on this page (dispatches, photographs, logos) are protected by intellectual property rights owned by Agence France-Presse. As a consequence, you may not copy, reproduce, modify, transmit, publish, display or in any way commercially exploit any of the content of this section without the prior written consent of Agence France-Presse.