Reducing the role of the state under the Structural Adjustment Programmes (SAP) has been subject to considerable criticism mainly due to its high social cost. Based on the data of the Household Income Expenditure Surveys (HIES) in 1990/91 and 2002 and fiscal data from 1975 to 2005, and qualitative evidence the study estimated the impact of public expenditure reforms under SAPs on rural poverty in Sri Lanka. The article argues that SAPs do not seem to have made profound effect on social and economic public spending except on food subsidy. The study estimated poverty elasticities with respect to different expenditure categories based on the simultaneous equation system which allows to appraise direct and indirect effects to get a clear picture of public spending on rural poverty. This article concludes that the poverty reduction effects of government spending on rural roads and education is particularly high compared to other socio-economic expenditure categories. It is worthy to note that targeting government spending is more important to reduce poverty in era of fiscal adjustment when the government is under pressure to cut its budget deficit from various fronts.