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Cutting Egypt's budget deficit: Who will pay the bill?

In order to reduce state budget deficit to 9.6% of GDP in compliance with IMF loan conditions, govt plans to raise taxes and cut fuel subsidies – both of which are likely to impact Egyptians' daily expenses

Marwa Hussein, Thursday 23 May 2013
Egypt
IMF Managing Director Christine Lagarde talks with Egypt's Prime Minister Hisham Qandil at the cabinet headquarters in Cairo, August 22, 2012 (Photo: Reuters)
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Egyptians' everyday expenditures might see some substantial increases if the government manages to carry out its plan to cut subsidies and raise taxes.

In order to reduce the state's budget deficit for 2013/14 to 9.6 percent of GDP (some LE197 billion) from an expected11.5 percent for the current fiscal year, the government must implement a raft of austerity measures.

The 2013/14 state budget, currently being debated in the Shura Council (the upper house of Egypt's parliament, endowed with legislative powers), will be based on these measures – both on the expenditure side and revenue side.

The deficit could reach LE312 billion, or 15.2 percent of GDP, if the measures aren't implemented, government officials have indicated.

"We may not be able to reduce the deficit by the required amount if the draft laws regarding the procedures outlined in the budget aren't adopted," former finance minister Mohamed El-Morsi Hegazi warned when the budget was introduced to the Shura Council.

He pointed to a set of tax law amendments and plans to cut subsidies and partially reform the public-sector wage structure.

The legal amendments will affect income taxes, sales taxes and property taxes, among others. While many of these taxes will be paid by the rich, the major source of income will be a regressive sales tax.

Raising sales taxes

Debates in the Shura Council concerning the increase of sales tax from 10 to 12.5 percent on some items were postponed after deputies of the Salafist Nour Party objected to the planned increases.

The Muslim Brotherhood's Freedom and Justice Party (FJP), however, which enjoys a council majority, appears set to stick to the government plan.

"The sales tax is necessary for cutting the deficit, especially that the goods to be taxed are not basic commodities," Mohamed Gouda, head of the FJP's economic committee, told the media.

The government plans to first increase sales tax on cement, iron, cigarettes, alcoholic drinks, carbonated drinks, mineral water and telecoms.

The tax increases on certain goods are seen as a first step to be followed by a radical change in laws governing sales taxes. The sales tax will be transformed into a value-added tax (VAT) that will be extended to virtually all products – with a handful of exceptions – by November 2013.

The planned sales tax increases, imposed on consumer goods and considered a very regressive tax, are expected to raise annual tax revenues by LE15.5 billion (roughly $2.2 billion). In fact, the government hopes to see sales taxes become a primary source of revenue.

Overall revenues from sales tax are expected to reach an annual LE126.5 billion (some $18 billion), roughly one third of fiscal revenue for the coming year.

Income taxes

Amendments to Egypt's income tax law were adopted last week. Along with a tax on stock market transactions, amendments to the income tax law can be considered among the most progressive measures undertaken by the government to date, effectively transferring much of the tax burden to higher-income segments of the public.

The amendments, ratified by the president few days ago, kept the lowest bracket of earners (those earning under LE5000 – roughly $700 – per year) exempted from taxes, while raising taxes on those making more than LE250,000 per year from 20 to 25 percent.

The Shura Council has also approved a 0.001 percent levy on stock market transactions and bank loans. It rejected plans, however, to tax stock market dividends and mergers and acquisitions, which had been expected to raise revenues by LE5 billion per year, according to an official source.

Property taxes

Property tax laws, meanwhile, should come into effect in July, following recent amendments to a 2008 property tax law. The tax, to be paid by high-income segments, was repeatedly postponed since first being proposed.

The Shura Council approved amendments exempting single-home owners from the tax and raised the bracket for taxable properties from LE500,000 (roughly $72,000) to LE2 million (roughly $287,000). Egypt’s government expects to collect around LE2.7 billion (roughly $388.5 million) in revenues from this tax.

The government is also eying other non-fiscal sources of revenue, expected to reach LE13 billion (some $1.9 billion).

This includes the modification of a law on mineral resources, in order to increase fees – which had been fixed for decades – on quarry extraction. This is expected to bring in some LE7 billion (roughly $1billion), while the issuing of a fourth mobile-phone license is expected to realise an additional LE5 billion.

Overall, the government believes the amendments should bring in some LE30 billion, according to the draft budget.

Reducing expenditure

The government also plans to realise some LE42.6 billion (roughly $6 billion) in savings on the expenditure side, mainly by reducing energy subsidies. It also plans to introduce a smart-card system for the distribution of fuel, especially diesel. A voucher system is also planned for the distribution of gas cylinders to streamline consumption.

Each vehicle will be allocated a specific amount of petrol per month at subsidised prices, while households will receive a limited number of gas cylinders depending on the number of inhabitants.

"These systems of coupons and smart cards are too complicated and expensive," said Khaled Amin Zakariya, assistant professor at Cairo University. "It will involve the creation of a governing body to manage and increase public-sector employment."

He added: "It is not without reason that the majority of the world broke with such a system."

The steps will have an effect on Egypt's poor, since any increase in transport costs are likely to result in an increase in food prices and inflation. A number of previous measures were announced and then later retracted following a popular backlash.

The total bill for energy subsidies is expected to reach LE100 billion in 2013/14, compared to some LE120 billion expected this year.

"The recent devaluation of the Egyptian pound and the expected increases in consumption will significantly raise Egypt's subsidies bill to more than LE100 billion," said one finance ministry source who requested anonymity.

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