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Egypt: Understanding the new budget

The newly released state general budget seems more optimistic than realistic

Ziad Bahaa-Eldin , Wednesday 15 Jul 2015
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The new state general budget was released 2 July, when the public was still reeling from the assassination of Prosecutor-General Hisham Barakat and the escalating terrorism in North Sinai, so naturally it did not garner the necessary attention or media coverage.

The budget is the state’s declaration of its policy, anticipated resources, planned public spending, as well as projected borrowing for the coming fiscal year (1 July 2015 to 30 June 2016), and in the absence of a clear government economic programme, the budget gives us the best view of the government’s intentions as well as economic and social policies for the coming period.

Thus, although the budget was issued late, denying society the opportunity for dialogue and participation, it still merits discussion, so that society and its political and civic institutions can follow its implementation and monitor the government's compliance with its promises.

I would like to mention that two weeks ago, following my comment on the draft budget, the finance minister called to clarify certain points with a view to promoting a public dialogue, and I thank him for his interest and keenness to follow up and comment. So what does the final budget hold?

This year the government projects revenues of LE632 billion and expenditures of LE864 billion, with the LE242 billion gap to be covered by loans.

According to the finance ministry, this puts the deficit at nine percent of GDP, which in turn should limit rising public debt, the exponential increase in prices, and the decline in competitiveness of the Egyptian economy. But we cannot understand the nature of the budget and its social impact by looking at the deficit alone. We need to dig deeper into some details in order to assess the budget’s potential impact on people and society.

Starting with spending, we find that just three items still account for 80 percent of all expenditure: civil service and public sector wages, estimated at LE218 billion this year (25 percent of all spending); debt service of LE244 billion (28 percent of all spending); and subsidies, estimated at LE231 billion (27 percent of spending). This leaves just 20 percent of the budget for all other public spending, a meager percentage that doesn’t give the government much leeway for action.

The most serious outcome of this structural imbalance is that only LE75 billion is directed toward investment spending, equal to about 8.5 percent of total expenditures. This means that private investment must meet the finance gap.

But the current state of confusion in investment policies and laws is not conducive to achieving a breakthrough. On the other hand, spending on government wages increased just 5.3 percent on last year’s projections, indicating the government’s intention to limit exponential increases in this item, while spending on subsidies is down one percent from last year’s projected budget (although 15 percent over actual spending on subsidies last year according to the finance ministry). Those adjustments come from decreases in energy subsidies due to the decline in global fuel prices, while providing increased support for programmes that target the poor directly.

As to the revenue side, things are less clear and, in my view, unrealistic. The state expects to bring in LE622 billion this year, an increase of 13.5 percent over last year’s anticipated revenues, two-thirds from taxes (LE422 billion) and one-third from other revenues (LE197 billion). But I fear that the desire to reduce the deficit to nine percent of GDP has led us either to severely overestimate potential revenue or that the state aims to pursue an onerous taxation style to reach these record numbers.

So, if we consider the significance of that LE422 billion in anticipated tax revenues this year, we find that this is a 16 percent increase on last year’s anticipated tax revenue and, according to the finance ministry, a 33-percent increase compared taxes actually collected last year. I don’t know if this increase is realistic or overly optimistic, or if it signals an intention to take what might be too big of a bite out of economic and commercial activity in light of the ongoing economic slowdown.

This sharp increase in projected tax revenue is even more mysterious considering that the state has put a two-year moratorium on the stock exchange capital gains tax and reduced the income tax rate from 30 to 22.5 percent. So where will these increased revenues come from? The same question is posed by the projected increase in non-tax revenue, up to LE197 billion this year from an anticipated LE160 billion last year. This is similarly extremely optimistic.

There are undoubtedly positive aspects in this year’s budget: limits on government wage increases, more subsidies that target the poor, and less reliance on unknown foreign grants. However, the drive to reduce the deficit to nine percent of GDP means that the few resources available for public investment and social spending have shrunk beyond what low-income Egyptians can bear, and that projected tax and other revenues are unrealistically high and may damage the prospects for an economic recovery.

The dialogue continues, and there may be persuasive answers to these questions.

The writer holds a PhD in financial law from the London School of Economics. He is a former deputy prime minister, former chairman of the Egyptian Financial Supervisory Authority and former chairman of the General Authority for Investments.

This article was published in Arabic in El-Shorouq newspaper on Tuesday, 14 July.
 

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