Egypt's austerity measures to cut deficit by 14.6 pct: govt

Bassem Abo Alabass, Friday 4 Jan 2013

An ‘economic initiative’ set up by the Egyptian government expects deficit reduction amid new tax reforms, but former minister of finance argues that the new reforms ‘do not make sense’

Hisham Qandil
PM Qandil announced an economic initiative to discuss the proposed reform measures prior to signing the IMF loan deal (Photo: Reuters)

Egypt’s new Initiative for Economic Development released its new estimates for state budget in the current 2012/13 fiscal year, forecasting a reduction of the budget deficit.

The total budget deficit will slump, according to the initiative's press statement released on Wednesday, by 14.6 per cent to reach LE184.7 billion ($29 billion) instead of LE216.4 billion ($34 billion). The initiative says the improved performance will be down to the new governmental reform programme, which includes increasing taxation and cutting expenditures.

The initiative was announced by Prime Minister Hisham Qandil on Sunday as the government seeks to tackle Egypt's key economic challenges and promote dialogue between all societal factions and political forces.

State revenues are expected to reach around LE396.7 billion ($62 billion) in the current fiscal year, which ends in 30 June 2013, compared to LE373.billion ($58.4 billion) planned by the government.

Sixty nine per cent of the new projected revenues will be generated from taxes, which is expected to reach LE274.3 billion ($43 billion).

In December, Egypt President Mohamed Morsi decided to raise taxes as part of a package of austerity measures to secure a $4.8 billion loan from the International Monetary Fund (IMF). However, he postponed the implementation of tax increases due to the country’s political turmoil.

The increase in taxes will reportedly come into effect this month, but the Cabinet has not set a specific date yet. The new measures include higher sales taxes of many products, including steel, cement, soft drinks, beer and cigarettes. Mobile phone services, air-conditioned transportation and cleaning and security services are among the services that are slated for new or increased taxation.

Income tax brackets were also modified, and the highest bracket was changed so that annual incomes above LE1 million (instead of LE10 million) are taxed at a 25 per cent rate. The president also issued a law levying a 10 per cent tax on Initial Public Offerings (IPOs), company mergers and acquisitions.

Egypt has received a total of LE303.6 billion in revenues and grants ($47.5 billion) in the last fiscal year 2011/12.

Hazem El-Beblawi, the former minister of finance, criticised the current tax structure during a governmental dialogue with civil society, saying that taxes on corporations’ income should be modified.

“It does not make sense to impose the same tax on small and big enterprises,” he commented.

El-Beblawi added that the government should look into monies lost in tax evasion.

On the expenditure side, the government expects reductions of 2 per cent from LE594.8 ($93 billion) to LE583.8 billion ($91.3 billion).

The decline in spending will mostly affect the energy subsidy's bill, which will drop to LE182.8 billion ($28.6 billion) after implementing the new measures.

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