The forthcoming budget: challenges and questions

Ziad Bahaa-Eldin
Monday 27 Jun 2016

Next week, the House of Representatives will discuss next fiscal year's budget, set to go into effect on July 1, 2016.

Despite the few days allotted for debate, which will allow only the narrowest review and revision by the House, a discussion of the budget in and out of the parliament will provide an opportunity to understand and assess the government’s economic program, which is vital given the ambiguity of economic policies so far.

So to make this debate more accessible to the general public, I’llattempt here only to highlight the general features of the budget and the challenges it poses, leaving analysis and opinion for another occasion.

Total public spending in the forthcoming budget is expected to cometo LE936 billion, an increase of LE72 billion, or 8.3 percent, on the previous year’s estimates. This includes LE292, or 31 percent of total spending, to service the public debt, LE228 billion, or 24 percent for wages of public sector employees, and LE210 billion, or 22 percent for subsidies.

Expenditure on these three items alone willthus make up 77 percent of all public spending, leaving just 23 percent for all other items, including infrastructure and investment.

This demonstrates a profound structural imbalance in state finances, especially considering that spending on subsidies relative to overall spending is about 4 percent less this year as a result of the global decline in oil prices and thus the cost of energy subsidies, and that the burden of servicing the public debt may yet increase due to the higher interest rate policy adopted by the Central Bank last week.

Moving to the revenue side, the government expects to collect LE433 billion, or 69 percent of total public revenues, from taxation and LE195 billion, or 31 percent of the total, from non-tax sources. Both revenues amounting to LE628 billion are just 2 percent over estimates for the current fiscal year, which is realistic.

More worrying,however, is that the overall deficit target for the coming year, to be financed by more borrowing, will be LE319 billion, or 34 percent of total annual spending and 9.8 percent of GDP, while total public debt will reach 100 percent of GDP. In short, this means that next year the state will borrow one-third of what it spends, that one-third of spending will be directed to debt service alone, and that total public debt will be the equivalent to what the country produces in one year.

This is assuming the effective collection of projected tax revenues,economic growth of 4.4 percent, and no increases in the price of oil or imported primary goods —all of which are optimistic assumptions.

It's true that this situation is not the fault of the current government alone as public debt has been increasing over the last few years. But with the latest jump it has become a ticking bomb that threatens the stability of the country, its chances for development, its ability to attract investment, and the realization of social peace.

Parliament should therefore not waste the little time it has to debate minor details in the proposed budget, but direct specific questions to the government. Are we to take on more domestic and foreign debt without limit, or should parliament set a clear debt ceiling binding on the government? Can the deficit be tamed by curtailing social spending and increasing taxes and fees, or by serious attention to investment and encouraging growth and employment? Should the state plow ahead with more megaprojects of uncertain cost, funding, and economic benefit, or reassess public spending priorities? In other words, does the government have a clear vision for gradually getting out of this critical situation or is it just cruising along?

These are legitimate and necessary questions; and if parliament doesnot ask them, then it would be abandoning one of its most important duties, leaving the Egyptian people to confront rising inflation in the short term and en event increasing debt burden for future generations.

*The writer holds a PhD in financial law from the London School of Economics. He is former deputy prime minister, former chairman of the Egyptian Financial Supervisory Authority and former chairman of the General Authority for Investment. This article was published in Arabic in El-Shorouq newspaper on Monday, 20 June.


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