Key questions about debt under Brotherhood rule

Samer Soliman , Sunday 16 Sep 2012

Egypt's new political regime should focus on tax reform to increase state revenue with which to help the poor; president Morsi, however, has his own reasons for postponing such a step

The sales tax in the 1990s, income tax reform in 2005, and proposed property tax in 2010: while Mubarak’s regime was politically stagnant, it was vigorous and prolific in the financial realm. But this vigour did not improve deficient state revenues that caused it to resort to the slippery path of borrowing – from inside or abroad.

Mubarak came to power in 1981 when state revenues were about 47 per cent of GDP, considered high by international standards. Within a few years, it became clear that revenue from oil and the Suez Canal – along with foreign aid – began to drop, and the state was unable to compensate for the shortfall in tax revenue.

Since one of the main characteristics of Mubarak’s regime was a tendency towards 'stability' – adapting to changes instead of directly addressing them – the government in the 1980s depleted insurance and retirement funds, printed money and borrowed from abroad to compensate for acute shortages in state revenues. This culminated in catastrophic inflation sweeping across Egypt’s economy during that period.

In short, Mubarak used 'hit-and-run' tactics and cunning to offset the deficit in state revenues to avoid taking the bitter pill of increasing revenues through taxes. But this became impossible to avoid by the early 1990s, when the state imposed a sales tax and eventually swallowed an even bitterer pill by taking even more from people’s income with a new income tax that came into effect a few years ago. 

About a decade ago, I warned that the state’s financial crisis would not be resolved except through a democratic political regime. Mubarak was incapable of developing state revenues for two reasons. First, he was an illegitimate ruler who did not hold the people’s trust, and therefore it was hard for him to convince the public that what he was collecting from them would be used efficiently and scrupulously. Thus, he could not persuade or force them to pay the due tax.

Secondly, because his state apparatus – including the tax system – was corrupt and sagging, incapable of performing its job efficiently. This is why I said democracy would solve the problem of state revenues, because first and foremost it gives a legitimate political regime the right to demand that those who can afford it should assist in funding the state that serves them. Also, because the new regime, with its popular support, would be able to reform the state apparatus to make it more efficient and less corrupt.

If that were so, then why has the elected regime delayed the start of increasing state revenues? Why has it resorted to Mubarak-style borrowing from the IMF? Does this mean that democracy, like dictatorship, is incapable of resolving the Egyptian state’s financial problems? Or does it mean that Egypt is not yet a democracy?

I believe Egypt has taken a huge stride by holding unrigged elections, but it remains far removed from the essence of democracy. Democracy is the rule of the majority, and the majority in Egypt is the poor or those who barely make ends meet, who have a direct interest in making the well-to-do pay tax.

Therefore, the reluctance of the new regime to demand that those who are capable pay their taxes means that a minority continues to monopolise the country’s financial and economic policies.

The crucial question that Egypt’s new rulers have ignored is: Does the state really need tax revenues? The answer is yes because of needed root reforms in the state apparatus. We all know the deteriorating state of public utilities; and we all know the appalling state of education, healthcare, security and other services.

Of course, it is not just a matter of lack of revenue, but also how it is utilised. Even if efficiency and integrity in using public revenues improves, Egypt will still need a dynamic developmental state capable of leading economic development or creating an atmosphere conducive to this development. The size of the government and its role in the economy remains a controversial issue today.

Even the World Bank – the epicentre of conservative economics – admitted a long time ago (in a report issued in 1997) that the development model in Southeast Asia had proven that a proactive developmental state that generously spends on education, research and infrastructure is a fundamental precondition for economic progress.

Anyone familiar with the debate on modern development theory knows well that this issue was settled in the mid-1990s – namely, that the state needs to spend more to achieve development. As for the issue of social justice, which will have to wait for some time, the Egyptian state certainly needs more revenues to spend on the poor.

The reluctance, so far, by the Morsi administration to discuss tax reform means it is likely to be postponed because he is currently busy building his political base, which is concentrated in financial and business circles. Any discussion of tax reform would rupture this base; this means that the Morsi administration will not focus on state revenues for quite a while, even years. By then, the problem will be worse and the cost of remedying it greater.

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