26 April - 2 May 2001
Issue No.531
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Al-Ahram Weekly On-line 26 April - 2 May 2001 Issue No.531 |
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A tough balancing act
Finance Minister Medhat Hassanein is treading a thin line between addressing social inequalities and promoting economic efficiency. Gamal Essam El-Din reviews the outlines of this fiscal year's proposed state budget
The new state budget for fiscal year 2001/2002 is bound to provoke considerable controversy when it is presented to parliament in the coming weeks. Minister of Finance Medhat Hassanein announced Tuesday in the People's Assembly four main aims of the budget, which gained the consultative Shura Council's approval two weeks ago.
The first two objectives involve the reduction of social inequity and unemployment. The second two, by contrast, are reformist-oriented, entailing the promotion of economic efficiency and the speeding up of liberalisation policies. Economic circles doubt that Hassanein will succeed in reconciling these seemingly contradictory goals.
Hassanein's outline of the new budget before the Shura Council has revealed that public expenditure is estimated at LE127 billion, the highest in Egypt's history, compared to LE112.6 billion in the current budget. Out of this, total allocations for social programmes will reach LE51.5 billion, representing around 40 per cent of total expenditures.
Hassanein pointed out, however, that the new budget's financial resources are estimated at LE106 billion, which means that the government is LE21 billion short of cash to cover its proposed expenditures. To cover the deficit, he said the state is depending on funds from two sources: an estimated LE11 billion to be provided by insurance and pension funds and around LE10 billion to be raised by issuing bonds and treasury bills and by bank borrowing under safe limits. "On this point, the government will ensure the application of two basic fiscal principles: borrowing only to invest and keeping debt at a sustainable level," Hassanein said.
A report issued by the Shura Council's Financial and Economic Affairs Committee hailed the fact that the new budget clearly tilts towards pleasing as many social brackets as possible. "But the problem is that most previous budgets have never been able to secure this objective, primarily due to a lack of fiscal prudence and unrealistic forecasting of the required cash resources. As a result, the total budget deficit has grown to unprecedented levels in the last few years, climbing from LE7.2 billion in 1997/98 to LE13.8 billion in 2000/2001. In 2001/2002, the deficit is expected to reach LE20.8 billion or 6.7 per cent of GDP," the report said.
To meet its objective of furthering economic efficiency and liberalisation, the government intends to restructure a number of major economic bodies, such as the Railway Authority and the Postal Authority, which, due to their inefficiency, depend on the state budget to cover their expenses. The plan is to turn these entities into holding companies as an initial step towards their eventual privatisation, thus relieving the government of their financial burden. However, this move goes against the public's interest, since these authorities would have to increase the cost of their services to meet their financial needs.
A large number of Shura Council members are apprehensive that many of the other measures targeted to reduce the estimated deficit in the new budget might also have their cost in social terms.
According to Hassanein, the budget normally depends on a number of revenue sources, mainly taxes, customs, oil sales, Suez Canal revenues and public sector company revenues.
"Revenues from taxation and customs duties are estimated at LE70 billion, representing the biggest sources of budgetary finances. This is natural in a country switching to a full-fledged market economy," he argued.
To increase tax revenues, Hassanein unveiled the government's decision to launch the second and third stages of the sales tax. "The application of these two much-delayed stages is expected to generate LE1.5 billion. This amount, plus an additional general tax rise valued at LE3 billion, will bring in an extra estimated LE4.5 billion in tax revenues. These increases are necessary in order for the state to afford the new annual bonus for employees," Hassanein said.
Besides the tax rises, Hassanein said that a five per cent "revenue-raising fee" will be imposed on new car sales, applicable to all cars manufactured abroad or assembled at home.
The council's report said the targeted increase in taxation negates the social objectives of the budget. It warned that not only are there great obstacles to securing this increase in light of the current market recession, but the attempt to increase revenues by levying new taxes may prove harmful to many social brackets. Rifaat El-Said, a council member and secretary-general of the leftist Tagammu Party, emphasised that imposing additional taxes in place of generating new cash resources usually leads to an aggravation of social poverty and worsening the market recession. "It is a balancing act that many former finance ministers have failed to pull," El-Said said.
In response, Hassanein said the new sales tax will not apply to traders of such essential goods as foodstuffs, soft drinks and tobacco. He said the new tax will only apply to particular traders of such products as electrical appliances, upholstery and ready-made garments. Thus, it will only affect the income brackets that can afford it.
Hassanein's decision to issue sovereign Eurobonds worth $2 billion has also raised fears among council members of national debt accumulation. The objective of issuing these Eurobonds, whose terms range from five to 20 years, is to cover the deficit in budgetary allocations, he said, adding that the bonds are a tool for implementing the state's development plans and raising the annual growth rate to a targeted six per cent.
"These bonds are actually long-term debts whose financial burden will be borne by the coming generations, especially the limited-income groups," El-Said said.
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