17 - 23 January 2002
Issue No.569
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Al-Ahram Weekly Online 17 - 23 January 2002 Issue No.569 |
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Getting the priorities right
The government is congratulating itself on a leaner budget, and seems hopeful that a bit of spending may nudge the economy out of recession. But Keynesian-style programmes are not easy, warns Abdel-Fattah El-Gebali
Prime Minister Atef Ebeid happily announced that the budget deficit is now down to 1.3 of GDP. In his latest speech to the People's Assembly, the prime minister gave the impression that, having achieved a near balanced budget, the government is now prepared to use public spending more aggressively to revive the economy. This could be interesting -- for all the right and wrong reasons. Public spending is undoubtedly a powerful tool. It can, within certain social and economic limitations, stimulate demand, production and employment. And it can boost inefficiency and inflation and favour one segment of society over another.
One has to be careful about public money and where it goes: to which sectors, to the benefit of which classes? When fiscal restructuring is going on, one also has to look at where the cuts are introduced, and the social and economic implications. The link between public expenditure and development is all too obvious. Public spending affects jobs and investment, and reshapes the structure of the economy. A successful finaxidle potentials and improve the lot of the general public.
Our economy has a history of financial malaise. In the 1980s, the budget deficit hovered around 23 per cent of gross domestic product (GDP), leading to heavy reliance on domestic and foreign borrowing. As foreign borrowing expanded relative to domestic borrowing, inflation shot up, from an average of 12 per cent in the 1970s to around 18 per cent in the 1980s. By 1990-1991, inflation was well over 20 per cent. The problem here is not only that inflation is a social and economic nuisance. Its persistence over so many years can create grave structural imbalances.
It is a traditional goal of budget wizards to keep expenses within, or close to, revenues. Throughout the 1990s, the government made strenuous efforts to achieve this goal. Public spending dropped from 43 per cent of GDP in 1991-1992 to 24.7 per cent in 1998-1999. Capital expenditures -- the more dynamic and aggressive component of public spending -- declined even more drastically, from 13.3 per cent to 5.3 per cent over the same period. Despite the fiscal reforms of the 1990s, the net deficit is still a significant portion of GDP. And one must take into account that budget proposals are usually too optimistic in terms of deficits. Often, end-of-year deficit is much higher than projected.
In absolute figures, Egypt's actual deficit has been on the rise throughout the 1990s. There was a remarkable drop in 1992-1993, when the deficit shrank to LE1.7 billion from LE5.8 billion in 1991- 1992. It climbed again to LE6 billion in 1995-1996 and then to LE8.5 billion in 1996-1997. There was another drop to LE4.6 billion in 1997-1998, before the deficit shot up again to LE10.2 billion in 1998- 1999 and LE13.7 billion in 1999-2000. What is particularly worrying is that, throughout the 1990s, the government has focused more on cutting back expenditure than increasing public revenues.
Let us look more closely at the budget. Wages eat up a large chunk of public spending -- accounting for about 25.1 per cent of the budget in 2001-2002. As salaries increase, in tandem with prices, this chunk has proved hard to assail. Despite the cutbacks in subsidies, spending kept rising, complicating the problem of public debt. Expenditure on health, education and other social services increased at a lower rate than total spending. As wages increased -- and perhaps as a result -- capital spending declined, affecting the quality of such public services as health care and education.
Almost one out of three of our schools, for instance, is under-equipped, dilapidated, or both. And, despite the rise in spending on education, the size of classes shot up to 60 students per room in some cases. This being the case, there is an obvious need to increase spending on education, not the other way round. The same dilemma is true of health services. With wages accounting for a large portion of expenditures, any attempt to introduce cutbacks could, for example, jeopardise the ability of state-run clinics to provide low-cost medicine to the needy. Cuts in health care spending are hazardous in a country where endemic diseases are common.
For ethical as well as social reasons, the state has to remain responsible for education, health, and general utility services. The government has an obligation to sponsor basic health care units. Instead of building homes for the rich, the government should focus on rehabilitating poverty-stricken neighbourhoods. The completion of drinking water projects and the replacement of old purification stations with new ones requires LE6.7 billion. The renovation and maintenance of roads would take another LE9.2 billion. In brief, there is so much to do and so little to do it with. If we are going to make fiscal policy our priority, we have to get our priorities right.
* The writer is head of the economic unit at the Al- Ahram Centre for Political and Strategic Studies
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