Al-Ahram Weekly Online   2 - 8 December 2004
Issue No. 719
Economy
 
Published in Cairo by AL-AHRAM established in 1875

Economic assembly

Parliament will be busy laying the legal foundation of some key economic reform laws, reports Gamal Essam El-Din

Gamal Mubarak

If the reformers in Ahmed Nazif's government have their way, the People's Assembly's final session will be busy tackling a new batch of key economic reform laws. The draft laws to be debated by the assembly primarily focus on reforming crucial sectors like taxes, customs, and banks, as well as fighting private and public monopolies.

The legislative reforms are -- for the most part -- the brainchild of a cabal of younger, reform-minded technocrats and businessmen close to Gamal Mubarak, the son of President Hosni Mubarak and the head of the ruling National Democratic Party's (NDP) Policies Committee. They were brought into government last July via a long- delayed cabinet reshuffle aimed at meeting domestic and international pressure for change.

Topping the new package of economic reform legislations is a law featuring -- for the first time in modern Egyptian history -- a raft of bold tax cuts.

Addressing an NDP conference last September, Gamal Mubarak said the new tax bill reflects the party's new philosophy, which aims at abandoning the age-old official policy of counting on tax revenues and custom tariffs as major sources of state treasury income. Mubarak said the NDP would be doing away with the "beleaguered socialist- oriented policy involving the government acting on behalf of the entire society in spending tax money... in favour of a new approach aimed at providing citizens with a major portion of [what used to be] tax money for them to spend." The reason, he said, was that "we believe that citizens will be capable of spending this new cash liquidity more wisely than the government," which should lead the market out of its moribund recession.

Finance Minister Youssef Boutros- Ghali, who is close to Mubarak, indicated that the new policies would inject around LE2 billion in cash liquidity into the pockets of at least 17 million fixed-salary employees.

The new bill will tackle laws governing both personal income and corporate taxes.

When it comes to the personal income tax Law 187/1993, fixed-salary employees in both the private and public sectors will be divided into three categories based on net income. Ten per cent in taxes (down from 20 per cent at present) will be levied on income ranging from LE5,001 to LE20,000; 15 per cent (down from 20 per cent) on income ranging from LE20,000 to LE40,000; and finally, 20 per cent (down from 32 per cent) on income higher than LE40,000.

Professionals -- such as lawyers, doctors, and accountants -- have been divided into four categories, each subject to progressive rates of taxation ranging from 10 to 20 per cent (rather than 20 to 40 per cent in the current law).

Whereas the current law levies 20 per cent taxes on the first LE2,500 of income, the new bill requires no taxes to be paid on the first LE7,500. Only 10 per cent in taxes are to be paid on income ranging from LE7,500 to LE20,000, a sharp drop from the 27 per cent stipulated by the current law on income ranging from LE2,501 to LE7,000.

Those making between LE20,000 and LE40,000 will also pay only 20 per cent of their income in taxes (rather than the 35 per cent currently levied on income from LE7,001 to LE16,000). Incomes over LE20,000 will be taxed at a 20 per cent rate by the new law (compared to the 40 per cent currently levied on incomes higher than LE16,000).

In general, the new bill aims to place a 20 per cent ceiling on income taxes, down from 40 per cent at present.

The new bill also reduces corporate tax from its current 40 per cent to just 20 per cent. This reduction, as indicated by the NDP's "Economic Trends" policy paper, is aimed at encouraging private investments and kick starting the economy.

Prime Minister Ahmed Nazif's government, however, is walking a fine line with these radical, sweeping cuts. Destined to strip the state treasury of between LE3.5 billion and LE4 billion in revenue per year, the cuts represent a sizeable amount for a government suffering from a ballooning budget deficit. The cuts will push the deficit, forecast by the Finance Ministry to reach 7.5 per cent of GDP in the fiscal year ending 30 June 2005, to climb to at least nine per cent.

This will be exacerbated by a local government debt that hit LE221.2 billion in 2002/2003, or 58.3 per cent of GDP.

Former finance minister Ahmed Ismail told Al-Ahram Weekly that most poor countries like Egypt consider taxes and customs tariffs their most important sources of income. "They are indispensable for a country that does not enjoy higher rates of overseas investment and exports," Ismail said, especially when one considers that Egypt is not a major oil exporter.

As such, Ismail predicted the cuts would be both a blessing and curse. "In the short term, they might increase incomes and stimulate consumer spending, but in the long term they could be catastrophic in terms of exacerbating the budget deficit."

A veteran member of the liberal- oriented Wafd Party, Ismail is afraid that the new tax cuts might be catalysed more by political interests than by sound economic perspectives. "These cuts might be aimed at improving the ruling party's image ahead of the 2005 presidential and parliamentary elections," he said.

Finance Ministry statistics indicate that revenues from general and sales taxes rose by more than LE40 billion over the last two decades (from LE3.3 billion in 1983/84 to around LE51.6 billion in 2002/03).

Whereas the previous government made a concerted effort to raise tax revenues by up to LE4 billion, Nazif's government will be stripped of approximately the same amount by the new cuts.

Finance Minister Ghali has argued that the loss in tax revenues will be recovered in two years. "During this period, the scope of the tax base will be broadened to include new brackets, while fighting tax evasion (which costs the state treasury more than LE30 billion a year) will be more effective," Ghali said, predicting that by 2007/08, the state treasury would not only be able to recover the LE2 billion in tax cuts, but increase its overall tax revenue by at least LE3 billion.

Parliament will also be discussing a new anti-trust bill aimed at fighting monopolies. The economic committees of both the assembly and the consultative Shura Council provisionally approved the 77-article bill, which critics said was 10 years late in the making. The privatisation programme launched in 1994, after all, bans producers (private or public) from possessing more than 35 per cent of the market share of any particular product. It exempts, however, large government authorities such as the electricity authority, which monopolises more than 90 per cent of electric production in Egypt. The bill also establishes a specialised anti-trust agency to monitor the market and implement the law.

Other bills dealing with accounting, auditing and loan defaults are also on parliament's agenda.

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