Al-Ahram Weekly Online   19 - 25 June 2008
Issue No. 902
Economy
 
Published in Cairo by AL-AHRAM established in 1875

The cost of budgeting

Protecting social welfare is what the government alleges to be the main focus of the new budget. Sherine Abdel-Razek examines the validity of these claims

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The People's Assembly approved the draft budget for fiscal year 2008/2009 last week, which comes at LE341 billion -- 25 per cent above estimated actual 2007/08 spending. The rise is a result of a 30 per cent increase in spending on public wages and subsidies, at a time when inflation reached record levels in 19 years. The figure also includes LE3 billion recommended by MPs to be allocated for education, health and agriculture.

According to the government, some 88 per cent of expenditures will be channelled to financing social needs such as salaries and wages, subsidies and public spending on infrastructure, health and education. Surprisingly, however, LE74.3 billion in public debt service is included in this percentage.

On the other hand, the government expects LE276 billion in revenues, mainly from increasing non-tax revenues, the Suez Canal, oil exports and receipts of selling assets. Banque du Caire is slated to be sold in the first quarter of 2009, in addition to the selling of a new fixed line licence.

While the budget was approved by a majority of members, 103 MPs refused the draft at the voting session, stressing that it failed to deliver its main promise: guarding the social welfare of the poor during the coming year. Al-Wafd newspaper, mouthpiece of Wafd Party, ran an editorial the day after the session highlighting the reservations which made its members reluctant to vote for the budget.

The article criticised low allocations for the sectors of education, health and agriculture. Spending on education is projected to be LE34.8 billion, equivalent to 9.25 per cent of public expenditures and three per cent less than last year's. This is equivalent to 3.25 per cent of GDP which is very low compared to what neighbouring countries spend on this item. Tunisia's spending on education, for example, comes at 7.3 per cent of GDP compared to 6.8 in Morocco and Saudi Arabia. Limited funds for health at LE12.1 billion is equivalent to LE150 per citizen for the entire year is another shortcoming of the budget, the editorial stated.

It further warned of the social effect of the economic duality which society is witnessing due to an ailing public sector incapable of offering high quality services to the majority of people or meeting the needs of its employees. On the other hand, there is a very competent profit-making private sector capable of paying high salaries and producing best quality products.

The People Assembly's Budget and Planning Committee issued several recommendations after examining the articles of the new budget. While underscoring the decline in public spending on education, it highlighted some problems related to this issue. Almost 83 per cent of the education budget is paid in salaries and wages, while 6.4 per cent is dedicated to investments. The reduction in money allocated for providing students with a daily meal to around LE26 annually for each student in pre- university education, pushed the committee to demand either finding new provisions for this item or cancelling it all together and using the money in developing other services.

The same applies to the low figure for materials needed in vocational education. Each student in agricultural and industrial secondary vocational schools is allocated LE21 and LE23 annually, respectively, to buy needed materials.

The effectiveness of the cost, or the quality of service provided by the public education in Egypt, is a factor which needs to be assessed. According to The Strategic Economic Trends Report issued by Al-Ahram Centre for Political and Strategic Studies, a lot of money is being wasted in the education budget due to an inflated pay roll, which includes a high portion of white collars compared to the number of teachers, and the high cost of printing unnecessary extra books.

The report also highlights a number of criteria used to assess the efficiency of education, among which is a high illiteracy rate of 29.33 per cent, the relatively high density of classes averaging 45 students per class (compared to the maximum 36 figure stated in the education law of 1981).

Subsidies have always attracted a lot of attention in all previous budgets, but this year it is more important than ever due to the spiral increase in fuel and food prices. This also comes amid an avalanche of government promises of socialist-like policies of protecting the poor using this means. At LE133.6 billion, subsidies have the lion's share of 35 per cent of the government's overall expenditures. Some LE62.7 billion of this is used to subsidise the oil and energy sectors. This figure will increase through the year since it was calculated when oil prices were at $75 per barrel; revised estimates put it at LE96 billion.

The Budget and Planning Committee called for better rearrangement of subsidy priorities. For example, while energy subsidies overburden the government, more affluent members of society benefit more from it. According to recent estimates by the ministries of finance and petroleum, two per cent of Egyptian families belonging to high-income brackets save LE1,800 annually due to oil subsidies. Meanwhile, this figure is as low as LE234 annually in the lower-income brackets. Hence, the government made a good move recently by removing tax exemption from high energy- intensive industries.

The second largest expense after subsidies is public wages and salaries, which amount to LE78.6 billion -- 21 per cent of the budget. This covers payments to more than 5.3 million public workers, in addition to 600,000 workers in public enterprise companies and economic authorities. The figure includes the 30 per cent increase in salaries recommended by President Hosni Mubarak in early May. However, this increase cannot be seen as a blessing since it was followed by a fierce inflation wave covering all goods and services.

The difference between revenues and expenditures, known as the budget deficit, is projected to be equivalent to 6.7 per cent of GDP -- a worldwide accepted ratio. Means of covering this deficit is a major issue since the government usually resorts to issuing bills and bonds, pushing public debt painfully upwards and increasing the burden of debt service payments. A recent resolution related to imposing a 20 per cent tax on capital gains in investments in treasury bills and bonds increases revenues, but more of these instruments are issued. It is a double-edged sword.

A recent study by the Egyptian Centre for Economic Studies found that the current fiscal policy might be indirectly pushing inflation upwards. The extensive bonds financing of the deficit, particularly from the domestic banking system, will sooner or later result in additional inflation. This is because the principal and interest on the debt accumulated must be financed, even partially, by printing new money and causing more inflation.

Finally, the new budget allocated LE74.3 billion for debt service. Public debt in 2007/ 2008 reached LE594.8 billion, with a 29 per cent increase on 2006 levels.

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