You may be convinced that the modus operandi of the Egyptian interim government is a dramatic departure from Mubarak’s crony capitalism to a new era of state welfarism. After all, the newly approved budget incorporates changes towards the publicly hailed theme of “social justice”. The new budget bumps up subsidies on food and consumer-goods from 8% to 26% of annual GDP. Welfare benefits will increase by 50%, housing subsidies by some 50% and oil subsidies by 32%, according to the Wall Street Journal. Moreover, LE7.5 billion have been allocated to fix minimum wages for public employees, who generally suffer from comparatively low incomes, at LE700 ($118) a month. And in hindsight you may be tempted to believe that “social justice” is well on its way.
But don’t get ahead of yourselves just yet. There is still plenty of scope for reshuffling expenditure in a way that improves asset distribution without compromising long-term growth. Take energy subsidies for example: the new budget allocated an additional LE30 billion to energy subsidies compared to the 2010 fiscal. Unquestionably this will mainly benefit the rich who consume higher energy levels. The government would have been better off slapping higher taxes on premium unleaded petrol – used primarily by the wealthy Mercedes and BMW drivers – and allocating this LE30 billion elsewhere (more on this below). Moreover, subsidizing gas and petrol will only incentivize the public to divert their usage away from public transportation to private modes of commuting. This will further exacerbate traffic congestion and pollution levels in a country where environmental degradation is a matter of serious concern.
A more controversial item on the new budget is the excessive allocation of public resources to minimum wages without any restructuring of wages in the public domain. State workers commonly receive what is called a ‘base salary’, which in reality only make up a fraction of what an employee earns. The remainder of their income is comprised of end-of-year bonuses. Al-Ahram reports that the base salary only makes up 20% of the new budget’s wages allocation. The government, therefore, had to set aside an additional LE7.5 billion ($1.5 billion) in order to set public-sector wages at LE700. And with a rising inflation of 12%, you can hardly blame a public-sector employee for wanting to have more money in their pockets! Ashraf Badr Eddin, a former deputy member of the parliament’s Planning and Budget Committee, argues to the contrary, however. “The government could have raised wages without putting additional pressure on the budget, increasing the deficit and possibly inflation, if it was accompanied by a reform of wage structure,” Badr Eddin told Al-Ahram. Regulating bonuses and setting laws to fix maximum wage can do this.
Nothing, however, is more puzzling than the government’s new law on income taxes. According to Al-Masry Al-Youm, “The government will exempt incomes of up to LE12,000 a year from income tax, up from LE9,000 previously…On top of the 20 percent flat tax (on incomes levels of LE40,000 or more), the government would also impose an additional 5 percent on annual earnings that exceed LE10 million ($1.7 million) annually, whether for individuals or companies”. A move towards a more progressive tax law, eh? After all, social justice necessitates that the higher your income is, the more you should be taxed so that poorer households can be relieved from the same burden. Indeed, countries with low indexes of inequality such as Austria, Canada and Denmark commonly impose tax rates ranging between 30% – 47% on household earnings averaging $40,000 or more. A family earning an income of LE40,000 ($9,500) a year in Egypt, however, will find it virtually impossible to afford a second-hand 2007 Toyota. Can you even begin to imagine how a four-member family earning LE12,000 per year ($2,000 pa) can bear the burden of taxation?!
Samir Radwan accepts the conventional wisdom that tax cuts for the rich will spur domestic investment and will also attract foreign capital. Resultantly, there will be higher economic growth rates and the poor will benefit via a trickle-down effect. Besides the fact that empirical evidence does not substantiate this theory, the primary concerns for any policy-maker at this point in time should be the soundness of the macroeconomy and the political stability of the country. Reforming tax law should involve raising tax rates at the higher income brackets (i.e progressive tax system) and alleviating more of the poor households from the burdens of taxation. And one should not fear that higher taxes for the rich will deter away foreign investments. There’s an overwhelming consensus among economists that tax incentives are secondary to worker’s education, infrastructure and political stability. In fact, Mubarak typically offered very generous tax incentives to foreign investors but neglected spending on education. Consequently, Egypt attracted far less investments than other countries of commensurate income levels since the 1974 open-door policy (infitah).
The government would be better off designating more resources to food subsidies especially since international food prices are expected to continue on an upward spiral. This requires reshuffling of some expenditure away from energy to food. Additionally, the government needs to commit itself to down-sizing the public domain. State employees currently make up a third of the total workforce in Egypt, which heighten pressures on very limited resources. The interim government insists that down-sizing the public sector would not be tolerated by millions of state workers given the current inability of the private sector to absorb more labor. However, promoting labor-intensive industries with the best export performance can mitigate this problem. This should be accompanied by increased spending on primary education and training for the unemployed.
Many will excuse the interim government for not taking such bold steps towards economic reform. With little political backing from the masses, Samir Radwan gave into the temptation to buy off impatient citizenry with generous handouts until a democratically elected government takes over in 2012. However, the ability of the present state to usher a new era of social justice, you may be convinced soon, will prove to be optimistic.
Mohamed is a Masters student at SOAS doing a MSc in Economics with reference to the Middle East, dissertation on FDI in Egypt from 1974 to the present.
Views expressed in articles are the author’s and do not represent Comment Middle East
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