After a very long wait, Egypt’s Ministry of Finance has released a breakdown of revenue and spending in the budget for the 2016/17 fiscal year, which began on July 1. Although the ministry has not yet shared the actual budget law, this data gives the clearest picture yet of the government’s plans and priorities for the current year.
Overall, the government plans to spend LE974.79 billion and generate LE669.76 billion this year, with an fiscal deficit of LE319 billion or 9.8 percent of projected gross domestic product.
By contrast, in 2015/16, projected spending was LE864.6 billion and revenue LE622.3 billion, with a fiscal deficit of LE251 billion or 8.9 percent of GDP. The most recent data available, which looks at the eleven months from July 2015 to May 2016, shows that the fiscal deficit during those months exceeded LE311 billion, or 11.2 percent of GDP.
One thing that stands out clearly in a side-by-side comparison of spending is that allocations for subsidies and social benefits have been eaten up by interest payments and investment.
This is in line with the government’s general policy goals of curbing subsidy spending and trying to boost economic growth through public investments like construction. Officials have also conceded that Egypt’s public sector debt is eating up a greater and greater share of the public treasury.
Spending on subsidies and social benefits has declined in absolute amounts as well as in comparison to other categories, but every other category has grown.
Most of the anticipated savings in subsidies and social benefits comes from a planned reduction in subsidies on petroleum products. Spending on petroleum subsidies peaked in 2013/14 at more than LE126 billion. It has steadily been declining, partly due to subsidy cuts and partly due to a sharp drop in global oil prices. It’s difficult to gauge how realistic this year’s figure is, since the government has not yet released official data on petroleum subsidies in 2015/16.
Meanwhile, GASC, which supplies bread and other subsidized commodities is given a bump, despite a much-celebrated scheme to reduce bread subsidy expenditures by introducing smart cards. In the first 11 months of the 2015/16 fiscal year, GASC received more than LE40 billion in subsidies, already exceeding its full-year allocation.
Some of the decline in subsidy spending will be made up for by an increase in social benefits. Most of this increase comes from “service expenditures for non-employees,” a category that includes things like medical expenses and bonuses for services rendered by non-employees.
Employee compensation, as usual, is set to increase — although at just below 5 percent, that increase is substantially below inflation. A look at the breakdown between basic wages and rewards and allowances makes it clear why public sector employees are so keen to protect their bonuses: even with plans to reduce them this year, bonuses and other awards and allowances amount to more than half of total employee compensation.
On the interest side, while foreign loans tend to grab the headlines, the numbers show that Egypt’s domestic debt — mostly in the form of treasury bonds and bills—is a much bigger drain on the budget, amounting to more than 97 percent of interest spending. Repaying domestic debt doesn’t strain Egypt’s foreign reserves, but the government can’t negotiate or default on this domestic debt without taking down the local banking system.
The rise in interest payments is a consequence of Egypt’s government spending more money than it brings in. This sets up a bad cycle, wherein the government is forced to borrow more money each year, in large part to fund the interest on its existing debts.
This year, Egypt is counting on taxes to make up the bulk of its revenue. This is an ambitious goal, since tax revenue for the first eleven months of 2015/16 was just LE268.64 billion. The government likely collected a sizeable chunk of tax revenue at the end of the fiscal year, but its unlikely it got the LE154 billion it needed to hit the year-end target. Still, that hasn’t stopped the government from setting an even higher target this year.
The government is also expecting a rise in the “Other” category, which includes dividends from the Central Bank, the EGPC, the Suez Canal and other public entities, as well as service fees and mining and oil revenues.
Meanwhile, grant revenue is projected to remain low, despite exceeding its target in 2015/16.
The government is anticipating a decline in taxes on income, profits and capital gains, largely due to lower anticipated taxes from the EGPC and its foreign partners.
Property taxes are also expected to be down, mostly due to an expected drop in taxes on financial transactions, such as interest on treasury bonds and bills—perhaps reflecting disappointing revenue in this category in 2015/16.
The highly contested value added Tax doesn’t appear in the 2016/17 budget, but the decline in income and property taxes is still expected to be made up for by increases in consumption taxes. In particular, excise taxes on basic commodities like tobacco, petroleum products, alcohol, sugar and tea are expected to increase.
There are certainly public policy arguments to be made for using taxes to discourage the consumption of all of these goods. Still, it’s hard to avoid concluding that this is a budget that places a heavy burden on those least able to pay, while cutting spending on social programs in favor of debt service and investment in very specific kinds of infrastructure.