Egypt's first post-revolution budget fails to meet popular aspirations

The government says its budget for 2011-12 is tailored to demands for social justice and development, but economists believe the proposals don't go anywhere near far enough

Egypt's interim government was obliged to make a series of popular, socially-oriented adjustments in its first budget after the country's revolution. However the reforms made in this direction don't make the 2011-2012 budget a revolutionary one; its social dimension is still very limited and in general doesn't represent any significant structural changes from the Mubarak era.
The budget's main social decision that was the fixing of a LE700 minimum wage for public employees, set to cost the government LE7.5 billion. Added to the 15 per cent premium on last year's wage decided earlier, and the increase of the number of beneficiaries from social security pensions, allocations for wages look like jumping almost 25 per cent this year to reach LE116.5 billion.
But are these the social measures people were expecting in order to redistribute revenues in Egypt?
For many, the answer is no. Fixing a minimum wage doesn't mean a lot if it is unaccompanied by a restructuring of wages in the public administration, a measure mentioned by many, including new Minister of Finance Samir Radwan before he came to office. Yet no concrete decision has yet been taken towards this.
Wage structures in public administration have long faced criticism. The Egyptian government invented what is called the 'base salary', which in many cases represents a fraction of what an employee earns. While the gap between base salaries is regulated and there are criteria to fix it, whether accepted or not, issues involving bonuses are left unregulated.
Ashraf Badr Eddin, a former deputy member of the parliament's Planning and Budget Committee, believes that an increase in the minimum wage without wage restructuring may do more harm than good.
“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,” says Badr Eddin, noting that base salaries represent only 20 per cent of the budget's wages allocation.
“Anyhow, how can we talk about social justice without mentioning a maximum wage?” asks Badr Eddin.
Ragui Asaad, professor of planning and public affairs at the University of Minnesota, thinks the fixing of a minimum wage should be accompanied by a rise of salaries for all employees, warning of further complaints of injustice if new employees receive the same wages as more experienced ones.
The new budget also brings changes in taxes, most notably to the income tax law.
Modifications include a rise of the exemption level, from LE9,000 to LE12,000 per year, and the raising of the maximum tax level from 20 to 25 per cent for annual salaries over LE10 million. These changes signal a move towards a more progressive tax law but again are less than what was hoped.
"It is good to raise the exemption level if everyone benefits from it, but still the changes are limiting this exemption level to employees, while other categories will benefit from exemption of only LE5,000,” explains Saeed Abdel Moneem, professor of accounting at Ein Shams University, who calls for more tax-breaks for families, as seen in many other countries.
Ibrahim El-Essawi, an economic expert at the Institute for National Planning, says there should be reform of the tax brackets as most of them are concentrated on the lower end of the income spectrum. The law imposes the maximum tax -- 20 per cent -- on incomes over LE40,000, or around LE3,330 per month.
“With today's prices, this kind of salary doesn't mean much, especially if the person is in charge of a family,” complains Abdel-Moneem.
Ibrahim Al-Essawi believes the maximum tax should reach 35 or 40 per cent as in other countries.
There is a common perception that higher taxes would be opposed by the government and the business community. In fact, many famous businessmen, including Naguib Sawiris, the main shareholder of Orascon Telecom, and Galal Al-Zorba, head of the Federation of Industries, welcomed the 5 per cent rise in income tax. Others, though, have expressed displeasure. The raised maximum tax would be imposed on companies as well as individuals.
The suspension of the property tax law, introduced in 2008, also raised accusations that the government is not implementing policies in the interests of the poor.
The law was criticised for increasing the tax burden on the middle class, though it exempted owners whose property was worth less than LE500,000. However, the decision met criticism from some economists.
"I can understand that the government increases the exemption level not to put extra pressure on the middle class, but to suspend it at a moment when the state needs revenues is not the right decision. Owners of mansions and villas should pay the tax," says Samer Soliman, assistant professor of political economy at the American University of Cairo.
The cancellation of capital gains tax after it had been announced is also seen as government favouritism towards the rich.
Reforms to subsidies also reflected a step away from social justice, with food subsidies witnessing a sharp cut despite increasing international food prices.
Instead the main increase in subsidies will be for energy, up to LE99 billion versus LE67.68 billion last year. “We can't talk about social justice and income redistribution if we allocate that money to subsidising energy which we all know mainly benefits the rich,” says Ragui Assad.
“We know that the tourism sector accounts for 22 per cent of the country's diesel consumption. That means that around LE10 billion of the $46 billion reserved for diesel subsidies go to that highly-profitable sector. Why should we subsidises 5-star hotels?” asks Badr-Eddine.
Energy subsidies for some industrial sectors also persist. “Fuel subsidies should be rationalised. Why does the state subsidise owners of Mercedes' or BMWs?. If they fear inflation then we can find a way to compensate the poor or to limit it to small cars," he says.
This increase in spending, without reviewing controversial expenditures, is causing a sharp rise in the deficit which has reached 11 per cent of GDP.