With summer starting in full force, debates in the People's Assembly on the proposed new budget are about to heat up, Sherine Abdel- Razek reports The government will present its budget for the fiscal year 2005/2006 before the People's Assembly on Saturday. Both the minister of finance, Youssef Boutros-Ghali, and Minister of Planning Osman Mohamed Osman reviewed the draft proposal with President Hosni Mubarak last week. Projected expenditures are LE187 billion, compared to only LE130.1 billion in government revenue. This once again leaves a huge fiscal deficit, some LE57.7 billion, equivalent to 9.2 per cent of GDP. For the past year, the budget deficit was equal to 10 per cent of GDP. In contrast with previous years, the new budget's expenditure and revenue items are categorised in order to more fully reveal the real fiscal situation of the economy. Abdel-Fatah El-Gibali, a consultant to the finance minister, pointed out that one of the most important differences in this year's budget is that the LE22 billion cost of oil subsidies are listed along with direct subsidies. Being indirect subsidies -- which means that the government pays the difference between the cost of production and the sale price -- oil subsidies were previously not shown in the budget unless the General Petroleum Authority had net profits. El-Gibali explained that the new method has been quickly gaining popularity among governments in the past five years. "It was first heard of in 1996 when the United Nations called for unifying the way state budgets worldwide are prepared." The amendment was introduced by a new law which put strict conditions on any government authority or body exceeding its budgetary allocations . "This will help in putting a ceiling on extra expenses," said El-Gibali. With the revamped system of categorising budgetary items, it is difficult to directly compare to previous years' budgets, but analysts are generally pleased. The new budget comes 10 months after a business-friendly, reform-minded government came to power. Its reform package has included changes in the taxes and customs structure, together with an accelerated privatisation programme and more investment-friendly policies, all of which are reflected in the budget. Boutros-Ghali was recently quoted as saying that the tax and customs reform resulted in a LE3 billion drop in revenues, below previous government projections of LE4.6 billion. "The cyclical growth of the economy and the accompanying increase in value of imports by 30 per cent during 2004 has helped in offsetting the effect of the expected decline in the customs," observed Hani Genena, a senior economist at EFG-Hermes, Egypt's largest investment bank. Revenues will also be boosted by some of the recent adjustments, according to Genena. "Abolishing the tax holidays for the new projects together with the 10 per cent tax-exempted revenues of the listed companies will add a substantial amount of money to the coffers of the government." Fortunately enough, the upcoming fiscal year also coincides with the expiry of the tax holidays for some heavyweight companies that were established according to the Investment Law of 1997. At the top of this list are telecommunications companies Vodafone and MobiNil which, according to Genena, are together expected to pay LE1 billion worth of taxes this year. This year's budget also increases the annual wage raise for government employees from 10 to 15 per cent. The minimum level of this raise was increased to LE30 per month. The increasing investment appeal of various sectors of the economy under the new government is reflected in the recovering value of expected investments for 2005-2006. Total investments by the private sector, government bodies and economic authorities and the public enterprise sector stood at LE110 billion. According to Minister of Investment Mahmoud Mohieddin, foreign investments are expected to double to $2 billion by the end of June 2006. Foreign investments this year have already exceeded $1 billion after having declined to $408 million in June 2004. Increasing foreign interest in the petroleum and energy sector explain much of this difference, said Genena. Even more significantly, companies investing in this sector pay the highest tax rates, thus enhancing government revenues. Unfortunately, what this budget does have in common with previous ones is a hefty fiscal deficit. Boutros-Ghali argued that as the economy is still in the midst of a transitional period, preventing the deficit from exceeding last year's level is an achievement in itself in light of the decline in tax and customs revenues. The government deficit has reached record levels during the last five years. The oil subsidy now costs the government LE22 billion, compared to under LE1 billion in 1995. The overall subsidy allocation in the new budget is LE35.4 billion. While demands for abolishing or cutting subsidies on certain commodities to lighten the burden on the budget were recently raised, it is expected that any such potentially unpopular moves will be delayed until after this year's presidential elections. On the plus side, the government is better able to finance the deficit this year, with the privatisation programme generating LE3.5 billion since August, according to Mohieddin. The budget deficit is usually covered by a combination of borrowing and privatisation proceeds.
