While some positive moves have been made, Egypt's budget for 2009-2010 leaves some demands unmet, writes Abdel-Fattah El-Gibali* The Egyptian parliament recently passed the budget bill for the 2009-2010 fiscal year, following important amendments that have meant an addition to the budget of LE4.8 billion to reach LE354.6 billion. This particular budget is unique because it will deal with the negative effects of the global economic crisis, in addition to recent changes in the Egyptian arena including piracy in the Red Sea and swine flu. Statistics show that Egypt's economic growth rate dropped from 7.8 per cent in the second quarter of 2007-2008 to 4.1 per cent in the second quarter of 2008-2009. And although it improved slightly to 4.3 per cent during the third quarter, the latest estimates indicate that it will drop again to four per cent. With this in mind, it was necessary that the budget focus on boosting economic growth, encouraging the effective use of resources, supporting production and removing obstacles that hinder economic activity, while giving attention to the weaker segments of society. Economic growth had to be a priority, even if it came at the expense of fiscal balance. Increased public expenditure -- and by default the increase in purchasing power -- has become a necessary means of revitalising the economy, even if it takes place at the expense of increased debt and borrowing in the short term. It must be taken into consideration that such debt is capable of driving growth and of increasing the economy's capacity to generate the necessary resources to repay this same debt in the medium term. However, it must be noted that public expenditure has dropped from LE356.8 billion in the 2008/2009 budget to LE323.9 billion in the 2009/2010, meaning it is a contractionary rather than an expansionary budget, as would be expected in times of crisis. Some observers believe that this may be attributed to reduced spending on subsidies, grants and social support, which dropped from LE136.7 billion to LE73.4 billion during this period due to the decreased global value of most related goods. Yet the primary reduction in the budget is not in subsidies but rather -- and more crucially -- in investment, which has dropped from LE38.4 billion in 2008-2009 to LE36.5 billion in the current budget at a time it is expected that LE43.2 billion will need to be spent in this area. There is clearly a deficit here. The problem is essentially twofold. First, the government failed to carry out its promise to spend more on investment, as announced when discussing the economic stimulus package of LE13.3 billion. Second, the private sector reduced its investments during this same period. This led to a slowdown of the production sectors which in turn led to a rise in unemployment, reaching 9.37 per cent during the third quarter of the 2008-2009 fiscal year in contrast to 8.8 per cent during the second quarter, and around 6.8 per cent during the first quarter. All these factors should have necessitated greater public spending, not the opposite. The fundamental increase in this section of the budget is related to increased spending on public debt interest, which has risen from LE52.9 billion to LE71.1 billion. Even though this increase is unavoidable and cannot be decreased or changed in any way because it is related to legal obligations of the public budget, it must be admitted that it does not contribute to reinvigorating economic activity. While the increase in public debt for 2009- 2010 will reach about LE30 billion, the increase in its interest rate payments will reach LE18.2 billion, even with the average interest on public debt dropping from 12.5 per cent to nine per cent. The public debt has reached the point at which it will be difficult to shoulder in the long run. As long as the interest on public debt remains higher than the economic growth rate, public debt will continue to increase faster than GDP grows, unless the country has a surplus in the budget. The greater the difference between the interest rate and the growth rate, the greater the surplus needed to maintain the proportionate ratio of debt to GDP. One of the significant features of this bill is the increase of salaries from LE79 billion in the current budget to LE87.5 billion, an increase that is related to regular salary raises and to salaries for the special cadres of teachers and doctors. These raises have created controversy; some hold that it would be better to direct these funds towards other sectors that are more capable of generating new work opportunities that could stave off the increase in unemployment expected with the current crisis. Yet these funds go to a high- consumption sector and thus directly into markets, aiding growth. Data from the Ministry of Economic Development shows that local demand (consumer and investment) has played a significant role in the country's growth recently, in comparison to previous growth in which foreign demand (exports and tourism) played a major role. Based on this data, new government expenditure must go towards funding domestic and not foreign demand, as the government intends with the current bill. Discussing alternatives for public expenditure and its distribution requires an examination of the factors that drive growth in the national economy. The role played by salaries in invigorating domestic demand has been made clear. Salaries should not be viewed as only an expense, but rather as the primary income for a wide sector of society. These salaries support the country's economic growth, and their increase leads to increased purchasing power and helps to draw investment. As such, the increase of these salaries helps to improve economic performance. The challenge facing public expenditure is in guaranteeing that its level does not affect the balance of overall economic stability. The optimal scope of public expenditure for meeting specified goals must be determined, and this scope depends on the nature of the prevailing economic and social circumstances. The problems of expenditure are not only related to its levels or its structure being inappropriate, but also to administrative problems in controlling it. Discussion of the role of the public budget should not be limited to the size of the budget deficit, but rather should take into consideration how much it contributes to creating new work opportunities, increasing investment, and changing the structure of national production. In other words, the success of fiscal policy must be measured by the degree to which public expenditure contributes to increasing employment and absorbing society's labour surplus, and -- ultimately -- its ability to generate mid- and long-term public revenue. * The writer is head of the Economic Research Unit at Al-Ahram Centre for Political and Strategic Studies.
