A sizeable budget planned for 2009/10 promises controversy of similar proportions, Niveen Wahish reports It is that time of the year again, when the new budget is being set out and prepared to be presented to parliament early next month. And the process is indeed in full swing: the draft budget was scheduled to be presented to the Cabinet of Ministers yesterday. At around LE410 billion, the upcoming fiscal year (FY) 2009/1010 budget is expected to be the largest ever in Egypt's history. Then again, over the past few years, each budget seemed to be bigger than the year before. The problem with the budget is not its size but the fact that revenues do not cover expenditures. Slower economic growth brought about by the global financial crisis has meant fewer revenues from sources such as taxes and customs. Revenues are estimated to reach LE322 billion. The global slowdown has affected not only government revenues but spending as well, since it necessitated an extra spending of LE15 billion to stimulate the economy and to compensate for the drop in external demand, in addition to items such as state employee wages, health and education. With increased spending, estimates put the budget deficit at between LE86 billion and around LE100 billion. A deficit occurs when there is a gap between revenues and expenditure. Its seriousness stems from the fact that the government often reverts to borrowing to cover its needs. This in turn balloons government debt, and by default debt service. This FY, 2008/09, some LE74 billion was designated to debt service alone. While budget deficit is always a controversial figure, this year it is expected to be even more so. The widening deficit which reached 6.7 per cent this year -- at LE70 billion -- will grow further, according to initial estimates by 7.3 to eight per cent next year. This dampens the previous government target to lower the budget deficit by one per cent annually, a pledge which the government had taken upon itself and succeeded to achieve for the past four years, to bring down the deficit from a high of 9.6 per cent in FY 2004/05. However, the government seems to be well aware of the problems associated with over- borrowing to cover its needs. Minister of Finance Youssef Boutros Ghali has often said that he worries about future generations and does not want to burden them with debts that could affect government budgets for years to come. And Prime Minister Ahmed Nazif, addressing the Economist Roundtable in February this year, had also said that while the government may not be able to lower the budget deficit this year, it will try not to get it to expand. But things may not be too gloomy. Reham El-Desoki, senior economist at Beltone Financial, sees the size of the budget as a natural evolution. "The government needs to increase its spending on wages, subsidies, interest payments, and investment, in addition to spending on its goods and services. And with the annual increment in spending on these items it is normal that spending should increase to that level. If the spending in FY2007/2008 was LE380 billion and the new year's is LE410 billion, the increase of eight per cent is reasonable, comparing with 17 per cent on average since FY2003/2004." Further, a note issued by Beltone Financial Research at the end of February believes "that there is room for the government to raise enough financing, whether from actual resources or through debt, without leading to a large inflation of the budget deficit, given its ability to restructure its revenues and expenditures to increase revenue resources and better target expenses." Beltone also expects in that note that "the implementation of the property income tax and the new sales tax could serve to partially counterbalance the higher spending." Draft legislation is expected to be presented to parliament in its current session converting the sales tax into a value-added tax. This move, Beltone believes, will boost tax revenues. In addition, the note said that, the "implementation of the new property tax law, which lowered the tax rate on property in Egypt to 10 per cent, from 40 per cent, while expanding the tax base, should generate additional revenues of around LE1 billion in FY2009/10, compared to the previous annual average of LE550 million." But Mounir Hindi, professor of finance at Tanta University, does not see eye to eye with this theory. In his opinion, it is not time to talk about imposing additional taxes. What the economy needs is increased consumer purchasing power to boost spending and accordingly boost production and employment. To do this, he opines, citizens must be given tax exemptions. Not only that, but he believes that if given what the Ministry of Finance claims that real estate units worth 500,000 or less will not be paying taxes, this means that the government might not conjure the needed sums. Hindi recommended that proper spending of resources is what the budget needs. He lamented the misallocation of funds citing the example of the Sidi Gaber train station in Alexandria. "It was renovated last year, and now it is being torn down again," he said. Subsidies are another thorny area of the budget. This year a drop in oil and commodity prices is expected to mean that the government needs to allocate fewer funds to subsidies and could redirect those funds to other areas. Indeed, Beltone agrees. In another note issued late January, the company said "the theoretically freed up funds only mean that debt financing would be lower or the funds would be used to finance other fiscal items, without expectations of a drop in the budget deficit due to the drop in international prices." The same note cites that subsidies had ballooned to LE83.7 billion in FY2007/08, from LE54.2 billion in 2005/06, on the back of rising commodities' prices and the expanding group of beneficiaries. Energy subsidies constitute 70 per cent, on average, of total subsidies. And some 60 million individuals are estimated to benefit from the ration card system.