Sherine Nasr and Sherine Abdel-Razek assess measures to fund the 30 per cent public sector pay increase Elation at the announcement of salary increases for state employees has been tempered now the government has revealed how it intends to pay for them.The six million government employees who will benefit from the 30 per cent rise announced by President Hosni Mubarak in his Labour Day speech were not the only ones dismayed this week when the government revealed its plans to cover the pay rise. Many fear the package of emergency economic measures designed to finance the extra cost might unleash yet another series of price hikes. On Monday, the People's Assembly approved a raft of measures that will, among other things, reduce subsidies on fuel, which at the petrol pump translates into an average 40 per cent increase in gasoline prices and a 47 per cent increase in the price of diesel. The costs of 80- octane gasoline and the butane cylinders used most often by poorer members of society, however, remain unchanged. The package also saw increased duty on cigarettes, elimination of tax breaks for private schools and universities, an increase in the tariffs paid by the most energy- intensive factories operating in free zones, an increase in vehicle registration fees according to engine capacity and the end of tax breaks on treasury bills.The changes will contribute an estimated LE12 billion to government coffers. Within hours of parliament's approving the changes, government ministers and leading members of the ruling National Democratic Party were touring television studios to defend the revenue generating moves, arguing that the measures adopted targeted the rich rather than the poor. The government, said Finance Minister Youssef Boutros Ghali, had gone to great lengths to devise a non-inflationary package with "the poor shouldering the least burden". Independent and opposition newspapers, predictably, were not convinced. "The bonus evaporated", "The biggest trick" and "Egypt in pain" were typical of the headlines at newsstands since then, with many commentators suggesting the government had given with one hand only to take away with the other. But there are not, as Ghali and other officials insist, any magic solutions to the soaring prices of commodities on international markets, and the government had done everything in its power to protect the most vulnerable members of society. The measures adopted, they implied, were the lesser of two evils. Minister of Trade and Industry Rachid Mohamed Rachid, who had earlier defended the measures, was quoted Wednesday by the daily Al-Masry Al-Yomas saying that he had argued from the outset that only policies targeting the rich be adopted, before imposing taxes on fuel and cigarettes. His statements suggest that there may have been disagreements in cabinet over the thrust of the policies. "Plans that increase real growth and development are a prerequisite to generating real revenues," said Rachid. He, therefore, repeatedly stated that in the future there will be more measures similar to those taken this week. "That the changes were announced just five days after salary increases has left many members of the public with the impression they have been deceived. The timing has had the unfortunate effect of taking the gloss off even the most positive measures in the package," says Magdi Sobhi, an economic expert at Al-Ahram Centre for Political and Strategic Studies (ACPSS). Gouda Abdel-Khalik, a professor of economics at Cairo University and chairman of the Economic Affairs Committee of the leftist Tagammu Party, goes further, suggesting the changes may themselves be unconstitutional. "The budget, or any related amendments, should be submitted to parliament three months before the fiscal year begins," he argues. "The pay increases were announced suddenly, and then came the government-proposed bill to finance them. The timeframe suggests the policies have not really been thought through." That microbus drivers demonstrated in some governorates on Tuesday morning demanding that they be allowed to increase tariffs in line with higher fuel costs indicates that hopes the changes will not be inflationary may be short- lived. "Increasing fuel prices has serious repercussions. Gasoline in particular is an indispensable component in the agricultural, industrial and transportation chain," says Abdel- Khalik. EFG-Hermes, Egypt's leading investment bank, believes the measures included in the package, combined with increased annual bonuses for public employees, can only increase inflationary pressure within the economy though the actual fallout is difficult to predict. "In an open market you cannot dictate prices," says ACPSS head Abdel-Moneim Said. It would have been better, he argues, to chase after more investment and then rely on that to generate additional revenues, while simultaneously ensuring that market regulatory measures are consistently enforced. The government, which has repeatedly said that the pay increases of public sector workers can only be financed by an increase in "real resources", has been taken to task by some economists for failing to explore all the avenues open to it. The package it has opted for, says Abdel- Khalik, really amounts to no more than the imposition of a series of indirect taxes, "which by default will impact most on those living on limited incomes". Imposing a 20 per cent tax on capital gains on stock market transactions, estimated at LE900 billion this year alone, he says, "would have yielded at least LE60 billion a year, a much higher level of revenue drawn exclusively from the most privileged". He also proposes an ascending scale of corporate tax to be levied on profits. Abdel-Fattah El-Gibali, a former advisor to the minister of finance, moots the more strenuous pursuit of unpaid tax as an alternative source of revenue. Overdue tax payments and tax evasion currently stand at LE96 billion, while the accumulated inventories of public sector warehouses were estimated to be worth LE79.5 billion in June 2007 compared to LE50.8 billion in 2001. "The fact that prices have already begun to rise before state employees have received their promised bonuses is very annoying," says Abdel- Khalik. "Egyptians deserve better."
