CAIRO: While Egypt has announced a substantial increase in tax revenues for the first half of the 2008/2009 fiscal year, it won't be enough to cover the expected budget deficit. A recent report indicates a 46 percent rise in sales tax revenue accompanied by a 24.7 percent jump in corporate tax proceeds compared to the same period last year. Simon Kitchen, an economist at EFG Hermes, linked the rise in tax revenues with increased rates and better collection strategies. "Tax rates have increased in some areas, and collection methods have been improved in order to cover the increased spending needs of the government as revenues from other sectors decline, he said. The Egyptian government has stepped up efforts to increase revenues from individual income tax over the past several years through the use of creative advertising. Campaigns running since 2006 have been an effective tool in increasing rates of return on private income taxes, reportedly bringing in LE 3 billion in added taxes for the current fiscal year through a campaign of television, radio, SMS and billboard media. Despite rising tax revenues in the first half of fiscal year 2008/2009 however, Egypt's budget deficit is expected to increase as a percentage of GDP in 2009/2010 due to increased government spending and a slowdown in earnings in key sectors like tourism. "Earnings are decreasing due to a reductions in effective demand and production, as well as because of the impact of the financial crisis on key sectors such as construction, textiles, tourism and exports. In this situation, tax revenues are key to sustaining government spending, explained Alia El-Mahdy, professor of economics at Cairo University. Government spending has increased in an attempt to subdue the effects of the global financial crisis on the Egyptian economy. Spending on subsidies rose by over 154 percet in the first five months of the 2008/09 fiscal year, reaching LE 34 billion total. Meanwhile, public spending on government investments increased 42.5 percent to LE 11.3 billion and public salaries and benefits increased 19.9 percent to LE 28.6 billion compared to the same period last year. Government expenditures are expected to continue rising into the next fiscal year. Finance Minister Youssef Boutros-Ghali stated Wednesday that increased government spending would lead to a deficit of LE 109 billion in 2009/2010 (8.4 percent of GDP), compared with LE 70 billion (6.9 percent of GDP) for the current fiscal year. Ghali announced that this planned increase in spending would include a 16 percent rise in education spending and an 18 percent rise in funds for healthcare along with substantial funds for investment in local industry. Government investment is expected to bolster falling economic growth rates for the remainder of the fiscal year and to help maintain a growth rate of 5.5 percent for the coming fiscal year beginning in July, although it is uncertain when the international financial situation will allow for a full recovery across sectors. With spending set to increase for the next fiscal year, government efforts to increase tax revenues can be expected to intensify, particularly in the face of dropping revenues from other sectors and uncertainty about future prospects for economic recovery.
