SEARCH

Egypt’s Budget Deficit: Why No One Wants Cuts

While many people generally agree that governments faced with deficits must cut spending, most do not like cuts in specific programmes.

It’s the same everywhere, not least the US where a national survey found that for 18 of 19 programs tested, majorities want either to increase spending or maintain it at current levels.  The only exception where people wanted to see cuts was humanitarian foreign aid, which accounts for about half a percent of the US budget.  pewresearch1

However the long-term trend over the past quarter-century is, for the most part, away from spending growth.

The survey goes a little way to showing how society is happy for a government to make the cuts necessary to rightside a budget, but when areas that affect them are on the radar, the public will likely lobby against these cuts.

Now, if we snap back to Egypt, where public debt is about 80% of GDP at $220 billion versus the US where government debt is at $11.7 trillion (and 75% of GDP), it is like comparing apples to pears.

But the public perception is the same. 

Egyptians generally agree that there must be cuts to balance the budget, but it is difficult to convince the public that wages take up a huge chunk of government spending, and that spending on some welfare programmes, like the energy subsidy system need to be drastically reined in.

This is what happens when Egypt decides to increase wages and continue to feed its addiction to energy subsidies: 

Dcode
Dcode

Dcode, a consultancy that specialises in “Dcoding” the Egyptian economy, explains that the reason the budget deficit widened during July and December of the current fiscal year to stand at LE91.5 billion (5.3% of GDP), up from LE74 billion a year earlier (4.8% of GDP) is a simple financing problem: Expenditures grew at a faster rate than revenues.

Even though government revenues from taxes grew, it was not enough to make up for the “debt service payments, higher subsidies and wages to accommodate popular demands and high international commodity prices.”

This is where a seasoned politician usually comes in to explain to the public that this is unsustainable and that spending on public sector wages (26 percent of the state budget is currently spent on paying the wages of almost one third of the total labour force) and energy subsidies (20 percent of government spending) must slow down. This can be done by actually going ahead with energy subsidy reforms, and redirecting funding to the private sector where jobs are more lucrative and dynamic and the government does not have to support millions of wages.

But, as we have come to realise, there are no experienced politicians in Egypt, just airheads who bump heads rather than engage in a real dialogue.

Why not take time to compile a diagram that shows the real impact of tax increases, subsidy reform and public sector cuts on Egypt’s neediest? If correctly enforced (and that’s a big If), Egypt’s struggling households will find restructuring the budget will by and large give them better access to bread and fuel (at cheaper rates than today), and will exempt them from paying taxes.



4 Comments


  • Automaton
    Posted February 24, 2013 at 9:04 am | Permalink

    True, American public opinion is opposed to reducing the budget deficit by spending cuts, but overwhelmingly in favor of tax hikes, which would accomplish the task just as well, or even better.

  • Nasser Gamal Eddin
    Posted February 24, 2013 at 2:29 pm | Permalink

    “This can be done by actually going ahead with energy subsidy reforms, and redirecting funding to the private sector”

    1. I thought energy subsidy reforms were meant to cut wasteful subsidies for the private sector (i.e.: heavy consumers who are rich and don’t need it) we are redirecting funding again to the private sector?

    2. You have mentioned percentages for wages and subsidies, there is also another important percentage missing: 25% of budget is allocated for debt servicing each year.

    3. I agree public sector workers are a huge problem but not because of their wages…because they are basically unproductive, they consume more of the budget than what they add to it. I don’t think redirecting these workers to private sector is going to work because many of them are underqualified/unemployable and we don’t have a social welfare system.

  • Posted February 25, 2013 at 10:45 am | Permalink

    I think the following passage should say expenditures grew at a faster rate than revenues:

    Dcode, a consultancy that specialises in “Dcoding” the Egyptian economy, explains that the reason the budget deficit widened during July and December of the current fiscal year to stand at LE91.5 billion (5.3% of GDP), up from LE74 billion a year earlier (4.8% of GDP) is a simple financing problem: Revenues grew at a faster rate than expenditure.

  • Farah
    Posted February 25, 2013 at 10:50 am | Permalink

    Yes good spot, thank you! Have corrected.



Post a Comment

Your email is kept private. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>