The Government Monitor No. 5: Draft Budget 2019: Meeting Deficit Targets by Postponing Payments

July 18, 2019
The Government Monitor No. 5: Draft Budget 2019: Meeting Deficit Targets by Postponing Payments

What’s the Issue at Hand?
The current draft budget proposed by the Council of Ministers (CoM) includes a set of 99 measures, detailing 61 legal amendments to increase revenue, 22 to reduce expenditure, and 16 measures to facilitate administrative procedures.

The proposed draft budget, as stated by the government, will decrease the fiscal deficit to GDP ratio from 11% to 7.6%.1 A small primary deficit2 is projected to persist for the second consecutive year, after having achieved a primary surplus in 2017.3 Moreover, the budget details several measures to incentivize direct foreign investment and private sector employment.

The measures included in the budget are set to decrease the deficit by an estimated LBP 1,740 billion ($1.16 billion) compared to 2018. However, 46% of this decrease is due to a deferral of dues for ongoing ministerial projects. These postponed payments are distributed across the years 2020-2023, with 5% of them being due in 2020, 65% in 2021, 17% in 2022, and 13% in 2023. The remainder of the projected reduction will be the result of cuts made to consumption expenditure, a three-year employment freeze, reduction in personnel costs, reduction in the contributions to non-profit entities, among others.

Twenty-seven measures are either related to amendments of existing fees and taxes or to the imposition of new ones. Nine of them are progressive in nature, including the introduction of an additional bracket for high incomes LBP 225,000,000/year (> $150,000/year) to be taxed at 25%, as well as making the retirement salaries of civil servants subject to the income tax. Eighteen measures amended or imposed regressive taxes and fees, 11 of which target areas such as an increase from 7% to 10% of the tax on gains from interest and imposing a 2% tariff on certain imported goods, both for the period of three years. A 3% monthly deduction from the pensions of military retirees is also one of those 11 measures. The seven remaining measures are levied on luxury goods, such as fees on special number plates, hotel room occupation, and tinted car window licenses.

Based on the proposed measures, tax revenue is expected to rise by 11%. Of these 11%, 38% result from increase in fees on goods and services, followed by tax on income, profits, and capital gains at 36%. Property tax is projected to contribute to 10% of the revenue increase, while the fees on international trade and other tax revenues (mainly stamps) will contribute to 8% each.

The budget measures reflect the elements of fiscal consolidation stressed in both the ministerial statement and the CEDRE reform program. Should these measures be fully implemented, the budget meets the main target of reducing the deficit to GDP ratio by 1% yearly over five years starting 2018. The budget also outlines some measures to reduce tax evasion, although they would need to be accompanied by further reform efforts given the magnitude of the challenge. However, the proposed draft law diverges from the ministerial statement’s promise to increase public investment, as well as the CEDRE pledges concerning the completion of budget laws prior to the start of the year.

Why is this Important?
Excessive spending on public employment, transfers to Électricité du Liban as well as debt payment in the past years come to necessitate austerity measures in light of the persisting economic downturn. While the challenges to increase revenue and curb expenditure are complex, the proposed measures require further detailed analysis in parliamentary review. It is particularly important to minimize a further increase in regressive taxation given the high degrees of inequality and rising living costs, in order to avoid further burden on lower income groups.

Background
After 20 ministerial sessions, the CoM approved a draft budget law which is currently under review in parliamentary committees. The main purpose of the 2019 draft budget law is to solidify the financial position of the treasury. The draft law, presented by the CoM as an austerity budget, sparked controversy in the country and triggered multiple strikes and demonstrations.

1 Exact estimations of the 2019 fiscal deficit to GDP ratio depends on the GDP growth in 2019. Numbers reported range from 7.6% to 8.8%.
2 The primary deficit is the amount by which a government's total expenditure exceeds its total revenue, excluding interest payments on debt. That way, the primary deficit indicates the extent to which a government can meet its expenditure obligations based on its revenues.
3 World Bank. 2019. ‘Lebanon’s Economic Update – April 2019.‘ https://www.worldbank.org/en/country/lebanon/publication/economic-update-april-2019