March 12, 2020
The Government Monitor No. 13 - The 2020 Budget: Slashing Investment and Social Services


What’s the Issue at Hand?
The 2020 budget law was published in the Official Gazette on 5 March, one month after it was passed by parliament. The law, which was not signed by the president, was made effective in accordance with article 57 of the Constitution.1 In light of the ongoing financial crisis and in effort to curb the deficit, the budget contained fiscal consolidation measures that decreased total expenditures by LBP 4.84 trillion (21%) compared to last year.
 
While the measures detailed in the budget could reduce the deficit-to-GDP ratio—currently at 7.6%—they come at the expense of promoting capital investments and social safety nets, thus adding additional burden to the expected economic and social costs of the crisis. In fact, 33% of the total budget cuts came from decreases in capital and social spending.
 
The following zooms in on the decrease in capital expenditure—a main driver of economic growth—and social spending in the new budget:
 
1. Capital Expenditure (CapEx)
Lebanon’s CapEx-to-GDP ratio, which is already one of the lowest compared to similar middle-income countries,2 decreased to less than 1% of GDP.
 

• While capital expenditure had comprised a modest 6.3% of the budget in 2019, this share decreased to nearly 3% in the 2020 budget. At face value, spending on capital dropped from LBP 1,456 billion to LBP 493 billion—shrinking by 66% compared to last year.
• Government spending on road construction, and water and wastewater works decreased from LBP 172 billion to LBP 8 billion, a 95% drop compared to last year’s figures.

 
2. Social Expenditure
While the government incrementally increased its financial support to the National Poverty Targeting Program by LBP 0.5 billion (8%) and retirement wages and indemnities by LBP 2 billion (0.1%), other social expenditures were slashed, leading to an 8% decrease (LBP 631 billion) in aggregate social spending compared to 2019:
 

• Healthcare expenditure—including hospital fees, purchase of medications, and transfers to NGOs—decreased by almost LBP 50 billion (7%).
• Education expenditure—including scholarship grants and contributions to primary, secondary, and tertiary education—were reduced by LBP 136 billion (7%).
• Government spending on housing shrank by LBP 300 billion—an 88% decrease from last year—after it had previously been increased by LBP 67 billion in 2019.
• Spending on environment conservation—including administrative and research costs and waste management—were trimmed by LBP 22 billion (33%).
• Social protection disbursements—which include, but are not restricted to, treatments, family assistance, children aid, and indemnities—decreased by nearly LBP 123 billion (a 2% cut from last year’s LBP 5,107 billion).
• Government transfers to the National Social Security Fund decreased by LBP 161 billion (3%).

 
 
Why is this Important?
While the new budget law contains measures to curb the country’s fiscal deficit, it comes at the expense of promoting citizens’ welfare. In fact, the 2020 budget significantly cuts capital and social expenditures at a time where they should be enhanced to help mitigate the challenges caused by the financial crisis.
 
 
Background
Lebanon is in the midst of a financial crisis that is worsening citizens’ socio-economic conditions and translating into a deep economic contraction. While people have pleaded against an austerity plan, the 2020 budget law, issued one month after the constitutional deadline, holds a number of harsh fiscal consolidation measures to curb the deficit.
 
 
1 Article 57 of the Lebanese Constitution considers a law to be automatically effective if the president does not transfer it, within a time limit, to Parliament for its review or promulgation.
2 Mahmalat, M. and S. Atallah. 2018. ‘Why Does Lebanon Need CEDRE? How Fiscal Mismanagement and Low Taxation on Wealth Necessitate International Assistance’ The Lebanese Center for Policy Studies.