September 2017
Salary Adjustment: Taxing the People to Cover for Elite’s Negligence

So much has been said about the salary adjustment. While many people are opposed to it over the perception that it imposes higher taxes, public sector employees and teachers think that an adjustment is long overdue. For one, their salaries have been adjusted only twice—in 2008 and 2012—since 1997, and these salaries have failed to maintain their purchasing power. That is, the rise in prices of more than 120% over twenty years has eaten up part of their income in real terms and reduced their standard of living.

Public debate has simmered for five years over how to finance the salary adjustment bill. Twenty-two taxes were signed into law on 21 August 2017, but they are currently under review by the Constitutional Council. They include an increase in VAT, stamp duty tax, and air transport exit fee, as well as well as capital gains on the disposal of fixed assets, corporate income tax, and taxes on interest, among others to cover additional spending.

As many can get caught up in choosing sides, it is important to reflect on how the issue was framed over the last few years, how the debate took place, and how and why it was settled now. It is through this that we can better understand the intentions and priorities of the political elite.

Let us start with the issue at hand, namely, why was the salary adjustment bill presented as a separate expense that requires additional financing? The fact that state revenues have increased over the last twenty years, partly as a result of the rise in prices, suggests that salary adjustment ought to be financed from revenues. In other words, the increase in public sector salaries should be treated like any other expense in the budget and revenues should not be viewed as being earmarked to finance a particular expense. Hence, what is required from the government and the parliament is a study of revenues and spending in the budget together—often referred to as unity of the budget—to figure out ways to address the fiscal situation in the country. The government should have examined public salaries, current spending, and capital spending to reduce expenditures in addition to its revenue stream, including public property management and taxes, some of which are under-collected.

In other words, the salary adjustment bill should be framed as part of total spending and revenues in the budget rather than isolating additional salary expenses. The latter has resulted in muddying the debate over salary adjustment and made the beneficiaries a target for a general public that pays taxes to finance public workers’ salaries, among other state expenses. In reality, the public is shouldering more of the tax burden to make up for public finance mismanagement on the part of the government and parliament, both of which have failed to prepare, debate, and approve a budget for the last twelve years to ensure fiscal discipline and effective and efficient spending. The absence of such a credible process hardly fosters requisite trust between the political class and voters.

Another common argument in the public sphere centers on the assertion that a salary adjustment is undeserved because Lebanon’s bureaucracy is overstaffed, unproductive, and it is fiscally draining on the treasury. This does not hold water for two reasons. One, while some state agencies are overstaffed, many are understaffed, casting doubt on the policies that subsequent governments are pursuing in terms of wanting to build a professional bureaucracy. Public sector reform that addresses tasks, salaries, and merit criteria is sorely needed. Lest we forget, the government has tasked the Office of the Minister of State for Administrative Reform with reforming the public sector administration, which remains as illusive as ever since the problems lies first and foremost with the same people who are asking to reform it: Political parties who are using government agencies to deliver services to and hire people who are politically loyal and serve their political and electoral ends.

Any serious reform to the bureaucracy cannot be carried out through denying a salary adjustment to public sector employees that is not based on merit but rather on salaries’ purchasing power. Furthermore, asserting that all public staff do not deserve a salary adjustment on equal terms fails to distinguish between those who are productive from those who are not and fails to recognize that they are entitled to the adjustment under Lebanese law.

One thing that is clear is that the political elite—both in government and parliament—are unwilling or incapable of raising revenues and curbing spending by tackling waste, mismanagement, and corruption in the public sector. There are many public allegations about unnecessary spending or state properties being stolen or under-invested. What is worse is that many parliamentarians are content making speeches about corruption in parliamentary oversight sessions but rarely follow it up with action. Others manage to unearth corruption deals after a bill has passed and not before. The fact that the government is not increasing revenues or lowering spending by tackling mismanagement and corruption indicates clearly that they are unwilling or incapable of threatening the interests of cronies, either due to collusion or fear.

The easiest route to shore up public revenue is to increase taxes. While their instinct is to impose indirect taxes that fall disproportionally on middle and lower income groups, they have opted to actually distribute the burden between consumers and capital. In fact, the increase in VAT from 10 percent to 11 percent will make up about 18 percent of the total of new revenues. The increase in interest tax from 5 percent to 7 percent will make up 25 percent of new revenues.

Despite the fearmongering rhetoric of the private sector on the implications of new taxes on the economy, such new taxes include a capital gains tax, corporate income tax, property sales, and interest tax, which in total cover half new spending from the salary increase. As modest as it is, some of these taxes can rectify the burden that is usually falling on consumers rather than on capital, businesses, and other types of rents that are left untaxed. The governments’ tax policy since the end of the civil war has favored indirect rather than direct and progressive taxes, in the process favoring the rich over the poor.

It very well may be of no coincidence that tax legislation was passed after the electoral law and with the election season just around the corner, as it is becoming the norm that salary bills like the one in 2008 and 2012 are made before scheduled elections. Over the last five years, no government or parliament established a proper process to deal with how to finance a salary adjustment. As contentious as the issue is, the political elite could have studied it as part of the budget, figured out how to cut waste and tackle corruption to finance it, and then studied its impacts on various sectors and the public. This is what any decent government or parliament should have done if they care about the public. In fact, this is how one would go about gaining back the people’s trust.