Late is better than never, or so the saying goes. Thus, despite whatever flaws the 2010 budget proposal may contain, that Lebanon’s Finance Minister Raya Hassan was able to bring it to the table at all on April 15 — two and a half months past the constitutionally mandated final deadline — should be seen as a positive sign. Should it also pass parliament and be enacted, it would be the first to do so since the budget of 2005, which has been the template for government spending for the last five years.
The finance ministry has described the budget proposal as “ambitious and expansive,” which in some senses, it is. It lays out significant increases in investment expenditure equivalent to 6.1 percent of gross domestic product, according to the finance ministry — though GDP calculations remain more a matter of ‘ball parking’ than precise measurement (see box). There is also a proposed jump in social spending of 24 percent, compared to the 2009 draft budget.
The bulk of the $805 million increase in investment — which the finance ministry points out is a 148 percent increase on the figure proposed in 2009 — will be focused on “the sectors of electricity, road maintenance, and water construction.” However, as 2009 budget spending was never enacted, “it is quite misleading to say that expenditures on projects [will] increase by some 150 percent,” said Marwan Iskandar, economist and managing director of MI Associates.
If the amount proposed in this year’s budget is actually invested, it could relieve some of the stress on Lebanon’s decrepit electricity infrastructure in the medium to long term. Some $255 million dollars will be allocated to building new power plants to produce 700 megawatts (MW), which is intended to cover the deficit between the approximately 1600 MW currently produced and the some 2300 MW the country requires. This constitutes the start of a four-year investment proposal by the finance ministry to spend $1.17 billion on the production and distribution of electricity.
Investments aside, the government will still have to foot the existing electricity bill, which the proposal estimates will cost $1.57 billion, a rise of 27.3 percent on 2009. And since the government does not hedge against future fuel costs — which comprise 94 percent of proposed expenditure on electricity — any future oil prices increases will inflate the burden. The draft budget also lacks any mention of reforming the electricity sector, through switching power generation from fuel oil to the cheaper gas alternative or performing a much needed efficiency overhaul. This is salient in light of the fact that Lebanon currently loses some $1 million for every megawatt produced.
Damn that debt
The largest burden the government continues to shoulder is the public debt, currently at some $51 billion and counting. However, the strategy of swapping short-term debt for long-term debt has worked in the finance ministry’s favor, as debt servicing is slated to be just 1.8 percent higher than 2009, going from $4.27 billion to $4.34 billion (see graph). Members of the ruling parliamentary majority have lauded the achievement; one MP even called it a “miracle.” That said, the sharp decline of debt-to-GDP ratio seen in previous years is slowing to a plateau. Debt-to-GDP ratio dropped from 180 percent in 2006 to 147.98 percent in 2009; this year’s proposed budget has this wavering slightly to 147.47 percent.
Hassan’s ministry stated to the press that the goal was, “maintaining the level of public debt-to-GDP, provided that the growth in public debt does not exceed the actual growth of the economy, while trying to avoid falling into the trap of a primary deficit.”
The fear is very real given that the 14.4 percent proposed rise in expenditure, some $1.87 billion, will push total spending to $13.46 billion. The move has cut the primary surplus — which excludes interest payments on the debt — from $872 million to $18 million. Under the budget proposal, this would increase the actual deficit to $4 billion, or 10.74 percent of GDP, which is estimated at $37.4 billion.
It is important to note that all these calculations are predicated on real GDP growth of 4.5 percent and an inflation rate of 3.7 percent.
Making the money to spend
According to the finance ministry the highest grossing tax measure last year was value added tax (VAT), generating $2.73 billion in revenue. VAT revenue is estimated to rise 8.7 percent this year, indicating an expected increase in domestic consumption.
While a possible increase in VAT had been the topic of debate earlier this year, none was suggested in the budget proposal. Instead, Minister Hassan opted to raise taxes on real estate registration from 5 to 7 percent on properties worth more than $500,000.
Elie Sawma, president of the building promoters federation of Lebanon, told Executive: “Our position is that the ceiling should be raised from $500,000 to $1 million because there is not one [decent] apartment in Beirut that is less than $1 million.”
He added that the minister should also consider raising taxes on non-Lebanese buyers by 3 percent, from the current 5.8 percent, as a “corrective” measure. The tax had previously been 17 percent until the real estate industry succeeded in lobbying former Prime Minister Rafiq Hariri to lower it.
Iskandar, however, said he believes there were more “equitable” options the government could have opted for.
“In particular, a tax on profits of real estate trading whereby you can introduce a tax of 25 percent on profits achieved in the first year, falling to 20 percent [the next year,] until by the fifth year there will be no tax,” said Iskandar, adding that such a measure would decrease speculation and drive down “prices of already completed apartments to a point where young people could secure decent housing.”
Real estate’s breakneck growth in recent years should make the increased taxation proposed in the budget relatively uncontroversial when it comes up for parliamentary debate, if only to tap the brakes on a bubble potentially speeding toward bursting point.
There are though, as Iskandar points out, other factors to consider: “This is something that lacks equitable treatment amongst the Lebanese [as] many of the politicians are themselves involved in [real estate].”
“The ceiling should be raised from $500,000 to $1 million because there is not one [decent] apartment in Beirut that is less than $1 million”
Breaking the bank
Minister Hassan also proposed a 2 percent tax hike on bank deposit interest, raising the tariff from 5 percent to 7 percent, which Iskandar estimates will bring in $100 million in additional revenues. Nassib Ghobril, head economist at Byblos Bank, called the deposit tax “totally unnecessary.”
Ghobril said that a 2 percent hike in the deposit tax would bring the government negligibly more revenues at a time when inflows are already increasing naturally due to solid economic growth. According to Ghobril, tax revenues increased by 25 percent and overall revenues increased by 20 percent in 2009.
“But what we are seeing is an increase in expenditures,” he said. “Last year we saw an increase in expenditure of about 14 percent overall. So the problem is not on the revenue side, it is on the expenditure side.”
Though Ghobril said he doesn’t believe that a 2 percent bump will be a deterrent to non-resident deposits, he remarked that “it certainly does not help,” especially when the growth rate of deposits has decreased in the first three months of 2010. What is more important, according to Ghobril, is that the tax hike casts Lebanon in a poor light in terms of its international financial image — a prized and sheltered possession, despite the debt.
An often-suggested and little-employed solution to the lack of discretionary revenue is financing projects through public-private partnership (PPP). It seems like this option is on the minds of many in the finance ministry, as Hassan mentioned it while proposing her budget and the Higher Council for Privatization President Ziad Hayek sent a statement to the press through the finance ministry detailing the difference between a PPP and complete privatization. Still, while PPPs may allow some necessary projects to begin, they would not solve Lebanon’s systemic financial problems.
Tardy to the party
No matter what is in the current budget proposal, it is for the year 2010, of which four months have already passed. This budget still has the constitutional process to pass, meaning it needs cabinet approval, then parliamentary approval, and at both levels it is subject to alterations. MI Associate’s Iskandar estimates that, in the best of all possible worlds, the budget might come into effect in July.
As Executive went to print, the cabinet had yet to approve the proposed budget. In parliament it will also have to face the finance committee, chaired by MP Ibrahim Kaanan, an ardent critic of Lebanon’s current taxation system and a member of the Free Patriotic Movement, rivals to Minister Hassan’s political camp.
So as Simon Neaime, professor and chairperson of the economics department at the American University of Beirut, said: “This is the best that can be done given the current circumstances, [but] overall the budget is only trying to pass time. It’s not tackling the real problems.”
