Lebanon’s Prime Minister Najib Mikati appears to be all out of options. Between thousands of public sector workers on strike for better pay and economists that warn of the dangers of a new wage scale, the billionaire Lebanese prime minister once again finds himself walking a fine line.

On the one hand, public servants are fed up with low wages and endless promises of better pay. Exacerbating the situation, last year’s minimum wage increase for the private sector coincided with increased inflation that drove prices higher for everyone. According to the Central Administration of Statistics, the consumer price index increased 10.1 percent in 2012, compared to 3.1 and 4.6 percent in 2011 and 2010, respectively. This means our wallets don’t buy as much as they used to.

But the public sector employees, teachers most prominently, have been asking for better pay since long before the recent bout of inflation. Their complaints have their roots in the spiraling costs of the 1990s and successive governments have only made half-hearted and insufficient attempts to improve their lot. Mikati promises that he still backs the raise but says that until there is a viable economic proposal for how it can be paid for he will not enforce it. “In the end we are responsible for maintaining financial stability and we cannot risk [making] any impromptu or hasty decisions that would hit the economy,” he said in November.

A glance at Lebanon’s balance sheet suggests that making the finances work will be a difficult chore, with the raise estimated to cost Lebanon’s treasury at least $1 billion annually — on top of the fiscal issues the country faces already.

The country has had budget deficits for years and will to continue to do so until at least 2016, according to the International Monetary Fund. Meanwhile the debt remains high – at $54 billion in 2011, representing a debt to gross domestic product ratio of around 140 percent. Simply put, there is little money to pay teachers, soldiers and their fellow public employees without raising new revenue or cutting other expenses. But what are the potential ways for doing so?

The proposals

Mikati has partially proposed a new funding model to pay for the raise. While he has been vague about some of the details — saying they need to be the result of further discussion — he has suggested a number of measures including taxing tall buildings. Under the scheme developers of skyscrapers would be permitted to build higher than they currently can, but would have to pay extra taxes on each additional story. The prime minister has suggested the plan could generate up to half a billion dollars per year — half the amount needed for the minimum wage increase.

Both the labor unions and the Economic Committees — the largest umbrella association of private sector committees — are skeptical whether the policy can work. Charles Arbid, who is involved in the Economic Committees as president of the Lebanese Franchise Association, notes that Mikati’s $500 million figure may significantly overestimate the actual amount of revenue generated.

Meanwhile former Labor Minister Charbel Nahas, who has been working with the union movements to draft an alternative proposal, accuses Mikati of pretending the money can be found “by magic.” “If we can make one billion from one floor, why not make 40 billion from 40 floors? We can pay off the debt in one day,” he remarks dryly.

The unions propose changes to the Lebanese tax system to pay for the bill. Nahas explains that there are two main policies – introducing taxes on capital gains, and increasing interest income tax on bank deposits. With regard to capital gains tax – which in Lebanon is currently non-existent — the unions call for it to be introduced at 25 percent, while on bank deposits they are suggesting increasing interest income tax from 5 percent to 15 percent, putting it in line with corporate tax in Lebanon. Nahas estimates that these increases could pay for the wage hike.

 ‘Very optimistic scenarios’

But it may be that both the unions and Mikati are overestimating the strength of their claims. Elie Yachoui, dean of the School of Business Administration and Economics at Lebanon’s Notre Dame University, thinks neither plan would come near to generating the revenues estimated.

He suggests that even a combination of the ‘Mikati floor’ plan and the unions’ tax increases could only bring in $800 million to $1 billion per year. And that, he added, was “a very optimistic scenario.”

He believes that the plan proposed by the unions could also have significant negative side effects on the economy. “The capital gains tax could be a very good tax” in the long term, but “any tax increase will be harmful to the economy in the short term,” he says.

Instead Yachoui suggests that Lebanon could use some of its gold deposits — the country has the second largest amount of gold per capita in the world — as a short-term way to pay for the raise.

The Economic Committees, for their part, have not proposed any substantive proposals as yet. While they have tentatively agreed that a pay raise should go ahead, their members such as Arbid oppose any new taxes to pay for it. Instead, he says the Committees are in favor of a “national economic dialogue” to examine proposed revenue sources.

Yet the government has allegedly been in dialogue over this issue for over a year, with little progress achieved. With the unions still on strike, there is little time to assess other options — or even fully study the plans that have been presented. With little patience on either side and public sector employees increasingly desperate, the chances of a negotiated settlement are currently few.