Source: Al Shorouk

During his first month in office, Egyptian President Abdel Fattah Al-Sisi issued a number of economic decisions, which had long been avoided by his predecessors for fear of their social and political implications. He thus rejected the austerity budget submitted by the cabinet and returned it instead to the Ministry of Finance so it may add more austerity measures meant to bring the budgetary deficit down to around 250 billion Egyptian pounds.

This resulted in changes on both the expenses and revenues sides. On the one hand, fuel prices were raised for the first time since 2007 as per the government’s plan to reduce energy subsidies by 41 billion pounds in the current financial year. On the other hand, Al-Sisi also issued a law amending articles and provisions of the tax code, and applying a 10 percent tax on stock market proceeds as well as a temporary 5 percent tax for the next three years on incomes that exceed one million Egyptian pounds a year. This takes place amidst news that work is underway on new fiscal legislation targeting property and value added taxes. 

Judging by the fast pace of these decisions, it seems that financial restructuring in Egypt has become a matter of urgency which can no longer be postponed.The issue at stake now is how to adopt actions and decisions – not widely popular, naturally- at the lowest political and security cost. This can only be achieved by investing early on in Al-Sisi’s popularity and by calling on all Egyptians, via a nationalist discourse, to share the cost of austerity measures meant to cut public spending and increase taxes.

The Egyptian government's current economic plan is founded on two scenarios. The first scenario seeks to reduce the deficit by cutting expenses and increasing revenues, in order to treat the long legacy of imbalances inherited from the Mubarak regime, which had relied, since the end of the 1990s, on an unprecedented expansion of domestic debt to finance its growing deficit. The economic team—at the Ministry of Finance primarily—believes that pursuing Mubarak’s policy is no longer possible, especially at a time when the public deficit and debt have reached alarming levels as a result of the economic slowdown and the declining growth rates which followed the January 2011 revolution.

The second scenario intends, on the other hand, to channel the capital inflows expected from Gulf countries, such as the UAE and Saudi Arabia in particular (which were previously used to finance the budget deficit through billions spent mainly on fuel subsidies) towards investments capable of re-launching the economy, as well as generating higher growth and employment rates.  This is in line with the government’s policy aiming to reduce public deficit and redirecting bank credits towards the private sector. This move is needed after the Egyptian government, in its attempts to finance the budget deficit, became the banking sector’s largest borrower in the past few years. The government's economic team believes that combining austerity measures and investing Gulf funds will achieve two rather conflicting goals, namely restoring growth through reforming the structural imbalances of state finances and regaining the confidence of both local and foreign investors. 

The economic team argues that in order to fix the structural imbalances of the Egyptian budget, there is a need to increase revenues and reduce spending. There is also a need to embark on a restructuring process, which should extend over the next five years. This article focuses on the revenue side. It reviews decisions already adopted as well as future plans expected to impose profit taxes on capital and property holders and expand the tax base. It is worth noting that the total contribution of privately-owned companies in state revenues, through taxes on industrial, commercial and capital gains, did not exceed 7 percent between 2008 and 2012. Needless to say, this very small percentage does not reflect the true share of these companies in the gross domestic product (GDP). Rather, it reflects broad tax evasion amongst small and medium enterprises and wide tax exemptions and government incentives amongst large companies. This situation will not be sustainable if the government has serious plans to increase revenues. The same applies to property taxes, which did not exceed an average of 2.9 percent of the total revenue of the state during the same period.  This leaves no room for doubt that major investments in real estate over the past two decades have escaped all taxation. Such investments were the result of wealth accumulation amongst the top the middle class in Egypt, which has profited from a steady growth in income since the beginning of the twenty first century.

In fact, the share of state revenues in the GDP have registered a decline since the early nineties, when the state lost the institutional, political and administrative capacity to target the sources of wealth it no longer under controlled or owned amidst a speeding economic liberalization. This led to excessive reliance on non-tax revenues from the Suez Canal as well as from oil and gas sales, for instance, and on indirect taxes. At the same time, the government was unable to increase revenues from direct taxes on income and wealth. All this eventually led to a severe chronic fiscal crisis that reached its peak in the past three years. 

It has also shaped the pattern of the relationship between the state and capital and property holding groups based on a mutual agreement to overlook what the other party was doing. The state, thus, overlooks the wealth accumulated by these capital and property owners and, in its turn, this class turns a blind eye to the deterioration of public services due to lack of funds, and accepts to rely instead on private health care and education. However, this situation is no longer viable. This is largely driven by the deep financial crisis facing the state, the urgent need to increase tax revenues with the decline of foreign aid, and the high political cost of reliance on indirect taxes that do not distinguish between taxpayers on the basis of their income. The real question now relates to the long-term political and social impact of such short-term fiscal measures. In other terms, how will the capital and property holders deal with the Egyptian’s state growing desire to impose more taxes on their wealth? And will they demand more political representation in exchange for the money they pay?

This article was originally published in Arabic by Al Shorouk.