Amended tax laws and postponed implementation: The Worst is yet to Come
In the midst of the crisis sparked by the first constitutional declaration issued on 22 November, President Mohamed Morsy issued several presidential laws by decree with economic consequences. The first, Law 100/2012, increased the price of Mazut supplied to electrical plants from LE1,000 to LE2,300 per ton. This is consistent with previous decrees raising electricity prices as an indivisible part of reducing energy subsidies. Prior to this, the President issued a presidential decree liberalizing the price of 95 octane gasoline and another decree mandating that, starting in January, propane canisters be distributed to those with supply cards for LE8 while raising the market price of the canisters to LE30, to save the state a few billion pounds and further reduce fuel subsidies.
These measures were supplemented by Laws by Decree 101, 102, 103 and 104 of 2012, which amended laws on income taxes, sales taxes, property taxes and stamp duties respectively. The goal of these decrees was to introduce new income tax brackets. Most significantly, it created a single bracket for those with annual incomes ranging from LE45,000 to LE1 million, a sign of the perpetuation of the neoclassical tax policy in place since the era of Youssef Boutros Ghali, Mubarak’s Minister of Finance, which is focused on reducing the number of tax brackets and imposing a similar tax rate on all of them. This is not a progressive tax system, which raises the tax rate with annual income increases.
The latest decrees also increased sales taxes on some goods and services. Contrary to government media reports, these hikes are not limited to luxury and harmful goods such as cigarettes and alcoholic beverages, but extend to foodstuffs such as cooking oils of various kinds as well as fertilizer, livestock fodder, hydraulic cement, detergents and agricultural pesticides, all of which were subject to tax increases of 5 to 25 percent. Taxes were also increased on transportation in air-conditioned trains and inter-governorate buses, as well as cell phone services. Stamp duties were raised on some bank transactions, such as loans and other forms of credit, on water, electricity and gas, on some driver licenses for trucks and on brick factories and some touristic activities. In addition, fundamental changes were introduced to the property tax law, which will go into effect with the beginning of the new fiscal year.
As soon as these decrees mandating tax increases were issued, controversy erupted and voices were heard loudly rejecting the hikes, especially since the decrees were issued in the midst of an unprecedented political crisis, the most profound since the ouster of Mubarak in February 2011. The Office of the Presidency hastily issued a statement at dawn on 10 December saying that the President had decided to postpone implementation of the laws until the government could convene a societal debate that would guarantee the public’s acceptance of these measures. What is the significance of these laws being issued at this time? And what does the postponement mean?
The decrees raising the price of energy products and increasing various taxes even as the Egyptian pound has fallen against the dollar by 10 piasters in three months—amid expectations of further devaluation in the next few weeks—is a sign of the deep financial crisis facing the Egyptian state, which is attributable to structural reasons whose roots stretch back to the late 1990s. But the last two years of violent political unrest that followed the fall of Mubarak has transformed this structural crisis into urgent, immediate crises that require rapid state intervention to address severe financial dysfunction. The pressing problems include the budget deficit, which stood at LE170 billion according to the final account for fiscal year 2011/12, the balance of payments deficit and shrinking foreign currency reserves to levels that presage the state’s inability to provide for the country’s basic import and energy needs. The deficit in the first quarter of the current fiscal year came in at LE50 billion. If we use this number to extrapolate over the three remaining quarters, the deficit is expected to reach LE200 billion, or nearly 13 percent of GDP, which is extremely high. This heralds a lack of sufficient financial resources, putting the state at risk of bankruptcy, as well as high inflation rates. It also makes it difficult for the government to meet its obligations to the IMF, which include, according to the government program submitted to the IMF, reducing the deficit to 8.5 percent of GDP by the end of fiscal year 2013/14.
For all these reasons, the government has found it necessary to take austerity measures, cutting subsidies, increasing taxes and devaluing the pound before a new parliament convenes and even before the adoption of a constitution, in order to placate the IMF and show Egypt’s commitment to the program. Hisham Qandil’s government was hoping to receive the first installment of the $4.8 billion loan in January and to reduce a deficit that the treasury is struggling to support. The IMF loan approval was postponed for a month.
The decrees now suspended, those raising energy prices that have not yet hit the citizenry and the devaluation of the pound are simply the very early repercussions of the government’s program—and President Mohamed Morsy’s program—to treat the financial crisis in Egypt by having the broadest base of the population shoulder the costs, and this by cutting subsidies without the provision of a social safety net and indirect tax hikes. This will entail severe hardship for most Egyptians, whether the “middle class” or the urban and rural poor. This cannot be separated from the decision to resort to the IMF and submit the government program for approval and the government’s commitment to the plan.
The heart of the problem is not only the injustice of these policies and their extreme incompatibility with the spirit of the January revolution and demands for social justice and human dignity, but also that these steps were taken in the midst of a violent political crisis sparked by the constitutional declaration and the decision to put a non-consensual constitution to a referendum, in a desperate attempt by the Muslim Brothers and their president to end the transitional period as they see fit to the exclusion of all others. A country witnessing such severe moves toward austerity, as is the plan after the parliamentary elections, usually relies on achieving broad political consensus for these choices and normally enjoys leaders who apply these policies with some degree of popularity and legitimacy. This is not the case with the current leadership given the sharp divisions and polarization among Egyptians and the spread of civil violence. Today, a non-consensual constitution, the product of the crisis over the constitutional declaration, will be put to a referendum to inaugurate a new political system based on division and polarization. There is no doubt that these divisions, the almost existential struggle between various political forces and the increased expectations among ordinary Egyptians for a better life after the removal of Mubarak will mean that the implementation of austerity measures will be extremely costly for the President, his group and his party when the first democratic payment comes due.
Amr Adly, PhD, Director of the Economic and Social Justice Department