Reducing the Budget Deficit without Effective Social Safety Nets is Unfair to the Poor

Press Release

20 July 2014

The Egyptian Initiative for Personal Rights warned Sunday against the consequences of focusing on decreasing the budget deficit on the expense of ensuring social justice –a pattern that shows from the fiscal statement of the public budget of 2014-2015.

The political administration reduced the budget deficit to under 10% using controversial economic measures without taking the necessary measures to protect the poor from the inevitable resulting inflation and increase in prices.

The Egyptian Initiative for Personal Rights released a study Sunday under the title of: “The Fiscal Statement of the State’s Public Budget for the Fiscal Year 2014/2015: Austerity Measures to Counteract a Crisis at the Expense of Social Justice.” The study provides an analysis of the items of the Fiscal Statement for the year 2014/2015, and subsequent measures such as cuts in subsidy and changes in tax policies.

The study showed that the main objective of the policies and measures at the forefront of the process was to ensure that the state budget deficit does not exceed 10%. This approach reflects an absence of a broad economic vision especially that the government has failed to make the required structural changes in public expenditure to avoid further budget deficit.

The new public budget shows a decrease in the budget deficit from 288 billion EGP in the initial fiscal statement which has been proposed at the end of May, to 240 billion EGP in the fiscal statement of the state’s public budget for the year 2014/2015.

The study looked at both revenues and expenses in the state budget and the economic measures that followed to allow for the implementation of changes in the current budget compared to previous years. The study follows, in detail, the contradictions between the general principles set by the decision makers to justify actions aimed at reducing the budget deficit and the actual reality as reflected in the allocations and priorities in terms of expenditures and measures taken to increase revenue.

The study notes that the government’s amendments that allowed for saving 48 billion EGP were not balanced with matching social safety nets. A mere additional 5.7 billion EGP were added as allocation for social safety nets and only in the form of social pension transfers- an ineffective system in combating poverty especially in the light of its tremendously low allocations and its failure to reach all of its eligible recipients. Also, the amount saved, 48 billion EGP, hasn’t been redirected to cause any meaningful increase in spending on economic sectors with the highest impact on the poor such as health and education. The percentage of health spending to Gross Domestic Product (GDP) has increased in the current budget by a mere 0.2% from its levels last year. Meanwhile, the education spending remained at the same level as last year with a slight decline in spending to GDP. As such, the government remains very far from beginning to enforce the constitutionally binding percentages of public spending on healthcare and education- 3% and 6% of GNP, respectively.  

To achieve savings and a reduction in the budget deficit, several measures have been taken to broaden the income tax base aiming at a significant increase in tax collected from companies and imposing taxes on capital gains. However the overall tax structure remains with no radical reform and without a clear and fair progressive taxation policy. The principle share of tax revenue remains to be proceeds from indirect taxes imposed on goods and therefore affects the entire society rather than focusing on the rich.

While the Egyptian Initiative for Personal Rights stresses its support to steps taken towards lifting energy subsidies given to industries that use energy heavily, it expresses reservations against lifting of fuel subsidies used by the poor-especially as such measures have been taken without sufficient safeguards against the inflationary impact on the poor- and which have the biggest impact on the prices of basic commodities. Furthermore, there has been a cut in support that goes to health insurance and a slight decline in subsidizing rationed commodities, which the government justified with the application of a new system, while there should have been a greater increase in subsidies affecting basic commodities to protect the poor from inflation. The study has also noted the absence of any reference of plans to develop the public transportation sector or to make it affordable across the country in order to make up for the hike in the prices of the fuel used in private transportation.

The Egyptian Initiative for Personal Rights calls for more transparency in the process leading up to the formulation of the public budget. Economic policies and decisions are being made without any social dialogue and in the absence of any channel that would allow for the voices and visions of the poor to be taken into account regarding the effectiveness of public spending- a basic citizenship right that is made harder to attain in the absence of an elected parliament. Unlike the poor’s lack of access to communications’ channels with the government, the rich and the powerful had been given the chance of negotiating with the political leadership in regards to its decision to impose additional taxes on wealthier members of the society.

As a result, the privileged segments of society managed to reduce some of the prospective taxes expected to affect them alone and succeeded in acquiring significant tax exemptions. This is in addition to the obvious reluctance to enforcing the Maximum Wage law in some government sectors.

To read the study: Click here