The 2003 draft budget has gotten off to a running start with the early approval of the draft law for the budget by the Lebanese government, paving its way forward to the Parliament.

However, is such early ratification the important financial indicator that the government claims it is? In actual fact, the parliament will not start studying the budget before the second parliamentary session that begins on October 22, 2002, and has until the end of January 2003 to approve it.

Budget Allocations

Hariri’s budget for 2003 envisages a slow-down in expenditure growth, with LL 8,520 billion ($5.6 billion) in expenditures and LL 6,400 billion ($4.2 billion) in revenues, resulting in a deficit of 24.8%. This is in comparison to the budgeted figures for 2002, which reached expenditures of LL 9,375 billion ($6.2 billion) and revenues of LL 5,500 billion ($3.6 billion), equivalent to a deficit of 41%.

The projected decrease in the budget deficit is the result of an LL 855 billion ($567 million) reduction in expenditures (equivalent to 9.1%) and an increase of LL 900 billion ($597 million) in revenues (equivalent to 16.3%). The bulk of budget expenditures has been allocated to the debt service, allowances, wages, retirees’ salaries and end-of service indemnities, as well as consumer materials and services, and contributions to public institutions. These make up 91% of budget expenditures, while the remaining 9% represents government contributions to reconstruction projects. (See Graph 1 for total budget expenditure allocation).

Expenditure reduction and revenue growth: A familiar problem


Expenditures

The reduction in expenditures originates from a decrease in the debt service and a reduction in the expenses of some ministries and administrations (See Table 1 for main expenditures by ministry). The debt service for the year 2003 is estimated at LL 4,000 billion ($2.65 billion), shrinking by LL 500 billion, or $332 million, from the previous year.

Such a reduction would appear difficult, if not impossible to achieve, as the national debt has risen this year to approximately LL 45,210 billion, or $30 billion. Therefore, its cost to the borrower, or the government, is going to increase to LL 4,800 billion ($3.2 billion). So, the government is in fact suggesting a reduction in the debt service of LL 800 billion ($530 million), not LL 500 billion ($332 million).

In view of the government’s declaration that the decrease in interest rates will be determined by market forces, some allude to the possibility of the government resorting to a reduction in the interest on treasury bills held by the National Social Security Fund (LL 2,400 billion or $1.6 billion) and the Lebanese Central Bank (LL 6,500 billion or $4.3 billion).

Decreasing interest paid on these funds from the current rate of 14%-16% to 7%-8% would translate into a decrease in the servicing of public debt by around LL 500 - LL 616 billion ($332 million - $408 million). Some economists say that this is the only channel open to the government to allow them to justify the figures, while others refer to the possibility of upcoming grants and loans at comparatively improved interest rates from a Paris II donor meeting.

As for cutbacks in ministerial expenditures, this will stem from the decrease in investment spending allocated for financing of reconstruction and development projects. This decrease is estimated at approximately LL 480 billion ($318 million).

Unbudgeted Obligations

• Sums owed to the National Social Security Fund, which amount to a total of LL 878 billion ($582 million), with $86 million for the year 2003, which are not included in the budget.
• An estimated LL 750 billion ($497.5 million) due to contractors and hospitals also does not appear in the budget.
• Funds for the Council of the South and the Fund for the Displaced were not allocated, on the assumption that there would be enough unspent money brought forward from previous years.
• Laws – Programs: Since 1993, consecutive governments have included laws/programs in their budgets by specifying a project for payment over several years, but not addressing it on an annual basis. Given financial conditions, the government postponed the payment of outstanding funds (or decreased the value) to the next years. The 2003 budget was no exception, as it included 23 laws/programs over various domains (roads, water, public buildings, schools, environment). The outstanding funds from the 2002 budget to be spent in 2003 amount to LL 562 billion ($373 million), but the 2003 budget decreased this amount to LL 88 billion ($58.4 million) and these are monies owed to contractors who have already started executing works.

Revenues

Revenues are estimated at LL 6,400 billion ($4.2 billion), reflecting an increase of LL 900 billion ($597 million) from the 2002 budget. This increase originates from the following sources:

• Revenues from the Value Added Tax, which increased from LL 800 billion ($530.7 million) to LL 1,100 billion ($729 million), owing to more active and improved collection, as well as the modification of a law that requires institutions generating annual business in the region of LL 300 million - LL 500 million ($199,000-$331,675), to be subject to taxation.
• Revenues from income tax due to levies on the wages of the retired and end-of-service indemnities, as well as capital gains and corporate tax revenues. In 2002, these revenues were estimated at LL 650 billion ($431 million) and will increase in 2003 by LL 275 billion or $182.4 million (42%) to reach LL 925 billion or $431.2 million.
• Property tax revenues, which are expected to increase from LL 332 billion ($220 million) in 2002 to LL 400 billion ($265 million) in 2003.
• Tax increase on employee contributions for pension funds to 8%, while the tax on members of the civil servants cooperative increased to 3% of the gross salary.
• Revenues from the settlement and rent of illegally occupied public sea-side properties, estimated at LL 75 billion ($50 million). Revenues from this article, included in previous budgets, were never collected and the law governing the settlement of public seaside properties has yet to be passed, as it is still with the ministerial committee.
• A rise in telephone revenues after an increase in monthly charges and a rate hike, both of which are expected to generate revenues between LL 250 to LL 300 billion ($166 million-$199 million).

Additional forms of revenue are listed in an attachment to the annual budget, known as Table No. 9. This schedule of fees includes motor vehicle inspection fees (mecanique), which currently range from LL 33,000 in the lower category (a 13 year-old model with a maximum of 10 horsepower) to LL 2.6 million in the upper category (a model less than two years-old with over 51 horsepower). Newly amended fees would range from LL 100,000 to LL 2.6 million according to the above categories, respectively. This constitutes a 50% increase in fees on all cars, except those in the upper category which were left untouched, and those in the lower category, which saw a 203% fee increase.

Inflated Expectations?

The government’s attempt to mend public finances by decreasing the deficit to 25% is also a way of sending signals to the World Bank and Paris II, indicating the government’s seriousness and commitment to reform. Effectively however, it is the implementation and transparency in carrying out the plan that counts.