Egyptian State Revenues are Overestimated

Egypt may not be able to raise enough proceeds to cover its needs as the state budget for fiscal year 2012/2013 is estimated assuming high economic growth. The budget was approved by the country's military rulers 1 July, without any prior consultations, as parliament was dissolved before discussing the draft prepared by the Kamal El-Ganzouri government. According to this budget, growth is estimated between four and 4.5 per cent, more than expected earlier by international institutions and investment banks.

The World Economic Outlook (WEO) report has expected in April year-on-year growth will reach only 1.6 per cent in the financial year 2012/2013 and will rise to four per cent the following year according to the forecasts of 11 economists. Growth plunged from a robust 5.1 per cent in the fiscal year 2009–10 to 1.8 per cent last year. “Estimated public revenues rely on optimistic expectations that the economy will recover. Estimations of international organisations and others [on growth] do not reach three per cent in the best case."

“Stability started to be restored and things seem better, but not to that extent,” Samir Radwan, former finance minister, told Ahram Online, adding that the government should have rather made more careful estimations. Overestimation of economic growth and public revenue make budget deficit forecasts unrealistic. The government expects a LE135 billion budget deficit standing at only 7.6 per cent of the GDP. A very ambitious goal compared to 9.8 per cent in 2010/2011.

“It is too ambitious to reduce the deficit in current conditions to levels less than before the revolution. Not only revenues are overestimated, which could make the deficit grow, but overestimations of the growth rate make the expected GDP also unrealistic, which means the budget deficit as a percentage of GDP will most probably be bigger than expected,” says Khaled Zakaria, visiting scholar at the Robert Wagner School of Public Service, New York University. The recently approved budget relies on these high expectations of recovery. Accordingly, public revenues are estimated to swell by 12.6 per cent compared to last year, to reach LE393.5 billion ($65.5 billion).

Taxes, the main source of sovereign revenues, are estimated to rise to LE266.9 billion from LE232 billion in 2011/2012. “I am not sure that achieving this target is possible,” points out Abdel-Fatah Al-Guebali, a budget expert. Income tax is expected to constitute almost a third of all state revenues and to grow from LE110 billion in 2011/12 to LE121.6 billion this year. Part of this awaited boom might have roots on the ground, but not all of it. A positive example is revenue from income tax on wage earners.

This item is estimated to feed the treasury with LE20.8 billion, up LE3.5 billion from last year. A justified figure given that wage earners are the only committed taxpayers in Egypt as their taxes are directly cut by the employer and transferred to the Tax Income Authority. Last year, tax collections from the mentioned item grew by LE4 billion to bring to the treasury some LE17.4 billion, according to the latest estimations.

Income tax on corporate activity, on the other hand, is considered exaggerated by many experts. It is expected to increase by LE6 billion, bringing to the treasury a sum of LE 89.7 billion. Income tax on corporations other than the Suez Canal and petroleum public companies are supposed to jump by more than LE9 billion to reach LE29.8 billion while they decreased last year by 25 per cent compared to the previous year (2010/2011).

In addition, to be able to collect this meagre sum last year, the Income Tax Authority was mobilised to collect tax arrears through reconciliation settlements and legal disputes to increase revenues. Official estimations of the arrears in 2011 was as high as LE100 billion. “Last year was exceptional, it is something that happened for one time. Next year’s estimations should not be built on those figures, they are exceptional results,” comments Zakaria.

Tax returns on oil companies are, on the other hand, expected to decrease by some LE5 billion to stand at LE45.8 billion due to the forecasted drop in oil prices. However, if prices are to remain at 2010/2011 lows, this downsized target might even be not achieved, for they only brought some LE34.3 billion that year. Another important source of fiscal revenue is sales tax, expected to increase by LE15 billion to reach LE100 billion, another figure offered without explanation.

Some experts believe the government might have in mind to replace the sales tax by a value added tax (VAT), but no official declaration was made about this, and it was not mentioned in budget documents. “The important question is will the new government be willing to implement the value added tax or not? Budget estimations in several areas are based on procedures that should be taken by a government who had no say on the budget. A state budget is not only some figures; it should reflect politics and should be elaborated according to a vision,” argues Khaled Zakaria. “The tax structure is very unbalanced and cannot be reformed in one day. We need to define well taxpayers and reach more efficient tax collection,” says Al-Guebali.

Radwan and Zakaria agree. “The tax structure in Egypt reflects the weakness and inefficiency of the fiscal administration. In fact, it depends on indirect taxation, like sales tax or customs, reflecting a problem in tax collection,” elaborates Zakaria. Indeed, income tax on industrial and commercial activities is expected to reach a humble sum of LE8.5 billion while the whole income tax on private professions is expected to generate the meagre sum of LE580 million.

Fiscal revenues make up for 67 per cent of revenues. In order to increase this ratio, many deep fiscal reforms are required. Last year, Radwan, while in office, pleaded for taxation on profits in the stock exchange as well as on acquisitions, but the idea was rejected by business lobbies and was not sustained by the military.

In fact, acquisitions by companies that can generate enormous profits are not taxed at all in Egypt, while an employee who earns LE500 per month, less than the minimum wage, is taxed. The state collects as well no taxes from profits generated from the resale of assets. Abdel-Fatah El-Gebali and Samir Radwan believe the immediate application of a property tax would be positive, especially that it concerns only owners of houses of high value. They both underline also the importance of a more efficient tax collection system regarding business and private professions.