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Campaign mounts on proposed new taxes

Lebanese Finance Minister Mohammed Safadi speaks at a press conference in Beirut, Lebanon, Tuesday, Oct. 4, 2011. (Mohammad Azakir/The Daily Star)

BEIRUT: Finance Minister Mohammad Safadi will face his first real test when he discusses the 2012 draft budget in the Cabinet amid signs that most ministers will kill the bill even before it is passed to the Parliament.

Safadi, who vowed to address the needs of Lebanese who are reeling under an economic slowdown, is aware that his proposed taxes will not gain favor among politicians and labor unions.

But the minister will probably argue that the government cannot allocate more money to improve social and medical benefits as well as build electricity and water facilities if revenues remain the same.

Safadi said earlier that he is willing to listen to the remarks of his colleagues in the Cabinet and will be open to any suggestion to raise the government’s revenues without increasing the VAT.

However, Safadi will likely ask the ministers who vehemently oppose some of the proposed taxes to suggest other types of taxes.

He will probably tell some of his critics: “If you want me to spend more money on infrastructure and improve the social and medical benefits for all the Lebanese then please help me find more funds.”

The proposed VAT tax hike has already come under sharp attack from most economists, labor unions and even some ministers.

Labor Minister Charbel Nahhas, who was credited with making major amendments to former Minister Raya al-Hasan’s 2010 draft budget, will most likely argue against raising the VAT from 10 percent to 12 percent on the grounds that it would hit the poor, raise inflation and cause prices of basic commodities to jump to alarming levels.

Some economists recommend avoiding any tax that would negatively affect the low and middle classes, especially during such a time of economic hardship in the country.

These economists have pointed out that any new tax that is levied while GDP growth is at rock bottom would exacerbate the situation and induce consumers to spend less.

Along with the General Labor Confederation and other labor unions, merchants and traders have also cautioned that a higher VAT would leave the economy in shambles and could cause a huge drop in consumption.

The taxes could also cause imports to decline as consumers start shying away from buying luxury goods such as cars, electronics and furniture.

Against this backdrop, Safadi may be compelled to go back to the drawing board and make major modification to his original 2012 draft budget.

Al-Akhbar newspaper, which is very close to the March 8 Forces in general and Hezbollah in particular, has blasted Safadi’s proposed taxes, claiming that the measures proposed by the minister will surely make more Lebanese join the poorer classes.

Hezbollah, which is considered a strong supporter of MP Michel Aoun, who totally rejects any VAT increase, will be in an awkward position since it will be compelled to take sides in this open debate over the draft budget.

Any attempt to undermine the work of Safadi will almost certainly anger Prime Minister Najib Mikati, who personally insisted on naming his long-time ally as the finance minister.

Observers believe that Hezbollah will be careful in its assessment of the draft budget in order not to antagonize its ally Aoun and at the same time not to widen the gap with Mikati and Safadi.

Safadi will also attempt to sell the idea of increasing taxes on interest rates on customer deposits to the commercial bankers, who are the biggest holders of the government’s treasury bills and Eurobonds.

Bankers have warned on many occasions that more taxes on interest rates on deposits would scare away investors and even prompt some major depositors to take their business somewhere else.

The allocations for the 2012 draft budget total LL21.063 trillion ($14 billion) compared to LL19.826 trillion in the 2011 draft budget, an increase of LL1.237 trillion or 6.24 percent.

Current expenditures stood at LL12.172 trillion in the 2012 draft budget, compared to LL10.783 trillion in 2011, an increase of 12.88 percent.

Allocations for investments in 2012 stood at LL3.078 trillion, compared to LL3.267 trillion in the 2011 edition, a drop of 5.77 percent.

Total projected revenues in the 2012 draft budget are LL14.816 trillion, compared to LL14.361 trillion for the 2011 draft budget, an increase of LL455 billion, or 3.17 percent.

As a result, the projected budget deficit at the end of 2012 will stand at LL6.247 trillion, compared to LL5.466 trillion in 2011, an increase of LL781 billion or 14.3 percent.

This means that the total budget deficit will close at 29.66 percent, compared to 27.57 percent in 2011.

According to the new figures in the 2012 draft budget, the Finance Ministry will allocate LL6.294 trillion to cover the salaries and end-of-service benefits for government employees

The ministry explained that it has increased allocation for compensation and end-of-service benefits for retired employees by LL230 billion.

The draft budget has also allocated funds to appoint the vacant posts in some ministries.

Investment projects in the new draft budget stood at LL3.079 trillion, which represents 14.62 percent of total government expenditures and 4.50 percent of GDP.

 
A version of this article appeared in the print edition of The Daily Star on October 07, 2011, on page 4.

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