From economic poetry to fiscal reforms

In my previous articles, I emphasized the destructive role of uncertainty on the economy because of political instability. Uncertainty was fueled by the chronic incompetence of governments and their lack of vision, as they were busy making deals to satisfy their hunger for power and fortune at the expense of the Lebanese. I stressed the need for a comprehensive economic strategy with coherent measures relying on a specific school of thought. As an economist belonging to the New Institutional Economics school, I believe that the Lebanese economic depression is intrinsically related to the nexus political-economic interests built by the ruling system throughout the thirty years following the end of the civil war.

Thus, I have proposed a mandatory implementation of rules for fiscal and monetary policy, which would contribute to the move towards impersonal governments. Impersonal governments ensure an equal treatment of citizens regardless their political or religious affiliations, since discretionary policies for opportunistic interests are no longer possible. I gave examples on a Golden Rule government spending approach for fiscal policy and the Taylor rule or the equation of exchange for monetary policy. These rules have succeeded in decreasing public deficits, controlling inflation and unemployment and contributing to a sustained growth in a number of countries. However, political instability caused by the hegemony of the armed party Hezbollah and its allies is impeding “impersonalization”, by taking the judiciary hostage, jeopardizing the rule of law and perpetrating corruption.

Unfortunately, under such political conditions, it is impossible to initiate an economic recovery. Many of the recent proposals for urgent economic reforms, including the recent ministerial statement, were general in nature, because, in addition to the incompetence of the authors of these strategies, general poetry hides intentions for further corruption or fears from being exposed.

In what follows, I propose a series of fiscal reforms, which would have speeded economic recovery by restoring the confidence of the Lebanese in their institutions and, more importantly, the confidence of the international community in our ability to improve governance. I am convinced there is no hope for these reforms to be applied unless we revive democracy through early parliamentary elections. The comprehensive strategy that the president is calling for now is long overdue. It would have protected the Lebanese from bearing a second time the price of corruption and waste. Indeed, regardless the long-awaited decision related to the reimbursement or the restructuring of the debt, it is we who will suffer from inevitable further capital controls or tax increases to finance the costs of destroying our institutions. In truth, in order to convince lenders that we will be able to pay the debt later we need a credible strategy. If we decide to pay, we still need a credible strategy to survive.

Adopting a Golden Rule government spending approach, allowing governments to borrow only for investments while current expenditures are to be financed by tax revenues, is of course to be developed and implemented once the public deficit is under control. Thus, for an immediate budgetary relief, the following measures ought to be considered:

1-    The use of public private partnerships (PPP) for infrastructure projects, especially in the energy sector.

I developed this point in a previous article. The success of PPP is conditioned by the existence of an independent regulatory body for the administration of transparent procurement processes and the control of contracts’ execution. Political considerations for personal gains have impeded the appointment of the regulatory authority for years. This has discouraged honest investors, and all hopes to stop the financial bleeding caused by the electricity sector were lost.

It is worth noting that Lebanon’s natural resources allow the country to potentially rely solely on renewable sources, such as wind, water and sun, to generate energy. The social benefits derived from such projects include less pollution, a lower health bill, increased tourism, public revenues from the sale of energy excesses to neighboring countries or the sale of the gas and oil stocks expected to be discovered off the Lebanese coast  and other benefits.

2- Restructuring employment in the public sector

The government employment rate in Lebanon is the highest in the world. Before the last parliamentary elections in 2018, the recruitment of approximately 5000 new employees in the public sector did not conform to the employment laws. They were employed as favors to secure votes during the elections. Non-compliance with the law has to be sanctioned by lay-offs and penalties.

Besides, the proportion of public servants wages and benefits in total expenditures is the highest (36%) and was even higher since the government decision to index salaries, wages and benefits to inflation in 2018, again before the elections. Cutting back wages in the public sector is not the solution. “Two wrongs do not make a right”. The government cannot correct for a previous mistake, rather an intentional decision for securing votes, by making another costly mistake. The impact of decreasing incomes during an economic crisis is a cruel blow on the victims and on aggregate demand. Restructuring employment starts with a comprehensive survey on government employment with the objective of increasing productivity rather than cutting wages. Reshuffling the personnel such as to assign the right person to every job, stopping employment in job categories that are already saturated or recruiting the right skills wherever needed, setting clear employment rules and developing training programs will potentially enhance productivity. The necessary surveys and studies need to be developed by experienced experts on the subject. The funding of these studies by international NGOs is a possible way forward.

Perhaps the most important gain from scrutiny of public sector contracts and employee turnover is its detrimental impact on corruption and the abuse of power.

3- Cuts in inefficient expenditures and waste

A cursory look at some of the itemized expenditures listed in the budget reveals a magnificent array of regulated sources of waste: office supplies, stationery for offices, other office supplies, public relations, other public relations, advisors, inexistent boards (such as the rail board), councils, public administrations, travel expenses and other travel expenses, rewards and bonuses, marriage, childbirth and death benefits, office refurbishment, unexpected expenditures, politicians’ security convoys …..  and the list continues.

4- The evaluation of government assets and the reduction of rents

Some unprofitable assets may be converted into fresh capital for productive purposes. Also, relocating public administrations to less expensive areas reduces rents. A comprehensive survey of the public assets may justify divestitures for profitable reinvestments.

5- Combat tax evasion and trafficking

Tax evasion can be combated by:

1) security measures to stop trafficking

2) ICT or e-government

3) restructuring of the tax system since some taxes are hard to evade by nature.

On the third point, it is important to note that a good tax responds to a set of criteria:

–       Equity or fairness: A tax should respect the ability to pay. Proportionality of income taxes or exemptions in consumption taxes on necessities improves equity.

–       Efficiency: Some taxes can distort economic choices. One might for example choose to stop working when taxes on income are unrealistically high. A tax may be justified if it pays for social costs such as the costs of pollution or the increase in the health bill.

–       Revenue potential: a good tax generates revenue. Thus, the choice of a broad tax base is important.

–       Administrative costs: a good tax needs to be easy to collect such as to minimize administrative costs.

–       Ease and simplicity: a tax needs to be easy to understand because complicated calculations from multiple tax rates for example encourage tax avoidance.

6- A supply-side approach to improve exports and develop our competitive advantage

The increase of a tax on fuel punishes firms and results in stagflation. Instead, a supply-side approach calls for decreasing the costs of production of our firms and exporting firms. This can be done by providing electricity to our production plants at lower costs or at no cost, decreasing fuel taxes, reducing tariffs on imported raw materials, reducing taxes in general, easing regulations and red tape, building trade relationships …

The reduction of the costs of production and fiscal incentives would finance research and development, boost innovation and develop human capital, which is one of our most valued competitive advantage.

To conclude, although these suggested fiscal measures, which are structural by nature, are needed for restoring internal and external confidence in the ability of our economy to bounce back, their implementation faces two major obstacles. First, it does not appear that the new government is ready or knows or has the intention to embark in serious reforms. Second, it would be difficult to gather data for an in-depth assessment of the current state of public finances because of the lack of transparency and the lack of expertise, despite we were promised a government of experts. Thus, correcting for the corruption and waste entails a new start with early parliamentary elections.

Nicole Ballouz Baker

مصلحة الأساتذة الجامعيين في حزب القوات اللبنانيّة

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فريق موقع القوات اللبنانية

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