BELIEF, أزمة الدين, العجز المالي, الملخص الاقتصادي

Lebanon’s Fiscal Tightrope: Public Sector Wage Hikes Add Fuel to the Fire

12:41 | 31 آذار 2024LIMS output
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public sector

On February 28, 2024, the Council of Ministers made a significant move, increasing public sector wages retroactively from December 1, 2023. This new wage package marks a substantial jump, with retirees and security forces seeing their salaries tripled, while active members of public administrations experience a twofold increase. Combined with previous raises, public employees now receive a total of nine times their initial salaries.

The recent salary increase, approved without secured funding, exacerbates concerns about fiscal sustainability. LIMS had previously questioned the budget’s equilibrium before the raise, and now with the additional expenditure, fears about a widening fiscal deficit loom large. The potential payment of these raises in US dollars rather than Lebanese pound could strain the central bank’s foreign exchange reserves, deepening the ongoing banking crisis. LIMS urges the central bank to resist such pressures and proposes expenditure cuts and tackling the black economy as more prudent alternatives to current measures.

Just a month earlier, Lebanon’s parliament celebrated the adoption of a balanced budget. However, LIMS, in a recent policy brief, has cast skepticism on the projected income and expenses of the adopted budget, even before the latest wage increase. First, the budget is expected to be challenged constitutionally and certain taxes repealed. Furthermore, Lebanon already positioned unfavorably on the Laffer curve, anticipated tax hikes may not yield the expected revenue. This could shrink the tax base further by forcing businesses to close or relocate and would definitely spur increased tax evasion and smuggling.

On the spending side, the brief stressed on the government’s reluctance to undertake substantial reforms in the public sector, including restructuring and dismantling dormant administrations like Alissar, the displaced fund, the ministry of displaced, and consumer markets, among others, raises concerns. The allocation of one million dollars in the 2024 budget for these entities, without visible contributions, adds to the criticism. Moreover, the persistence of phantom jobs within the government inflates public spending without corresponding productivity.

LIMS contends that the promised budget balance is unrealistic given the exaggerated income projections and inefficient expenditure. Instead, fostering economic growth is a more sustainable approach than burdening a shrinking economy with tax hikes. Growth can be stimulated through dismantling government monopolies and introducing competition in critical sectors for economic recovery, especially in areas where government management has been lacking, such as telecommunications, electricity, aviation, tobacco, Casino du Liban, and the transportation sector.

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