Throughout June, the Egyptian cabinet and parliament debated a budget for the 2017–18 fiscal year, which began on July 1. The budget has been referred to in Egypt as the “IMF budget” due to the number of restrictions in an austerity program imposed by the International Monetary Fund. The IMF—which approved a $12 billion package of loans in November 2016, in exchange for a number of reforms—aims to reduce Egypt’s public spending from around 30 percent of its gross domestic product to below 23 percent by 2021, with one-sixth of those cuts coming from the public payroll. In the final budget, approved by Egypt’s House of Representatives on July 4, the wages of government workers rose nominally, from nearly 229 billion Egyptian pounds (LE) to LE 239.5 billion—but this 4.7 percent increase was dwarfed by inflation of over 30 percent. What are the effects of this real reduction in government wages? Should the government make cutting this portion of public expenditures a priority?

As the IMF noted in its statements on the arrangement, the government’s total wage bill had already peaked as a share of GDP in the 2013–14 fiscal year. That year, expenditures on government salaries were 8.5 percent of GDP; the IMF program calls for reductions to 5.5 percent by 2020–2021.  As the IMF put it:
This projected path is expected to materialize from several sources: a) the new budget law eliminates indexation of bonuses and allowances of public employees and defines them in nominal terms as opposed to percentage of the base salary before; b) the current practice of scrutinizing new hiring and not automatically filling vacant positions; c) the new civil service law, passed by Parliament in August, will modernize the entire public employment framework.

Proponents of less government and a larger role for the private sector will hail this measure as a much-needed reform, but these cuts—a good chunk of which goes to middle-class and lower-middle-class civil servants who mostly spend their incomes immediately in the local market—could have serious repercussions on growth, employment rates, and even on the size of a shrinking and struggling middle class.

The argument for cutting the wage bill usually goes something like: “We have a wage bill that swallows a third of government revenues, yet we still have a dysfunctional bureaucracy. The bureaucracy is inflated and needs to be cut down.” It is true that Egypt spends 30 percent of governmental revenues on public wages, and one could argue that this is a large figure despite governments like Iceland spending 29 percent and Cyprus and Morocco spending 41 percent of their revenues on public wages, according to World Bank figures (see Table 1). Even if the Egypt figures might be large, they are certainly not exceptionally large. However, a high ratio of public wages to revenues does not tell us the whole story, and a high ratio could be either the result of a large inflated wage bill or low government revenues. In the case of Egypt, it is the latter.  Egypt is the fourth-highest out of 15 select countries listed in the table below when it comes to wages as share of revenues, but more in the middle of the pack in terms of wages as a percentage of GDP. This suggests that the distortion might be in Egypt’s low revenue-to-GDP ratio rather than in its high wage-to-revenue ratio.

Albania, Algeria, Jamaica, Ireland, and Turkey all match Egypt in spending 7 percent of GDP on governmental wages, but they spend 28, 19, 23, 23, and 23 percent of revenues (respectively) on wages, compared to Egypt’s 30 percent. Even some countries with higher levels of wages than Egypt as a percentage of GDP still enjoy a small wage bill relative to government revenues. Public wages in France, for example, is 10 percent of GDP but only 23 percent of government revenue. Iceland also has a wage bill of 9 percent of GDP and 29 percent of government revenue, and Israel’s shares are 10 percent and 26 percent.

Why, then, are Egypt’s numbers outliers in both directions—lower as a share of GDP, and higher as a share of revenue? This is mostly due to the fact that Egypt only collects 12.2 percent of its GDP in taxes, which is very low in comparison to international averages. With low government revenues, even an average wage bill would appear as large relative to that low revenue. Egypt’s government revenues is are too low even by IMF standards, and indeed increasing the government revenues is part of the IMF program’s answer to the issue of the budget deficit.

Without solving the revenue problem, cutting public wages is unnecessary and even harmful due to serious economic and social repercussions. First, civil servants in Egypt constitute a large portion of the lower- middle and middle class. Cutting out 3 percent of GDP that usually readily translate to effective demand will undoubtedly have a noticeable impact on GDP growth, as civil servants are a socioeconomic group that immediately spends their income on consumer products, driving domestic demand and therefore growth. Their spending patterns also rely more on homegrown and manufactured products, and rarely go on holidays abroad, which means that their spending patterns have a positive impact on the large trade deficit. Reducing civil servants’ pay would increase the pressure on a middle class that is already struggling, thus weakening economic and political stability.

Second, boosting high youth and women employment is one of the goals of the IMF program. However, half of the female workforce is employed by the public sector, which is much more egalitarian when it comes to gender than the private sector, and curtailing public employment is already having a negative impact on the employment of educated women. Cutting the wage bill will therefore disproportionately affect women, leaving them even more vulnerable to unemployment, informal and unprotected employment, and a discriminatory private sector.

Finally, with extreme austerity measures that can only be expected to lead to even more economic slowdown, it is difficult to see how the private sector might be able to grow to absorb the excess labor left behind by cutting the wages bill. Accordingly, the path to avoiding a Greek-style austerity scenario is for the government to concentrate its efforts on becoming better at collecting taxes in a just and fair manner, and thereby increase their revenues and reduce the relative wage bill without the negative economic and social consequences. There are some serious revisions even from within the neoliberal camp about the harm caused by austerity measures especially on growth and equality, and Greece is still a very fresh example of that. However, the program set out for Egypt seems determined to repeat these mistakes, while expecting different results.

This article has been published via timep.org in 5th July 2017

Table 1