Despite a £E2bn ($37.5m) increase in Egypt’s budget deficit, Cairo says it is still on target to maintain an overall budget deficit of 6.9 per cent of gross domestic product (GDP) for the second year running.

However, a previous plan to cut the budget deficit figure, as a proportion of GDP, appears to have been abandoned.

Compared with the draft budget submitted to parliament in April, Egypt’s new budget, which came into effect on 1 July, includes an additional £E3bn in spending and £E1bn in revenue.

“Under the constitution, parliament has the right to increase spending against additional revenues,” says Hany Kadry Dimian, deputy finance minister and also head of the macro and fiscal unit at the ministry.

While the deficit is £E2bn higher than in the budget proposed in April, Dimian says it meets the state’s target of 6.9 per cent of GDP.

In April, Cairo said it intended to cut the deficit as a proportion of GDP by 1 percentage point a year (MEED 13:4:07). However, Dimian says the deficit is unlikely to fall by more than 0.3 per cent over the next year.

Total expenditure for fiscal year 2008/09 has been set at £E343.9bn, with revenues of £E276.8bn, bringing the deficit
to £E67.1bn. “There is some improvement in the deficit-to-GDP ratio,” says Dimian. “We are expecting 6.9 per cent this year and 6.6 per cent next year.”

Of the extra £E3bn in spending, approximately £E1.8bn will be invested in key infrastructure projects, including an additional £E450m for the health sector and £E250m for roads.

Parliament has also agreed to an extra £E857m for the education sector and £E250m for youth activities. A further £E430m has been included to cover pay increases for teachers and administrative staff in schools.

The extra £E1bn in revenues will come primarily from bilateral grants. The government expects a further boost to its revenues from a series of planned reforms to the tax system.

“The budget does not include the fiscal impact of additional revenue generated from revising taxes, such as reforms to the sales tax, which will produce large sustainable revenue windfalls,” says Dimian.

One area of reform is to the country’s value added tax (VAT) system, which is currently charged at 10 per cent on most goods and services. The range of items affected by VAT is likely to be widened.

A draft tax law will be submitted to parliament early in its next session, which begins after the summer recess.

“We have various VAT rates so we will tend to streamline rates,” says Dimian. “We will probably have one main rate of VAT and will keep basic food items exempt.

“The more important reform comes with the widening of the tax base and improving its revenue buoyancy.

“The law will deal with the services sector, which is not well captured in the tax system.”

Egypt's budget deficit

• £E343.9bn - Total expenditure for the fiscal year 2008/09

• £E276.8bn - Revenues for 2008/09

• £E67.1bn - Total deficit under budget that came into effect on 1 July

Source: Egyptian Finance Ministry