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08.24.22

Lebanon’s discretionary spending favors public sector employees

Cynthia Saghir,
Wassim Maktabi

The compounding shocks that have hit Lebanon since the summer of 2019 have led to severe social repercussions. The financial crisis, the COVID-19 pandemic, and the Beirut port explosion collapsed the state's public finances and pushed 82% of the population into multidimensional poverty.1 The ruling class, meanwhile, eschewed arresting the crises with structural interventions, deliberately protracting socioeconomic malaise.2

These unprecedented shocks, by extension, rendered the state’s capacity to allocate public spending challenging. Luckily, Lebanon’s public accounting law authorizes the government and parliament, under exceptional circumstances, to transfer funds from the budget reserve and open additional credit lines not accounted for in yearly national budgets.3 This form of public spending, unlike financial transfers that happen systematically on the basis of the one-twelfth rule in the absence of a budget law,4 requires the approval of parliament and/or the government at every instance—making it discretionary.

To this end, this article assesses how politicians have chosen to allocate exceptional public spending since August 2019. More specifically, this article seeks to evaluate the state’s: (1) spending priorities; and (2) social protection spending. To do that, The Policy Initiative (TPI) subjected legislation published in the Lebanese Official Gazette between August 2019 and June 2022 to two coding methodologies. First, the collected financial transfers were categorized following the IMF Government Finance Statistics Manual’s “Classification of Expense by Government Function.”5 Second, the transfers that fall under the category of social protection were disaggregated under the five social protection pillars: social insurance, social assistance, social welfare, financial access to services, and economic inclusion and labor activation. 6

During this period, Lebanon’s discretionary public spending reached LBP 18.4 trillion, most of which directed towards social protection (58%) and economic affairs (37%),followed by general public services (5%) (Figure 1).

 

Since the onset of the financial crisis, discretionary spending on social protection reached LBP 10.6 trillion. Disaggregating the total amount reveals that the allocation was disproportionately concentrated in contributory social insurance (69%). The remaining amount was directed towards non-contributory forms of social protection, namely social assistance (14%), financial access to services (11%), and economic inclusion and labor activation (6%) (Figure 2).

Moreover, the breakdown of social protection spending by beneficiary group shows that the state’s spending patterns were significantly skewed towards public sector beneficiaries (Figure 3),who received almost LBP 6.5 trillion (69%) but are estimated to be around one fifth of the labor force.These benefits comprised social insurance contributions, such as end-of-service indemnities and contributions to the Cooperative of Civil Servants, army and general security cooperatives, military personnel and civil servants.

The majority of these contributions (LBP 5.5 trillion) took place between August 2021, when subsidies were effectively lifted, and April 2022, ahead of the elections season. These contributions targeted workers in public administrations and aimed to mitigate their diminished purchasing powers due to the extreme depreciation of Lebanese currency—the lira.10

Meanwhile, the remaining population received exclusively targeted services and benefits equating LBP 2.9 trillion.  These benefits took the form of social assistance (44%), mainly in cash-transfers to vulnerable households, financial access services (36%), such as the coverage of hospital and education fees, and labor activation (20%), specifically the provision of a one-time emergency grant to small and medium-sized businesses and soft loans to the industrial sector during the COVID-19 pandemic.12

As living conditions continue to deteriorate, this article echoes the need for an inclusive rights-based social protection system that is capable of withstanding shocks.13 Previous recommendations of structurally improving public finances to pave the way for the provision of tax-financed core lifecycle benefits are thus of paramount importance.14 With Lebanon entering the middle of its second consecutive year without a budget law, fragmented public spending on social protection endows the ruling political class with discretion over the selective allocation of social spending across beneficiary groups. One of the main costs of the lack of a fiscal framework is therefore a systematic skewness of social protection provisions towards a segment of the population at the expense of others. For Lebanon, this manifested in public sector workers receiving larger and wider social protection provisions.15 That is, up until the crisis eroded employees’ lira-denominated salaries. 

 

The authors would like to thank Sami Atallah and Sami Zoughaib for valuable feedback, as well as Bassel Hassan for research assistance.



[1] UN ESCWA. 2021. “Multidimensional Poverty in Lebanon (2019-2021): Painful Reality and Uncertain Prospects”

[2] Maktabi, W., Zoughaib, S., and S. Atallah. 2022. “Impoverish and Conquer: How has the Lebanese state responded to the financial crisis?” The Policy Initiative.

[3] Public Accounting Law. Decree 14969/1963.

[4] Based on the public accounting law, the government is authorized, in the absence of a budget law, to spend and collect revenues on a monthly basis based on one-twelfth of the previous budget.

[5] International Monetary Fund. Government Finance Statistics Manuals and Guide (GFSM). The manual is a macroeconomic statistical system designed to support fiscal analysis. The TPI team used the GFSM’s “Classification of Expense by Function of Government” to categorize the discretionary spending of the Lebanese government

[6] Ministry of Finance and Institut des Finance Basil Fuleihan. 2021. “Social Protection Spending in Lebanon: A deep dive into State Financing of Social Protection.”; UNICEF and ILO. November 2020. “Social Protection in Lebanon: Bridging the immediate response with long-term priorities.” International Labour Organization.

[7] Two-thirds of spending on economic affairs related to developing the Tripoli port in the aftermath of the Beirut blast.

[8] Ministry of Finance and Institut des Finance Basil Fuleihan. 2021. “Social Protection Spending in Lebanon: A deep dive into State Financing of Social Protection.”

[9] Central Administration of Statistics (CAS), & ILO. 2019. "Labour Force and Household Living Conditions Survey (LFHLCS) in Lebanon 2018–2019."; Statista. 2021. “Public Sector – Lebanon.”

[10] Al Akhbar. February 2022. “عون يُوقّع مرسوم إعطاء مساعدة اجتماعية للقطاع العام.”

[11] Only the regressive subsidies to the notoriously mismanaged Électricité du Liban had a universal benefit to the population.

[12] The Lebanese parliament approved a stimulus package worth LBP 1.2 trillion in June 2020 during the COVID-19 pandemic. The package was split equally between cash transfers to vulnerable households and financial support to private sector businesses.

[13] Maktabi, W., S. Zoughaib, and R. Eghnatios. 2022. “Intentions are not enough: Lebanon must adopt the National Social Protection Strategy.” The Policy Initiative.

[14] UNICEF and International Labour Organization. 2022. “National Social Protection Strategy.”

 

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