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Lebanon’s Rigged Budget

Sami Atallah,
Sami Zoughaib

The Lebanese Parliament passed the 2022 budget last week, nine months into the year. Not only was it passed well after a constitutional deadline, but the budget also lacks a macroeconomic framework and was not accompanied by financial statements from 2021. In the absence of these – an outlook and a past record – figures in the budget are devoid of meaning, rendering the exercise of formulating and passing a budget effectively worthless. 

The 2022 budget is flawed in numerous ways. Early draft budgets sent by the government for approval were incomplete. When a “complete” draft was finally forwarded to the Parliament, many figures were missing, forcing the postponement of multiple legislative sessions. The budget contains multiple exchange rates to collect taxes, an illegal act, particularly as it implicitly imposes the tax burden on different taxpayers as it sees fit. Compounding this, taxes are effectively calculated in foreign currency at an exchange rate that is determined on a monthly basis by the minister of finance and the Central Bank governor, which robs the Parliament of its prerogative to levy taxes. The budget allocates 17% of expenditures as a contingency, signaling poor allocation of resources, especially given that it only covers the remaining three months of the year. Some revenue items from the Ministries of Public Works and Telecommunications are not even recorded. Finally, but not exhaustively, the Minister of Energy and Water did not know that LL5 billion was allocated to the ministry he oversees. 

Such malpractice is symptomatic of a deeper problem regarding the role and responsibilities of state institutions tasked with preparing, approving, implementing, and evaluating the budget. Ultimately, the budget is not an accounting tool. It is a political document that spells out government priorities and the means to finance them. Hence, any budget should be drafted and approved as part of a process in which key actors – including the Ministry of Finance, line ministries, the Council of Ministers, the Finance and the Budget Parliamentary Committee, the Parliament, and oversight agencies – interact and make decisions according to specified rules and regulations.

Political leaders have worked to hijack this process for many years, whereby they subvert institutions and impose their hegemony over state resources. To this end, politicians used three strategies. First, armed with the Taef Agreement, which redistributed executive power from the president to the Council of Ministers (where all confessional leaders have reserved their seats), political leaders allocate state resources and rents to themselves and their cronies. Second, while sectarian politics is often blamed for the allotment of state resources, the redistribution engineered by political leaders goes beyond their confession and serves their business partners as well as economic elites, largely at the expense of the poorer segments of the population. Third, to ensure that the above strategies work effectively, political leaders undermine all state institutions that could hold them accountable. Let’s unpack these.

Confessional cronyism  

Confessional politics, entailing the distribution of resources among sectarian leaders, takes many forms. First, looking at budget expenditures over the last 30 years, public sector employees consistently absorbed 30% of spending. This is the outcome of ruling parties primarily staffing the bureaucracy with their supporters. In addition to providing jobs in return for loyalty, senior public sector employees are expected to provide or siphon public resources for Zaims' constituencies when needed. A second form of distribution is carried out through extrabudgetary funds that are controlled by political leaders. This is particularly the case regarding the Fund for the South, Fund for the Displaced, and Council for Development and Reconstruction, under which resources are allocated at the discretion of a confessional leader who captures the institution and distributes hefty contracts to their cronies. Public investments are therefore contingent on sectarian allotment to ensure “equity”, completely disregarding developmental needs or priorities. The third channel of confessional distribution comprises NGOs that benefit from state funding through the Ministry of Social Affairs. These NGOs are chosen on a confessional basis and provide services along the same lines. 

A broken tax system

While inefficient confessional distribution is illustrative of an eroding and sometimes non-existent budgetary process, they do not paint a full picture. Taking a closer look at the 2022 budget’s components, we see that fiscal policies were designed to consolidate economic benefits in certain sectors and among the country’s wealthiest strata. Consider that 50% of revenues are gathered using regressive indirect taxes – for example VAT – to which poorer taxpayers contribute disproportionately more than wealthier ones. Other kinds of progressive taxation, such as taxes on income, profits, and capital gains are secondary streams, while a tax on wealth continues to be rejected by the political elite, including in the latest parliamentary session. 

In addition to the regressive tax system, poor collection efforts and lack of enforcement allow for about $5 billion in tax evasion on a yearly basis. This leaky system benefits those with enough connections to evade tax payments. Evasion was legalized through arbitrary exemptions that were given to certain corporations or sectors without an economic justification. The number of tax deferrals issued by the government and Parliament on a yearly basis is exemplary of the erosion of the revenue collection system. In fact, deferrals increased significantly with time, reaching a peak of 34 in 2021. 

Successive governments chose to borrow money rather than impose progressive taxes to finance their irresponsible spending. Consequently, governments issued credit at unjustifiably high rates by offering bondholders – particularly banks and wealthy individuals – egregious returns, leading to an extreme concentration of wealth through socially regressive distribution. Interest payments on debt, which totaled about US$86 billion from 1992 to 2019, mostly benefited the resident and non-resident capitalist class within the country’s financial system. The government even exempted Eurobond holders from taxes on interest they made. On the social front, the country’s largest social expenditure was on subsidies, namely on electricity prices through subsidizing fuel prices. Beyond bringing the electricity sector to its demise, these subsidies disproportionately benefited larger consumers as well as fuel importers, and had very few positive effects on people’s welfare. 

Gutting oversight mechanisms and responsibilities

Policies that favor the country’s confessional and economic elite are complimented and aided by policies that prevent accountability in managing state resources. The feebleness of the budgetary accountability process is most strikingly exemplified by the fact that the Parliament failed to pass a budget for 12 years, from 2006 to 2017. In other years when the country had a budget in place, it took, on average, four months (more precisely 113 days) after the constitutional deadline to ratify it. Not only did the Parliament abandon its oversight role in the process, but it also normalized the illegal practice of not passing a budget by approving about 700 treasury advances – which allowed the government to spend from 1992 to 2015 – of which 240 were passed in 2011 and 2012 alone. In fact, the Parliament and its speaker became a de facto part of the executive branch, breaching the principle of separation of powers.

Other oversight agencies like the Court of Account, which is tasked with auditing the country’s expenses, have been purposefully weakened by undermining its financial and human capacity, unlike overstaffed line ministries. The Court of Account also lost much of its prerogatives on the budget due to extrabudgetary spending through special funds (south, displaced, and CDR), which is only subject to post-audit monitoring that is rendered impossible due to the Court of Account’s limited capacity.

The 2022 budget and the process by which it passed are but a symptom of the transgressions of Lebanon’s political elite, who have eviscerated the institutional budgetary process. This enfeebled system of elite preservation cannot produce solutions to the current crisis, after all, it is this very system that sits at the core of Lebanon’s current calamity.



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