Lebanon tax increase garners mixed reviews

Lebanon's parliament recently passed a law mandating a series of tax increases, ostensibly to fund a previously-approved increase in public sector salaries.

While lawmakers claim the new taxes, approved on October 9th, are necessary to finance the pay raise, economists tell Al-Mashareq their real purpose is to secure revenue for the state.

Lebanon currently has one of the world's highest debt-to-gross domestic product (GDP) ratios, reaching over 148% last year. As the government struggles to lower its fiscal deficit, it is saddled with roughly $77.3 billion in public debt.

The public sector salary increase will significantly expand fiscal expenditure, the International Monetary Fund (IMF) said in a September 13th report, cautioning that "while parliament has passed revenue measures designed to offset the fiscal impact of the salary scale increase, they are currently suspended".

Newly announced tax-rate changes include an increase in value-added tax (VAT) from 10 to 11%, an increase in the tax rate on bank interest from 5 to 7%, and an increase in the tax rate on corporate profit from 15 to 17%.

More than $1.50 was added to landline phone bills, $0.16 to pre-paid debit cards, and a 20% tax was imposed on some Lebanese and foreign lottery prizes.

A fee of $3.30 per person also was imposed on foreign national travelers entering Lebanon via land ports, as well as $100 per person fee on first-class air passengers and $266.6 on those arriving in private aircraft.

Additionally, a 15% income tax fee was imposed, as well as a tax on real estate contracts that amounts to 2% of the sale price.

Financing public sector pay

"The new taxes came in the context of financing the public sector pay and grade scale, which already has been approved by parliament," Finance Minister Ali Hassan Khalil said on October 9th, the day they were approved.

These taxes aim to reduce the budget deficit and protect Lebanon's fiscal status, he said, noting that public spending has risen from about $6.6 billion in 2005 to $16 billion this year with no increase in the tax base.

"The new taxes are not to finance the pay and grade scale," said Jad Shaaban, associate professor of economics at the American University of Beirut.

"Projections indicate that prices of products and goods will increase by between 10 and 15% as a result of these taxes," he said, adding that the higher costs will drive up the prices of services as businesses strive to absorb these increases.

Meanwhile, Prime Minister Saad Hariri had warned that the alternative to the tax increase would be a collapse of the Lebanese pound in six months.

"If we carried out the (public sector salary law) without revenues it would be a disaster for the country," he said on October 9th.

Monitoring the budget deficit

The pay increase for public sector employees will have a positive effect in terms of increasing consumption, but this will be countered by a decrease in investment because of the higher taxes, said Bank Audi chief economist and head of research Marwan Barakat.

"The expected increase in consumption means more imports for a country like Lebanon, which is classified as a major importer," he told Al-Mashareq, noting that this will increase the trade balance deficit.

Bank Audi recently conducted a study that indicated the new taxes would raise inflation by 4%, he said.

"The taxes, which also target the banking sector, will impact about $325 million of the banks’ annual profit of $2 billion," he said.

"Most of the approved taxes impact citizens and will therefore affect their purchasing power," said Violette Ghazal al-Balaa, editor-in-chief of the Arab Economic News.

The salary increase will benefit roughly 370,000 public sector employees, she told Al-Mashareq, but does not apply to private sector workers, of whom there are twice as many.

"The real purpose of the new taxes is to reduce the size of the deficit in the general budget," she said, adding that deficit reduction should be addressed in the budget law, which has yet to be approved, and not in a separate law.

"We must monitor the deficit indicator to make sure the new taxes achieved their purpose," al-Balaa said.