In what has been labelled an ambitious document, the ministry laid out its plans to increase government revenues by 9% to $5.6bn and to tighten expenditures by 3% to $7.6bn in the coming year. The result would be a total budget deficit of 27.1% of expenditure, or $2.1bn, down from 35.2% in the 2007 budget.

The increased revenues would be stimulated by a rise in the rate of value added tax (VAT) from its current level of 10% to 12% as well as an increase in taxes on interest rate deposits from 5% to 7%. These are expected to come into effect at the beginning of the year and were outlined as part of the five-year reform programme submitted to donor states at the Paris III conference this past January.

A further rise in VAT to 15% is planned for 2010 with the aim of generating at least 2% of GDP in additional revenue. Since its introduction in 2002, the tax has proved to be a major source of government revenue. In 2005, it generated 5.1% of GDP for the state.

The government estimates that the increased tax on interest income will generate about 0.5% of GDP in revenue, calculated on the basis of what it considers a realistic estimate of a deposit growth rate of 10% over the medium term. It also estimated this based on a 72% dollarisation rate of deposits (the percentage of deposits in dollars compared to the Lebanese lira) and relatively stable interest rates over the medium term.

With the auction of the two state-owned mobile networks to private bidders planned to take place in early 2008, the draft budget anticipates revenues from the mobile sector to drop by 29%. Although the sale will deprive the budget of a major source of revenue, the anticipated billions of dollars that will be made from the auction will give the government a boost in meeting its aim of reducing the size of the public debt. A recent Credit Suisse report estimated the licences could fetch above $3bn each.

Strong measures to trim expenditure and boost revenues are essential if the government is to able to achieve its aim of moving the primary fiscal balance (the budget total excluding debt servicing payments) from its 2006 deficit of nearly 1% of GDP to its planned surplus of 8% of GDP by 2010. Last year's deficit bucked a trend of primary balance surpluses since 2000. The 2008 budget law estimates returning to a primary surplus of approximately $1bn.

The cost of servicing the debt represents a huge drain on resources, constituting more than 45% of expenditures. Total public debt stood at $40.6bn, which was about 180% of GDP, at the end of September this year. In this year's budget, the cost of debt servicing is anticipated to be trimmed by 5% to $3.1bn, made possible through the help of international financing received from donors at the Paris III conference.

Another significant drain on resources is the state-owned power company Electricité du Liban (EDL). Last year, 20% of fiscal revenues, which were 3.5% of GDP, were paid out as government transfers to EDL, described by the government as "a real haemorrhage on public finances" and suffering "major governance problems". Total payments to the power sector, including the cost of servicing incurred debt, are equal to more than a quarter of the country's total public debt. In the 2008 budget, the government aims to bring down the cost of transfers to EDL to $666m to represent 13% of expenditures.

Based on its budget estimates, the ministry of finance predicts GDP growth of 4% in 2008, to be followed by 5.5% in 2009 and 5% in 2010. These figures are higher than those recently suggested by international observers. Earlier this year Citigroup forecast 2.9% GDP growth in 2008, while an Economic Intelligence Report (EIU) on Lebanon released last month predicted real GDP growth of 1.2% in 2008, rising to a possible 2.3% in 2009.

With Lebanon still feeling the heat from political wrangling over selecting a new president, due to take place later this month, a question mark remains over whether a future government will be conducive to the reforms and fiscal measures set out by the current government.

"The political situation will remain volatile, owing to continued clashes between pro- and anti-Syrian forces within the country. These will be fuelled by long-standing grievances between the various sectarian groups over the distribution of access to political influence and economic resources," said the EIU report, stressing that the government's reform plan could suffer the consequences of ongoing political tensions.

Source: Oxford Business Group