Part I- A Framework for a Budget Deficit Reduction Effort
It is now generally recognized in Lebanon that continuing to incur very
large fiscal deficits is unsustainable. Between 1994 and 1997 treasury
revenues have been equivalent to 15-18 percent of the Gross Domestic Product
(GDP). In the same four years, total government budgetary expenditures
have been about one-third of the GDP (in 1995) and are estimated to have
approximated 36 percent of the GDP in 1997. The resulting deficits, equivalent
to some 16-19 percent of the GDP, were financed by borrowing, predominantly
in the local currency, at high interest rates. With interest rates in Lebanon
several percentage points above international rates, and with a stable
(if not modestly appreciating) exchange rate of the Lebanese pound to the
US dollar, capital inflows have been attracted to Beirut. This resulted
in substantial balance of payments surpluses despite the fact that the
current account of the balance of payments recorded a considerable deficit.
The significant appreciation of the Lebanese currency and the substantial
growth in imports helped to moderate price increases in Lebanon.
Eventually, however, the cost of servicing this borrowing, on expensive terms, became too steep. It is estimated that paying the interest on the domestic debt in 1997 consumed almost all the revenues collected. The reverse fact is also true, namely that the primary balance in the budget is in much better shape when interest payments are excluded. A crucial element in the necessary fiscal adjustment is tackling the heavy burden of repaying debt.
Measures to reduce the deficit, however, are not simply technical steps designed to achieve certain numerical objectives, but also reflect a political will to carry them out. There is also the social dimension to the extent that reducing the deficit requires additional taxation and careful thought concerning areas of expenditure.
While this is inevitable in any budgetary formula, the selection process becomes more crucial when the deficit needs to be reduced drastically. The government needs to be seen as fair in apportioning the burdens and sacrifices. Clearly, however, it is beyond the scope of this report to consider the political and social dimensions of reducing the deficit. Rather the report will concentrate largely on the fiscal issues and, where relevant, will consider briefly the interaction between budgetary issues and other macro-economic variables; particularly in the external sector. Perhaps the underlying issues in this difficult situation could be best explored in the context of a framework for reducing the budget deficit.
This report does not pretend to be a blueprint for a deficit reduction policy. Rather it is intended to highlight the issues and outline the instruments involved. The answers to the issues that will be raised are, in the final analysis, judgmental. Lebanese society, as a whole, is required to arrive at a reasonable consensus on certain fundamental questions as a basis for creating an effective fiscal adjustment policy. Broadly these questions are: What level of expenditures can the country afford? What pattern and level of taxation is fair and appropriate in Lebanon? What size of public sector is proper for Lebanon? What are the trade-offs between holding assets and incurring debt?
It is hoped that this report will make a contribution to the ongoing
discussion on Lebanon's present fiscal situation.
Described below is a simple framework for a deficit reduction effort. It is not offered as a blueprint solution for Lebanon's fiscal troubles. Rather it is intended to highlight the issues, mechanisms and kinds of measures that would need to be employed in constructing a viable deficit reduction effort in Lebanon.
The objective in this illustrative exercise is to eliminate the budget deficit denominated in Lebanese pounds over the four fiscal years 1998-2001 and to limit the deficit financed by external borrowing (i.e. financing tied to specific projects) to a maximum of the equivalent of three percent of the GDP. The assumptions underlying this scenario are:
a) annual GDP growth of 12 percent in nominal terms in 1998-2001
b) revenue growth in line with the nominal expansion of the GDP
c) discretionary additional revenue measures equivalent to four percent of the GDP implemented in 1998
d) a freeze in nominal terms on total expenditures in Lebanese pounds at approximately LL7.8 trillion annually in the 1998-2001 period. This would be some LL200 billion below the estimated 1997 level.
The base year for this illustrative example is 1997 for which whole year results are estimated on the basis of data for nine months (See Table 1). Broadly, total expenditures are estimated to attain about LL8 trillion and revenues approximately LL4 trillion. With these preliminary estimates, the deficit would be equivalent to nearly 18 percent of the GDP (See Table 2). This deficit does not include foreign financed CDR (Council for Development and Reconstruction) expenditures. If these were to be included the overall deficit would probably exceed the equivalent of 20 percent of the GDP. On the basis of preliminary estimates for 1997, a 1998 hypothetical budget outline is constructed incorporating the known fiscal initiatives that are currently under discussion. Specifically, it is assumed that:
1. Revenues measures equivalent to about four percent of the GDP consisting mainly of LL5,000 increase in the price of 20 liters of gasoline, and a five percent sales tax, or its equivalent, in custom duties, are taken at the beginning of 1998, at the latest. Theoretically, these measures could be implemented over the two years 1998-1999 or even over four years. They could also be replaced by a combination of other measures. However, the effect of the measure can be diluted if spread over time.
2. Total expenditures would be limited to LL7.8 trillion, that is LL200 billion less than the estimated total actual expenditures for 1997. This assumption is based on the recommendation adopted at the July conference on the economy. A much more ambitious target would be to accomplish the reduction from the 1997 budget allocations. Such an objective, however, would appear to be unrealistic. If taken at face value, it would obscure the need for revenue measures. On the other hand, if it is to be implemented effectively, it would require very steep cuts in spending, much more than appears to be under current discussion. There is a widespread view that a significant amount of government spending is squandered. Without taking a position on this matter, practical considerations dictate that a fiscal policy cannot be established on the assumption that waste would be reduced if not eliminated. The first step should be to achieve the savings, by reducing waste, and once this becomes a fact to adjust fiscal policy accordingly.
3. Social and capital expenditures to be financed from the proposed
package of approximately $1 billion of borrowed cash would be spread over
a number of years and would be included under the LL7.8 trillion limit
for total expenditures. Under present procedures this proposed borrowing,
and the expenditures it would finance, can be presented and approved by
Parliament under legislation separate from the budget. But from an analytical
point of view (for the purpose of this exercise) these expenditures are
considered as being covered by the overall ceiling on government spending,
and the drawings on the loan as part of the of the budget deficit.
With these assumptions, revenues and expenditures are calculated almost to balance at the equivalent of 22 percent of the GDP in 2001; somewhat higher than the historical levels experienced in Lebanon in the pre-war years (under 20 percent of the GDP). On the basis of these assumptions more than three-quarters of the adjustment effort would fall on measures to reduce spending, and the balance accounted for by new methods of obtaining revenue.
Obviously, the proportions of the mix could be varied. It is believed,
however, that in Lebanon's present circumstances reducing spending would
appear to be more feasible technically, and politically as well. Technically,
because curtailing expenditure could ensure that spending limits are not
exceeded, while revenue generation is less predictable. Politically, expenditure
restraint, more than revenue augmentation, could be perceived as a passive
instrument. Finally, within the spending limit, the authorities could exercise
some flexibility in rearranging, admittedly to a limited degree, the pattern
of expenditures. In fact, when considerable savings in interest payments
is achieved, the room for non-interest expenditures would increase.
Treasury revenues would be expected to rise in line with the anticipated growth in the GDP. Some measures might be needed to ensure that this happens. If this was the only thing to occur, the ratio of revenues to GDP would remain at approximately the 18 percent level, and the deficit, in the context of the scenario, would not be eliminated. Hence the need for additional revenue measures estimated at the equivalent of four percent of the GDP.
To ensure revenue growth is balanced with the expansion in the economy, the efficiency of the tax system would have to be strengthened in order to reflect economic trends. Tax laws would need to be enforced and collection procedures improved. Duties, fees and utilities charges should be collected. Without strict enforcement, revenue collections would lag and public utilities would experience financial difficulties, translating into an additional burden on the Treasury. Wheat and petroleum prices would need to reflect international prices, and in the case of the latter commodity to secure significant income for the budget.
In addition to ensuring that receipts keep pace with growth in the economy (i.e. to grow at 12 percent annually), new revenue measures are needed to raise the revenue-to-GDP ratio. While direct taxation could be revised, the larger part of the new revenues would likely need to be raised from indirect taxes - specifically a sales tax or a value-added tax (possibly starting with the former and developing it into the latter). Most of Lebanon's neighbors in the eastern Mediterranean region have a sales tax.
The scenario assumes that such a measure would be in place in 1998 and enhanced in later years. Moreover, when and if Lebanon starts implementing an association agreement with the European Union, a further strengthening of the indirect tax already in place would need to be undertaken in order to recoup revenue losses resulting from the tariff duty reductions which is required in the partnership agreement with the EU.
This scenario does not assume any receipts accruing to the Treasury
arising from sales of assets to be used for financing general expenditures.
In Lebanon's present circumstances, serious consideration should be given
to applying the proceeds of sales of assets (including proceeds from privatization)
only for the purpose of repaying part of the debt. This is important both
psychologically and in terms of perception. Using these proceeds to finance
the fiscal gap could be perceived as a temporary measure. But when such
receipts are applied to permanently reduce the debt, then the budget secures
a lasting benefit. Of course, all this assumes the existence of a program
to reduce the deficit which is being implemented effectively.
Total expenditures in the budget in Lebanese pounds are estimated at about LL8 trillion in 1997. The objective for the four years 1998-2001 could be to place an absolute limit on these expenditures at LL7.8 trillion annually. This ceiling would be comprehensive and include all disbursements from the specialized funds (i.e. CDR, Council for the Development of the South, and The Fund for the Displaced People) and from cash borrowing abroad. The only expenditures that would not fall under the ceiling would be project expenditures financed by external loans secured on appropriate terms. These externally financed outlays would be subject to a separate ceiling not to exceed the equivalent of three percent of the GDP. Strict implementation of the ceiling on aggregate expenditures, assuming nominal annual GDP growth of 12 percent, could be expected to reduce effective government spending by the equivalent of 14 perceof the GDP to roughly 22 percent of the GDP in 2001.
While spending priorities are continuously being followed by the authorities, under a strict spending ceiling this task becomes even more important. In the context of Lebanon's fiscal arrangement, meaningful priorities of expenditure would make better sense if all government outlays (excluding project expenditures financed entirely by external loans) were examined simultaneously and relative to each other, regardless as to whether the legal formalities require it or not. In the budget itself, expenditure flexibility is virtually non- existent because budgetary outlays are dominated by given items such as wages and interest on the debt. These expenditures are obligated by law or are contractual and cannot be tampered with. Presently expenditures with a greater degree of flexibility, that is of discretion and choice, are operated essentially outside the budget.
Streamlining the budgetary process on the spending side would be enhanced by the integration of the special funds, i.e. CDR, Council for the Development of the South, and The Fund for the Displaced People, into the budget proper. The present arrangement, which compartmentalizes government expenditures into several budgets, renders it unclear as to what is causing the deficit. The perception that certain outlays are financed while others are not disappears when all spending is gathered into one account and compared with total receipts. The excess of the former over the latter is the cause of the deficit, and not any particular expenditure. Moreover, under the existing arrangements, Parliamentary review and approval of the budget is constrained and resembles more a formal procedure than a substantive shaping of fiscal policy. This is because what is formally presented to Parliament is a budget that does not include some significant discretionary expenditures. Thus on the spending side Parliament can do very little. Could it recommend not to pay salaries, wages, rents, and the interest on the debt? In fact, more likely than not Parliament ends up recommending adding allocations for some departments.
The expenditures outside the budget are approved under special legislation separate from the budget, as for example when Parliament endorses an external loan arrangement for a specific project, or an external cash borrowing. Once these arrangements are approved, then implementation becomes a matter for government decisions. These procedures have significant drawbacks. First when a loan agreement is presented to Parliament it stands on its own; it is not presented and discussed in the context of a comprehensive fiscal position nor an integrated development strategy. A more rigorous procedure would be for parliament to conduct reviews following the initial approval to contract a loan and its terms. The reviews would center on the appropriateness of plans to draw on the loan to finance expenditures in a fiscal year. The implementation of the second step could be in the context of the annual budget discussion in Parliament. Thus Parliamentary discussion would be more comprehensive than under present practice as it would provide an opportunity to review all expenditure proposals for the fiscal year and their sources of financing.
A start could be made by the government voluntarily mapping out to Parliament
and to the public at large a fully comprehensive fiscal plan. Further down
the road, consideration might be given to streamlining the budgetary process
through legal requirements that the budget should encompass all government
expenditures, revenues, and borrowing, and mandating full and prompt auditing
of all government accounts.
Interest payments on the public debt have risen sharply in recent years and in 1997 are estimated to account for nearly half of budgetary expenditures. Consequently, a crucial element in attempting to achieve viable spending policies under a ceiling would be to reduce the burden of interest payments. Every Lebanese pound not lost in repaying the interest is a freed resource available to finance other outlays. Reversing the trend in interest payments is vital for a successful reduction of the deficit; without it the budget is in danger of being overwhelmed by the swelling tide in interest payments.
There are four ways to achieve this objective, and all four instruments could be used simultaneously. First, of course, is to reduce the fiscal deficit itself, and therefore the financing needs of the budget. Second is to reduce interest rates. Third is to reduce the stock of debt, and fourth is to rearrange the debt structure away from high interest instruments and towards relatively lower interest-bearing instruments.
The impact of a contracting budget deficit on interest payments is obvious and direct. A lower deficit would reduce the financing needs of the budget and could be expected to lower the interest rates at which the financing is obtained. It would also reduce the increase of the debt and it could also help in securing lower interest rates on the refinancing of maturing debt instruments.
In addition to reducing the deficit in 1998, the authorities have an unusual opportunity, through liquidity management, to effect a significant lowering of the interest rates structure. In the recent past, a significant accumulation of public sector deposits has occurred. These had increased from LL1.4 trillion at the end of 1993, to LL2.7 trillion at the end of 1995, and to LL4.6 trillion at the end of June 1997 (See Table 3). At this level, these assets are probably more than double the amount needed in a liquid account for normal transactional purposes. In these circumstances, the authorities could allow a withdrawal of deposits of LL1 trillion in each of 1998 and 1999 to finance a major portion of the projected budget deficit. The impact on new financing requirements for the budget would be very substantial, which could translate into a very significant reduction in interest rates (See Table 4). Again, a lower interest rates structure would open up opportunities for refinancing maturing debt to reduce further the burden of interest payments. Lowering interest rates could also be helpful in encouraging domestic economic activity.
The refinancing referred to above calls for replacing a portion of the existing Lebanese pound debt by new debt instruments, also denominated in Lebanese pounds, carrying lower interest rates and hopefully longer maturities as well. Refinancing through conversions into foreign debt instruments to take advantage of interest rates differential might not be prudent. The interest rates differential, and therefore the savings, would diminish as Lebanese demand for foreign borrowing rises in order to effect the refinancing. It would also mean burdening the Lebanese economy with the exchange risk which is presently carried by the holders of pound-denominated debt instruments. Finally, the servicing of a growing foreign debt would constitute an additional burden on the balance of payments.
The use of Lebanon's assets to reduce the stock of debt merits careful consideration. A cost benefit analysis could be undertaken to determine the balance of advantages between asset holding and debt reduction. In this assessment no category of assets should be excluded, including public corporations which might be privatized, as well as gold holdings. At the same time, the assessment would examine how many assets could be used and in what mix and proportions. In all cases, any use of assets must be surrounded by ironclad safeguards designed to ensure that the proceeds are used only in the context of a permanent reduction in the stock of debt. Given the seriousness of the subject, consideration could be given to enacting legislation that would spell ounder what circumstances the assets could be used and with what safeguards.
To what extent should the debt be reduced? Clearly, one immediate objective is to strengthen the budget by freeing it from the burden of excessive debt service payments. Beyond that task, the question that needs to be asked is what level of debt would be appropriate for Lebanon. There are no established guidelines for debt levels; much depends on the circumstances and the objectives of the country concerned. For a small country like Lebanon, endeavoring to recapture its position as a significant financial center, the example of the competition such as Luxembourg and Switzerland (less than 25 percent of the GDP) might be contemplated as a long term goal. Broadly, a conservative debt load would range up to 30 percent of the GDP. The Maastricht criteria of up to 60 percent of the GDP, which are intended to ensure relatively strong currencies that could be kept together in line in the prospective European Monetary Union, is approximately halfway between the conservative position and the zone of risk at over 100 percent of the GDP. These categorizations present a rough guideline. No one should imagine that at 99 percent of the GDP there is no danger, and that at 101 percent of the GDP a crisis would erupt. Jordan presents an example of a country in the region that allowed its debt-to-GDP ratio to rise significantly above the 100 percent mark in the 1980s. Beginning late in that decade, and for almost ten years, it implemented several adjustment programs, negotiated debt reschedulements and sought debt relief before recovering to below the 100 percent mark.
Based on the estimated preliminary fiscal results for 1997, Lebanon's net total debt to GDP is indicated at the equivalent of 90 percent (See Table 2), the gross debt ratio is calculated to reach a higher level. The difference between the two ratios is accounted for by the considerable accumulation of public sector deposits. Given the existence of these liquid assets, which could be used to reduce quickly the stock of gross borrowing, it would be reasonable, under these special circumstances, to give more weight to the net debt concept.
At the same time, it should be noted that the budget faces a debt service bill that is a function of the gross debt position. Moreover, normally, and unless there are overriding circumstances, liquid balances are maintained at a level corresponding to the flow of transactions. When these two considerations apply, the gross debt/GDP ratio is used. If the budget demand for borrowing is reduced by LL2 trillion in 1998-1999, as suggested above by utilising the accumulated deposits, the calculated result would be to diminish the difference between the two ratios; these are estimated to be 71 percent and 76 percent for net debt and gross debt respectively in 2001.
The debt ratios discussed above are applied to the total debt comprising
the portion denominated in domestic currency with the part that is in foreign
exchange. In several important ways there is no difference between the
two segments since under Lebanon's free exchange system all Lebanese-denominated
assets could immediately translate into demand for foreign assets. While
it is true that a country could run out of foreign exchange and in that
case default on its foreign debt service payments, it could always print
its own currency and need not therefore technically default on servicing
its debt denominated in the domestic currency. This of course leads to
rapid inflation as witnessed during the early 1990s in Lebanon. That would
defeat the policy aimed at price and exchange rate stability. In a downward
spiral a segment of society - and it is usually the most vulnerable segment
- would be forced to bear the loss.
Reducing domestic interest rates aggressively (i.e. by some 3-5 percentage points) in order to contain the fiscal deficit could, as a side effect, result in unsettling the balance of payments position, involving some reserve losses. This could come about because the strength in Lebanon's balance of payments situation in recent years has been dependent to some degree upon attracting funds through the mechanism of high interest rates.
A closer look at Lebanon's balance of payments developments in recent year reveals a remarkable evolution (See Table 5). Between 1992 and 1996 imports doubled, they rose from $3.8 billion to $7.6 billion reflecting the requirements for reconstruction. Over the same period exports rose by some 70 percent. Preliminary data for the first half of 1997 indicate a likely leveling off in both imports and exports at the 1996 level, or possibly somewhat lower, particularly for exports. This would be in line with a slower pace of economic activity in 1997 and government measures taken in the middle of the year intended to restrain import growth, particularly certain categories of cars and some agricultural products. The trade of deficits which more than doubled between 1992 and 1996 (from $3.2 billion to $6.5 billion) might ease to about $6 billion in 1997. The current account balance is influenced by significant inward private transfers. Nevertheless, the current account deficit in 1996-1997 appears to have been running in the range of $5 - 6 billion annually. It is noteworthy that all these numbers are very large in proportional terms; that is if they are related to a GDP estimated at about $13 billion in 1996.
Details of capital account transactions are difficult to obtain particularly for the most recent period. However, the overall balance in the external accounts is known as it can be obtained from the foreign exchange movements of the banking system, as published by BDL. These reflect an approximate balance in 1992, large surpluses in 1993 and 1994, and 1996 (after a modest surplus in 1995). In the first half of 1997 the surplus position continued. When the large current account deficits are matched against the overall surpluses, the implied balancing factor, essentially net capital inflows, is very large; it has been of the order of $5 billion annually in 1993-1995 and over $6 billion in 1996. Clearly the capital inflows have more than financed the current account deficits and contributed to the reserves building up.
The gross foreign exchange reserves have increased from $1.5 billion at the end of 1992 to $6.5 billion at the end of May 1997. The question that could be asked is whether there was a need to increase reserves to such an extent. This increase has not been cost-free to the government. Every $100 million in reserves that was accumulated because of high interest rates on government treasury bills costs the state budget about $10 million annually. This represents the difference in interest rates paid on government securities and the interest rates paid to BDL on its foreign exchange deposits. (For the purpose of this example the spread has been assumed at ten percentage points).
A principal purpose of the reserves is to give confidence and help support the stability of the exchange rate. The difficult question is how much reserves are needed to achieve this objective. There is no straightforward answer to this question. A high reserves level might not be enough if the fiscal deficit is excessive, while a moderate level of reserves could be sufficient if the fiscal deficit is eliminated. Confidence in the currency is not dependent solely on the level of reserves, particularly when a significant portion is attracted by high interestrates. Confidence is also generated by strong policies designed to eliminate the fiscal deficit and by the performance of the economy as a whole.
Exchange rate stability is very important, but is there room for some exchange rate flexibility to facilitate the competitiveness of the economy? In this regard, the question could be raised whether the recent government measures to increase customs duties on certain categories of car imports, and to ban imports of some agricultural products, do not point to an exchange rate level at which imports are relatively cheap and also at which the domestic productive sector perceives a competitive disadvantage. To answer this question satisfactorily requires a careful analysis of not only movements in nominal exchange rates but also changes in relative inflation rates and in sectoral productivity.
Obviously, all this is beyond the scope of the present report.
It would be paradoxical to suggest that an effort to strengthen the fiscal position in Lebanon could lead initially to pressures on the balance of payments because normally a strengthened fiscal stance tends to help improve the balance of payments position and vice versa. Lebanon, however, now finds itself in this predicament because while the growing fiscal deficits contributed to the weakening of the current account of the balance of payments, the high interest rates contributed to attracting net capital inflows sufficient to create an overall surplus in the external account. If fiscal deficit reductions now assume an important priority, then the policy makers will need to consider how to reduce interest rates, and therefore the burden on the budget, while protecting the balance of payments position, a potentially delicate operation in its initial phases. But over the medium term, as fiscal consolidation is seen to be taking hold, the normal pattern of a strong fiscal position underpinning the external sector could be expected to emerge. Much will depend upon the strength and credibility of the total program designed to reduce the fiscal deficit.
The public sector in Lebanon is large, encompassing a wide variety of activities. Government expenditures, including investments financed by foreign loans, probably approach 40 percent of the GDP. These include significant amounts mandated by the conditions prevailing in the aftermath of the war - such as repairing the damaged infrastructure, compensation for war damage, compensation for displaced people, support for the residents of south Lebanon while the security emergency continues, and the rebuilding of the armed forces. Also, in the post-war period, with a significant shift in the distribution of income, coupled with the impact of the inflation/depreciation setback of the early 1990s, the demand for social services financed by the government has increased, and calls for increased salaries have persisted. In addition, the state owns the public utilities - water, electricity, communications, ports, airports, railways (and now the national airline), as well as real estate. The public sector as a whole might well approach 50 percent of the GDP. In addition, the banking sector in Lebanon has become highly dependent on the government in that its profitability is closely linked to holding the lucrative government treasury bills. All the components of this intricately related structure will be affected, and therefore will have to be adjusted, when a strong deficit reduction effort is implemented. It would not be an exaggeration to say the discipline that will be imposed by a deficit reduction effort will touch on wide-ranging social and political issues. What should be the salary of a high school teacher? Who should operate the public utilities? What level of payments should there be for social services?
It is beyond the scope of this report to attempt to find the correct response to these and other questions; indeed the task would require a number of teams to tackle these issues. Having said that, it might be useful, however, to mention three broad principles as a starting point for public discussion.
First, the smaller the government sector is, the better. This would be in line with Lebanon's traditional policy of relying on private initiatives to drive the economy; it is also the general trend in the world today. On the expenditure side, total government outlays, including investment financed by foreign loans, in the neighborhood of 25 percent of the GDP would appear to be feasible provided that sufficient priority is given to ensure an adequate and fair level of social services. Within the total of government spending, the portion that is clearly related to the consequences of the war, in particular the transfer payments for compensation, should be identified and phased out as soon as possible. On the revenue side, there should be room to raise domestic receipts to at least 22 percent of the GDP level, both through more efficient implementation of existing taxes and fees and by introducing new ones. Even at that level, the Lebanese tax burden would be lighter than in non-oil producing countries of the region.
Second, with a lower interest rates structure, the banking system should reorient its activities away from investments in government treasury bills and toward its traditional role of financing the private sector.
Third, serious and careful consideration needs to be given to privatizing
some public entities. The issues here are complex and an adequate regulatory
framework to protect the public interest should be developed. At the same
time, the utilities that may be privatized, as well as existing private
enterprises, should be allowed to operate efficiently - that is not to
be burdened by restrictive regulations - and to compete regionally and
beyond. All this would be consistent with Lebanon's traditional open and
liberal economic philosophy.
This report explores an illustrative path for a deficit reduction effort. Needless to say, there are many other possible permutations for such an effort, each carrying within it implied consequences. For example, if it is considered that budgetary expenditures could not be reduced to less than 30 percent of the GDP, the implicit consequence would be either to increase the bid to generate new revenues very substantially or risk a continuing deficit. Another objective might be that reducing the deficit should not in any way endanger the external sector. Here, the approach would require a very severe deficit reduction program implemented over a short period of time, and to accept the possible consequences for employment and social stability.
There are also timing issues. Why spread the effort over four years? Why not ten years? Would it be credible? A longer period would encompass more than one administration.
Would successive administrations be committed to the same program? On the other hand, some may prefer not to spread the adjustment pain, but rather to effect a shock treatment all up front. Would social and political conditions tolerate such an approach? Then there are considerations tied to the political agenda, such as Presidential or Parliamentary elections. Finally there are the aspects of the unknown, surprises such as a severe aggression from abroad, that could disrupt the most carefully laid plans.
A third category of questions would revolve around the validity of the
assumptions underlying a particular scenario. Could not the economy grow
much faster in real terms? Would not a regional peace treaty transform
the situation? In this area, it is important not to allow oneself to wishfully
assume the problem away, nor to sink into paralyzing pessimism. The illustrative
scenario discussed in the report while not pessimistic is very demanding,
and nevertheless could use a margin of safety.
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