What’s the Issue at Hand?
Seven months after the constitutional deadline, the Lebanese Parliament ratified the 2019 Budget Law on 19 July 2019. The law, in its first draft, was approved by the Council of Ministers (CoM) after 20 ministerial sessions, and forwarded to the Finance and Budget Committee (FBC) on 1 July. Of the initial 99 articles, the FBC amended 45, deleted seven, and added four. In addition, the Ministry of Finance amended 13 articles and added one. The Parliament then voted on the revised draft, amending another 18 articles, deleting two, and adding two. The final version of the law was published in the official gazette on 31 July. Some of the key provisions are:
 
    On spending

•  The budget expenditure stood at $15.4 billion, compared to $16 billion in 2018. In addition, $1.7 billion were allocated as treasury advances to Electricité du Liban (EdL), compared to $1.4 billion in 2018.
•  The Parliament cut the CoM’s draft budget by $156 million, the bulk of which, $148 million, targeted the presidency of the CoM. The Council for Development and Reconstruction’s (CDR) budget was reduced by $141 million (the FBC had proposed deeper cuts, reaching $191 million, of which $50 million were revoked by Parliament), whereas the Higher Council for Privatization and PPP and Higher Relief Commission had a combined budget reduction of $7 million.
•  The budgets of the Ministries of Economy, Energy and Water, and Finance were reduced by $8 million, $3 million, and $0.3 million, respectively. However, the Parliament increased the budgets of the Ministries of Public Health and that of Interior and Municipalities by $2 million and $0.7 million, respectively.
•  The Parliament rejected the CoM’s proposed reduction of former MPs’ retirement salaries.

 
    On revenues

 The approved budget revenues are projected to be $155 million lower than those estimated by the CoM’s draft. This reduction is primarily due to a 2% decrease in the estimated tax revenue, with a 3% decrease in the revenue from the tax on income, profits, and capital gains, and an 8% decrease in the revenue from fees on international trade. Projected total revenues hence are expected to stand at $12.5 billion.

•  The Parliament refused to subject the allowances of current and former MPs, ministers, and presidents to income tax, as proposed in the CoM draft.
•  The Parliament imposed a $33.3/KVA tax on private generator operators.
•  The CoM’s propositions of fees on hotel room occupation, tinted car windows, and licenses to carry arms, and of lowering the profit thresholds for VAT liability, were removed from the budget law.
•  The law decreased the rate of the CoM’s proposed reductions on the pensions of army veterans from 3% to 1.5%. Also, the proposed fee on imported goods was increased from 2% to 3%, however it was set to only target VAT liable goods, excluding fuel and raw materials.

 
    In sum

•  The budget law failed to further lower the deficit reflected in the CoM draft, decreasing it by a negligible $0.85 million. The fiscal deficit to GDP ratio stands at 7.6% according to the government’s estimates, although this number is seen as overly ambitious by multiple sources.1

 
Why is this Important?
In light of a dire fiscal situation caused by excessive spending on public salaries, transfers to EdL, and rising debt servicing costs, the Lebanese government is attempting to curb its burdening deficit, and hence adopted austerity measures in its 2019 budget law. However, the law failed to introduce any structural reform measures. The budget cuts to CDR also cast doubts on the government’s ability to implement the ambitious CEDRE projects. Moreover, contrary to the reforms promised at CEDRE, the government has so far failed to implement the electricity plan, causing an increase in treasury advances to EdL.
 
Background
The Lebanese Parliament approved a budget law for the running year that includes austerity measures aimed to solidify the financial position of the treasury. The budget law is a key element of the reform program that the government promised to implement in order to unlock the funds pledged by donors at CEDRE.
 
1 International Monetary Fund. 2019. 'Lebanon: Staff Concluding Statement of the 2019 Article IV Mission.' https://www.imf.org/en/News/Articles/2019/07/02/mcs070219-lebanon-staff-concluding-statement-of-the-2019-article-iv-mission ; and The Daily Star. 2019. 'Full Fitch Report on Lebanon.' www.dailystar.com.lb/Business/Local/2019/Aug-23/490292-full-fitch-report-on-lebanon.ashx.