Lebanese Cabinet Backs 2019 Budget With Strong Dose of Austerity

(Bloomberg) -- Lebanon’s government passed its 2019 draft budget after months of delays, the latest effort to get the nation’s fiscal house in order and threatening to unleash public anger over cutbacks.

The proposals must now be passed by parliament, where they might face stiff opposition from lawmakers alarmed at growing public anger over having to foot the bill for decades of mismanagement of government finances. Finance Minister Ali Hassan Khalil said in televised remarks that the budget sets a deficit target of 7.6% of gross domestic product for 2019, down from the current 11.4%.

“We can maintain this number and we can improve it,” Khalil said. “We are serious in this, and it will be translated through an injection of new investment projects that will revive the economy.”

At stake is $11 billion in funding pledged by international donors who are waiting for evidence that Lebanon is committed to reducing the deficit and combating corruption. Prime Minister Saad Hariri’s government had sought to cut nearly 1.2 trillion pounds ($800 million) in spending to stabilize public finances. Lebanon’s public debt, estimated at over 160% of GDP this year, is projected to rise to near 180% by 2023, second only to Japan’s, according to the International Monetary Fund.

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While the budget doesn’t feature cuts to public-sector salaries, the government amended what it deemed to be “exaggerated” benefits of some public employees, according to Khalil. Total expenditure in 2019 is projected at 23 trillion pounds, with revenues at 19 trillion pounds, he said. Spending doesn’t include 2.5 trillion pounds for the state-run electricity company.

In their discussions over the past two weeks, ministers approved a series of measures to increase revenue, including raising tax on interest on deposits to 10% from 7% over the objections of local lenders. They increased income tax for high earners, and hiked fines on tax evaders as well as work permits. The cabinet also cut ministerial budgets, state contributions to organizations and health-care benefits for public-sector employees.

As talk of economic collapse has replaced the national obsession with politics, markets have delivered a stinging verdict over government inaction.

Before today’s, Lebanon’s five-year credit-default swaps had climbed almost 200 basis points since late February, while the yield on Lebanon’s dollar bonds due 2028 was near the highest since January.

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Public-sector employees, including central bank staff, as well as retirees held a series of protests and nationwide strikes over recent weeks to demonstrate against possible cuts to their income. Ministers vowed to find alternative way to reduce spending.

Lebanon has committed to lowering its deficit, as well as reining in its ballooning debt and tackling rampant corruption in return for the billions in pledged donor money. The World Bank along and other countries offered the money to help Lebanon fund its infrastructure program to boost growth, generate jobs and attract foreign investment.

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