Wrong headed Tax Relief by the FPM in Lebanon

No one doubts that Gibran Basil is not another political figure who lost his parliamentary seat in the last elections in Lebanon. He is much more than that, he is the son in law of General Michel Aoun,the head of the FRM political party in Lebanon, and thus is entitled to a cabinet ministry in every Lebanese government. Most assume that the present standoff where the Prime Minister designate, Mr. Mikati, has not been able to form a cabinet, is primarily due to the obstructionist policies advocated by Michel Aoun who is demanding that Mr. Basil, his protégé, be given the Interior Ministry. (It is ironic that such nepotism is being advocated by the party who claims the mantel of reform, go figure).

As bad as the above might sound, the recent positions of the FPM, as articulated through its favourite politician, is nothing short of pure demagoguery. It does not take a genius to figure out that when a government, an institution or even a household that is already facing a structural deficit will be committing suicide by decreasing the level of income when the expenditures are essentially contractual agreements that cannot be reduced. But that is exactly what the FPM has been suggesting openly and I might add with the implicit support of all its allies who have stood by as this destructive charade is allowed to continue to unfold.

Lebanon consumes every year about 500 liters of gasoline per capita. These 2 Billion liters of gasoline have been subject to a tax LL9530 per 20 liters. The revenue derived by the Lebanese authorities from this tax amounted to over $650 million during 2010. The government used these funds, in combination with its other revenues, to finance the national debt and provide the meager level of services that its equally meager resources allow it to provide. Note that the Lebanese government is not in a position to adopt an austerity budget since things cannot possibly become more austere than they currently are. So what does the think tank of the FPM come up with to ease the pain and the burden of the Lebanese citizen? Why not cut the revenue of the government from the oil tax by half? Yes, you heard it right. All sorts of political pressures were used to force the tax to be cut from LL9530 to LL4530. That effectively took away from the already strapped Lebanese government over $300 million each year. But that was not enough, the FPM is at it again. Mr. Basil, with the blessings of the FPM and all its allies wants to eliminate this government revenue totally. They wish to eliminate the remaining $300-320 million of annual revenue. So what is wrong in taking the side of the poor consumer you ask? Well everything in this case.

Any individual with an IQ above 70 would tell you that when the government is in such a tight fiscal position then no tax relief is acceptable unless it is paid for. This simply means that a decrease of the sum of revenue from one source needs to be compensated for by an equal increase from another source otherwise bankruptcy and financial collapse will become inevitable. The $650 million lost to the Lebanese treasury, if not compensated for would increase the level of national indebtedness. Ironically the debt will increase by more than the tax cut since the new debt carries a rate of interest . In addition had the $650 million tax cut not been exercised, it would have decreased the level of debt and the interest rate required to finance it.

In a world best characterized by peak oil, a region in political turmoil, a global economy struggling to find its footing and above all the threat of climate change hanging in the balance it is wrong, immoral and irresponsible to encourage the consumption of fossil fuels.

The current proposal for tax relief suffers of two major shortcomings: (1) It is ecologically irresponsible and (2) it is economically misinformed. A far better strategy would be to reinstate the first LL 5000 tax per 20 liters that has already been implemented by offering an equal tax cut targeted to benefit the poor and the needier. This policy must not be allowed to pass.

Note: The suggestion by Mr. Basil to transition to natural gas is not without merit except for the fact, and he would be the first to admit it, that such a plan is for the long run not the short or even the intermediate since it places major needs on the infrastructure).