In clear breach of Article 86 of the Lebanese Constitution the 2025 state budget was approved by a single decree without any reform added or subtracted from the 2024 version of the former Caretaker Minister of Finance Youssef Khalil. To be noted that the Budget figures were ratified last year before the OPctober7th war which has disastrous implications on Lebanon’s economy and finance.
Article 86 outlines the conditions under which the government can issue the general budget by decree. It stipulates two main conditions; the draft budget law must be sent to the Parliament two weeks before the start of the regular session of the Parliament. If the Parliament fails to discuss and complete the budget, the President of the Republic and the Prime Minister must request the opening of an extraordinary session for the Parliament.
The draft law was targeting a deficit of LBP 17,567 billion (Usd196 million at the LBP 89,500/USD exchange rate, 4.11% of budgeted expenditures), noting that the year 2024 budget law targeted a zero deficit.
The Ministry of Finance is planning to finance the target deficit internally through the issuance of treasury bills. The 2025 budget proposal is now effectively obsolete. The government must act swiftly to withdraw it from Parliament, where it was submitted on time, to prevent a deepening crisis. In another note experts warn that issuing treasury bonds in local currency worth approximately Usd196 million (at the current exchange rate) to finance the deficit will create a parallel budget non accounted for and endanger financial stability once more given the current state of the banking system.
Why is a crisis inevitable?
The current draft budget relies on unrealistic revenue projections, which will almost certainly force the government to resort to Treasury advances.
policy measures fall short of what is needed to enable a recovery from the crisis. Bank deposits remain frozen, and the banking sector is unable to provide credit to the economy, as the government and parliament have been unable to find a solution to the banking crisis. Addressing the banks’ losses while protecting depositors to the maximum extent possible and limiting recourse to scarce public resources in a credible and financially viable manner is indispensable to lay the foundation for economic recovery. Without progress, the cash and informal economy will continue to grow, raising significant regulatory and supervisory concerns.
Khalaf said: “Article 86 of the constitution stipulates two basic conditions for approving the budget and issuing it by decree from the Council of Ministers. The first condition requires sending the draft budget law to the Parliament two weeks before the start of the regular session of the Parliament, which actually happened. However, the flaw in this condition is the failure to distribute the budget draft to the MPs. The second condition requires the President of the Republic and the Prime Minister, in case the Parliament fails to discuss and complete the budget, to request the opening of an extraordinary session for the Parliament, which did not happen. Therefore, the government’s issuance of the general budget by decree constitutes a clear constitutional violation under Article 86 of the constitution.” He continued, “Prime Minister Nawaf Salam’s government approved the 2025 budget in the same way the previous government did, despite it being an unsound budget that imposes new taxes and fees exceeding the Lebanese citizen’s ability to bear.” Khalaf said: “The possibility of challenging the 2025 budget before the Constitutional Council is available, and its most important element is the violation of Article 86 of the constitution, especially since the internal regulations of the mentioned council allow for challenging a text with the force of law.”
The IMF has already warned that “the timely approval of the 2024 budget was an important first step, but stronger efforts are needed to strengthen public finances. The tax administration remains underfunded, hampering tax collection and putting the formal sector taxpayers at a disadvantage. Lack of resources prevents the provision of essential public services, social programs, and capital spending. It also exacerbates inequities and negatively affects perceptions of tax fairness. Looking ahead, and given the likely lack of any financing, the 2025 budget should continue to aim for a zero deficit through more ambitious fiscal reforms, particularly to further enhance revenue mobilization through strengthening compliance and reprioritizing current spending to meet essential social and infrastructure needs”.
Funding spree
Even the least damaging financial solutions would have severe repercussions on Lebanon. The available funding sources are both uncertain and scarce. The state could be forced to print more Lebanese pounds, incur additional debt, or tap into the Central Bank (BDL)’s already depleted reserves. Each of these measures would jeopardize the stability of the national currency’s exchange rate. In details, the budget anticipates revenues at LBP 410,128 billion (Usd4.58 billion) and expenditures at LBP 427,695 billion (Usd4.77 billion). It is worth noting that in accordance with the practice established in recent years, the 2025 budget law does not include an advance to Eléctricité du Liban (EDL) after the latter revised its tariffs to stand above production costs. Said target figures compare to LBP 308,435 billion (32.97% increase) in government revenues and LBP 308,435 billion (38.67% rise) in budgeted expenditures in the 2024 budget law. Revenue wise, the projected increase is mainly attributed to modifications in the way taxes are calculated and to increases in existing taxes/penalties, and does not embed in the introduction of new taxes. The draft budget suggests a high contribution from tax revenues of LBP 326,416 billion, representing 79.59% of total revenues, with non-tax revenues (LBP 83,712 billion) expected to represent 20.41% of target revenues. Delving into details, levies on goods and services (LBP 191,266 billion) are budgeted to be the major contributor (46.64%) to total revenues, with the share of income taxes (LBP 43,109 billion) and levies on international trade (LBP 50,684 billion) accounting for 10.51% and 12.36% of total revenues respectively.
It is worth noting, in this perspective, that non-tax revenues represent revenues from state owned enterprises such as Casino du Liban, ports, the airport and the telecom sector among others. The draft law introduces a fee on every receipt issued by the Lebanese Republic (LBP 100,000 on local currency receipts and Usd2 on USD denominated ones), and also adds a LBP 100,000 fee on invoices issued by the Ministry of Telecommunications. The draft budget also suggests permitting the use of e-stamps for all stamps that range between LBP 2 million and LBP 3 billion in an endeavor to alleviate the shortage in stamps, whereby citizens are having to resort to the black market to get stamps, paying multiples of the price in the process.
New appointments saga
Khalaf said: “Lebanon has suffered enough from the policy of quotas and the distribution of public jobs across different categories and levels within state institutions to cronies and loyalists, considering the public administration as the most common place for power-sharing.” He added, “The traditional political forces have not yet realized that the public administration should be independent of parties, movements, and all political clubs, and therefore they must completely lift their hands off it without any conditions.” He continued, “The public administration is not political positions nor party-sharing posts, but rather the productive hand of the state at all levels. This should also apply to the judiciary and all military and security institutions, and other official sectors.” The government will spend about Usd2.54 billion to pay salaries, wages, social benefits, contributions to mutual funds, retirement pensions, end-of-service compensation, transportation, service and productivity allowances, an increase of about 50% over the 2024 budget, but still about 62% lower than in 2019. Salaries, wages and social benefits constitute about 53% of total budget expenditures, noting that the recorded increase is somewhat linked to the call-up of new elements to military service this year, as a state policy of social control, especially in communities that are unable to emigrate or find jobs in the private sector. In addition, about Usd219 million in emergency and exceptional expenditures (4.6% of total expenditures) are likely to be paid in the form of transportation and productivity allowances and aid during the year.
High cost of civil service
The Lebanese public administration employs approximately 300,000 civil servants, an all high figure if compared to similar economies, with 120,000 in the military and security apparatuses, 40,000 in the education sector, 25,000 in ministries and public administrations, and 115,000 in public institutions and municipalities. As a percentage of total government spending, wages and salaries and related benefits together with salaries of some public institutions averaged at 22 percent in the past ten years, one of the highest expenditure items together with retirement and end of service, debt service, and transfers to the loss making electricity company, “Electricité du Liban”. In 2012, this ratio increased to a little less than a quarter of total government spending
However, there is a significant vacancy rate of 73%, with 19,600 positions unfilled. This shortage is particularly acute among second-grade employees, who are just below the position of director general. Only 20% of skilled employees remain in critical positions, leading to a lack of experienced personnel in leadership roles.
“What is required from the presidency and the government as a fundamental step in the path of reform and state-building is to restore the regularity of public life in Lebanon based on the legal and human rights frameworks of the state, ensuring people’s rights and not as a favor to them, he added. Therefore, the Civil Service Council must be activated and enabled to restructure public jobs on correct, sound, and solid foundations through serious and fair exams, with results announced based on competencies, experiences, and personal qualifications only. As for appointments in the first category, there are additional criteria parallel to the standards and role of the Civil Service Council, most notably appointments based on parity and rotation.
The law also amends the way taxes on wages and salaries are calculated for employees that get partly or fully paid in USD, whereby the USD-denominated portion of the salary will be multiplied by the exchange rate set by BDL, and added to the LBP portion of the salary & then applying the tax brackets on the whole salary in LBP. On the expenditures front, social benefits account for over one-quarter of (27.04%) of total budgeted expenditures, followed by salaries & remunerations (22.39%) and administrative expenses (11.85%). Other significant expenditure items include, transfers to NGOs (10.12%) and capital expenditures (9.79%) mainly in the form of governmental expropriations.
Salaries, wages and benefits constitute about 53% of spending, in addition to about 19% for operating spending on public facilities, and about 7.5% to cover debt interest. In contrast, it appears again that investment spending does not exceed 9% of spending
More of the same
To be noted that proposed figure do not reflect the total and actual budget deficit, as it does not include other treasury expenditures and does not include all debts and arrears owed to contractors, hospitals, and the National Social Security Fund. Last year, the budget law recorded a “miracle” by being issued with a zero deficit, and while the repercussions of the sweeping crisis continue, the Ministry of Finance has not published the results of the budget since 2021, so that the deficit figures, collected revenues, and spent expenditures cannot be verified. In any case the budget is “more of the same” as it continues to raise taxes and fees.
The state is estimated to collect revenues of Usd4.582 billion, of which 79.6% is tax revenues of Usd3.647 billion, and 20.4% is non-tax revenues of Usd935 million. Moreover 66% of revenues will come from indirect taxes on consumption, knowing that 34% of total revenues are expected to be collected by the public treasury from the value-added tax alone. In contrast, direct taxes on income, profits and property will not constitute more than 17% of total revenues, while non-tax revenues will constitute about 17%.
The budget for 2025 fails to meet expectations in terms of public administration reform. Despite the government’s efforts to allocate funds and implement changes, the budget figures reveal significant shortcomings. The 2025 budget sets government expenditures at USD 4.779 billion, which is a 38% increase from the 2024 budget. However, this increase is overshadowed by the fact that salaries, wages, and benefits constitute about 53% of spending, leaving only a small portion for investment and development. This imbalance highlights the government’s focus on immediate financial relief rather than long-term structural reforms.
Unbalanced budget
The budget fails to meet its announced goals since disproportionate allocation of funds towards salaries and benefits, coupled with a significant revenue shortfall, highlights the need for more comprehensive and sustainable financial planning. There is no new study on the elements of the civil administration however an earlier study disclosed that when measured as a percentage of GDP, the ratio of spending on public servants remained almost constant at 7.1 percent because the Lebanese economy experienced a high rate of growth over the period 2007 till 2010, inclusive. The average age of central government employees, excluding military personnel, is around 49 years; 22 percent of those central government employees are expected to retire in the next 5 years. Females are an important component of central government employees, making up 70 percent of central government civil servants, excluding the military and teachers. It is estimated that the public sector employs around 28 percent of total wage earners in Lebanon and 13.5 percent out of total employees. This could be considered to be high by international standards. In recent years, additional recruitment in the public sector, especially in the armed forces and the education personnel, took place in response to major security events or political pressures in the absence of human resources management and planning.
Maan Barazy is an economist and founder and president of the National Council of Entrepreneurship and Innovation. He tweets @maanbarazy
The views in this story reflect those of the author alone and do not necessarily reflect the beliefs of NOW
