The takers versus the makers: Understanding Egypt’s Subsidy Paradox

In my younger years, when I had just graduated from the American University in Cairo, I landed my first real job at the US Agency for International Development (USAID). This was my first real taste of doing development work and doing it in Egypt was an added bonus. USAID gave me a starting salary of approximately $2,000 a month, a significant amount of money for a new graduate in Egypt in the early 1980s. I remember getting my first paycheck in a white envelope and inside was $1,200 instead of the $2,000 I was promised as my monthly wage. When I enquired about the missing portion of my paycheck, I was informed that I “qualified” for a 40 percent salary deduction, mostly from taxes, social security, and processing fees, and that I would be giving up approximately $800 monthly.

I was also told that my $800 deduction would be withheld monthly, and not through an end of year lump sum payment when I filed my taxes for the year. Taxes in those days, as they are today in most corporations, are withheld monthly from your paycheck. The tax department calls it “min el manbaa” deductions, or deductions directly being garnished from an individual’s monthly pay.

I remember thinking at the time that this deduction was very high, more so for someone just starting out and trying to establish himself. The wage garnishment was a serious blow to my monthly disposable income and I couldn’t help thinking about the downstream implications this had on the ability for Egyptians to spend and in turn the impact this was having on both production and employment.

What further crossed my mind was if my salary didn’t grow over time, and with such a high tax rate, I was screwed especially if I was to marry, start a family and have children. What savings could I ever accrue with these deductions? In the middle of discovering this calamity, I was reminded of a quote from comedian George Burns that I had heard years before. Destitute in his later years, and after a successful career in show business, he was asked where all of his money went. He said, “I spent it all on fast cars, and fast women and the rest I wasted”.

With that satirical reflection in mind, and with the state deducting so much from me, all that I would have left would be mere subsistence, and there would be absolutely no way for me to follow in George Burns’ footsteps, unless of course, I won the lottery. But, what I did know, and fully grasped at the time, was why the government was taxing me and everyone else so heavily. This was meant to pay for all the freebies and entitlements the government had created over time. In Egypt then, and much more so today, every citizen is entitled to a variety of subsidies on foodstuffs and petroleum products accompanied by free education both at the primary and secondary level, and free university education up to the graduate level if you so choose, along with a litany of other health care benefits that are aimed at the poor.

Even in the 1980s, it was clear that the delivery systems for these subsidies had failed. Subsidies were going to people who didn’t need them, and the social safety net that was created was for too over reaching forcing the government to consistently try to find ways to fund it. Three decades later this problem is now even much more perverse with entitlements going as far as supporting outlandish schemes for affordable housing, and over many decades guaranteeing government jobs for those that couldn’t find work in the private sector, creating a support structure from the state that now seemingly extends from the cradle to the grave for millions of Egyptians.

Many now see these cradle to grave benefits as entitlements with no real acknowledgement of who is being taxed, and how heavily to make this possible. They seemingly only see that the state is not doing enough without understanding that the “makers” in society are being pushed to their limit, with the “takers” demanding more and more. It is as if God said let there be satan so they don’t blame everything on me. And, let there be government, so the takers don’t blame everything on satan.

Just the other day I read an article about the demonstrations now emanating from our public universities, and how select students were trying to prevent other students from attending class, and the ways in which they were trying to ensure that midterm exams for the year would not go forward. Also, in the article that I read, a young lady was interviewed and was quoted as saying “who cares about education now, we care about our liberty”. That all may be well and good, honey, but it is no solace to the people being taxed at such a high rate for you to go to school in the first place. What of the tax payers, I thought to myself, whose financial contributions made her education possible, what lack of gratitude, what callousness towards the opportunity that she’s been given to advance herself. Her true liberation lies in advancing her education, that so many tax payers are paying through the nose to give her free of charge, and she’s seemingly taking it all for granted.

In Egypt, we have a saying “beyakol wa yenkar” which means in rough translation “he eats and denies being fed”. This is effectively where things stand with Egypt’s subsidy program at the moment, those benefiting from it seem to be in denial that they are getting any benefits at all, and there is absolutely no acknowledgement of the sacrifices tax payers are making to make all of this possible. In the minds of millions of Egyptians, subsidized foodstuffs, fuel, free education and health care are a right, and who funds this and to what degree this impacts their disposable income is not their problem. The society’s “group think” seems to completely dismiss what the rich and the middle class are doing to help the poor by paying taxes at a level that I have not seen in any country other than Egypt.

To understand Egypt’s social safety net problem you need to extrapolate out from a typical Egyptian household to an entire population. On average, an Egyptian household has one income earner, usually the father, who supports a wife and five children. He struggles to make enough money to sustain everyone. Inevitably the family will go to sleep hungry, the kids survive off hand me downs, and the whole family unit typically faces a multitude of perils. The way Egypt’s government typically assists these households is by providing a variety of benefits to sustain them as they cannot sustain themselves. They get subsidized bread, vegetable oil, rice, sugar and tea, propane for cooking (botagas), gasoline if they own a car, free primary and secondary education for their children, and free health care too. The apartment they live in was probably given to them by the state, and more often than not, the father probably works for the state too.

Seemingly, the state seems to have abandoned the concept of birth control for its citizens. This was something that our outgoing government would not have tolerated based on religious grounds, and the Mubarak government before them gave this topic little more than lip service. I remember a speech that President Mubarak gave where he preached about the perils of having too many children with no means to sustain them. A man in the audience stood up and said to the President “we have given up so much, what are we supposed to do when it comes to having kids”. The President responded by saying that birth control was easy if you “batalto shaawa”, or stopped screwing around. It was funny yes, but this is no laughing matter with millions of people now on the verge of starvation.

In Eastern Europe, when economies there became extremely depressed, people stopped having babies altogether. Russia at one point verged on a negative population growth rate, as did Ukraine. In Egypt, on the other hand, it seems that when times get tougher, population growth continues to climb unabated. This was the case in China until the government decreed that families could not have more than two children, period. In Egypt, at one point I proposed that subsidies should be limited to the first two children born and that things like free education would not be provided by the state to anyone who chooses to have three children or more. Those in attendance looked at me as if I had lost my marbles.

Tens of millions of Egyptian households are now absolute takers living off government support in one way or another. As the number of taker households grew over time, the government was forced to find a greater amount of money to sustain Egypt’s ever growing safety net. The greater the amount the safety net requires, the more we need to tax the makers either directly or indirectly. And, what happens when there aren’t enough makers to support the takers? Well, that would be Egypt’s current plight.

Today, Egypt’s paradox is all about a government requiring a finite number of tax payers, or makers, to provide support to an endless number of takers, through a subsidy program that is likely the worst managed in the world. And, our economy is struggling under the weight of the enormous amount of money we take from our income earners, our makers, in order to pass it on to others in society, some who are in fact poor and disenfranchised, and others that are beneficiaries of government support for no apparent reason.

Simply put, any successful economy is one where the numbers of makers earn enough to sustain the numbers of takers with residual to spare. Any economy that is failing has the reverse problem. There are either not enough makers to sustain society’s takers, or there is simply not enough residual left over to support the needs of infrastructure, and other basic works. This is how extreme poverty becomes coupled with dilapidated infrastructure like crumbing public schools, roads, airports, and the like. And, in Egypt this is where things stand today. Walk into a public school, a public university, or a public hospital, and nothing more needs to be said. They are all in such a sad state of disrepair, so behind the times in their technology and infrastructure that you immediately know what the quality of learning from these institutions is likely to be, and that anyone being treated in a public hospital for a serious illness is likely going to end up dead. It isn’t the Doctors, but what is a Doctor without the proper instruments? What is a teacher without books or computers? How do you teach with several hundred, or several thousand students in a classroom? This is Egypt’s folly today and this is why Egypt now ranks at the bottom of the barrel when it comes to the quality of our primary and secondary education in comparison to other nations across the globe. I guess this makes demonstrating outside your public university easier because there isn’t much you are going to learn in the class room anyway.

Also, let’s not forget that corruption in Egypt also made serious in-roads into Egyptian public education as well. Anyone familiar with some of the antics that occurred in our universities over the past two decades not only bordered on the criminal, but the insane. Select public universities became notorious for giving doctoral degrees to associates and off-spring of high ranking politicians, real degrees, not honorary ones. These degrees were not Master’s degrees, they were Doctorates, and upon the completion of their studies, the associates of those in power became university lecturers that are responsible for the education of tens of thousands of graduates today. Sadly, when I see the destruction being caused by students on the grounds of our public universities now, I don’t know where the destruction is more prevalent, by the students outside their classrooms, or some of the select professors inside those classrooms.

I provide below some interesting statistics on Egypt’s takers and makers for you to draw your own conclusions. A shocking number under the takers category is the total number of Egyptians currently unemployed coupled with those not of working age. That number is 57.1 million people. Yes, 57.1 million, or over half of the Egyptian population. That would mean that potentially one of every two Egyptians is a taker of some sort, entitled to some kind of subsidy from the state, unless they emanate from a household that can sustain them. What makes Egypt an outlier on the above number is how many people are out of the work force. In Egypt’s case, there are the unemployed, those that choose to be out of the work force and those that are too young to be part of the work force, a disaster still in the making.

But, there is more. Total subsides that supported our safety net in 2012 amounted to $29.3 billion, an amazingly high number for a country the size of Egypt. After all, Egypt’s total tax revenue for the same year was only $32 billion. Taking out state revenue streams like the Suez Canal and foreign aid, just imagine what this actually means. After you pay for subsidies in all of their forms and collect taxes from all sources, your annual residual for a population approximating 100 million people is only $2.7 billion. And, can this maintain your infrastructure; ensure clean drinking water for all, paint the walls of your schools, buy new public busses, etc., or does everything around us crumble? Sorry, let me correct that last statement, everything around us hasn’t already crumbled, it has gone to hell.

A closer look at Egypt’s makers is also a cause of serious concern. There are only 14.8 million Egyptians employed in the private sector who are likely the primary tax contributors supporting an annual subsidy bill of $29.3 billion. Assuming no other sources of revenue, this would mean that every maker in this category would be paying $200,000 annually in taxes to sustain Egypt’s 57.1 million takers. Yes, $200,000 annually (thank God for things like the Suez Canal and for foreign aid). Simply by using net averages, and assuming that those employed in the private sector were the only contributors to tax revenues, this would mean that for every Egyptian working in the private sector, they are carrying the burden of providing some sort of subsidy to four Egyptians along with having to maintain their own households.

Worse still, Egypt’s subsidy bill has grown from approximately $17 billion in 2007 to $29 billion in 2012, and now in 2013 hovers at around 13 percent of GDP. What is more striking is that about 50 percent of the total subsidy bill isn’t spent on food for the poor, it is actually subsidizing fuel oil, natural gas, LPG, diesel oil, kerosene, and of course gasoline. In fact, only 15 percent of the subsidy bill is being used to buy food for the poor.

Of the 50 percent total subsidy bill earmarked for petroleum products, 35 percent of this spend goes towards subsidized diesel oil, and 13.5 percent for gasoline. Of course, the poor need cheap gas for their cars, right? Something doesn’t make sense here, does it? For decades, I personally have been fueling the family Mercedes with subsidized gas. I have no other option. Subsidized gas is still available to everyone so I can’t just waltz into my neighborhood gas station and say, “excuse me sir, I’d like to pay full price for my gas please, I can afford it”. I guess I’ve made up for it over the years by leaving great tips for the gas station attendants that are responsible for my fill ups and they always seem to be very happy to see me when I drive in. And, for all of you that are thinking that smart cards are now going to fix the problem of targeting gasoline subsidies to those that need it most, what about the past three decades? How much money was wasted by not targeting subsidies to those that actually needed the aid? Did we squander $10 billion, $20 billion, and how could this money have been used elsewhere in the economy?

As for diesel subsidies, the story doesn’t get much better. I was in Hurghada a few years back and a friend of mine invited me for a ride on his boat. He called it a boat, but it turned out to be more like a yacht. I remember him saying. “I can’t believe how cheap diesel is in Egypt. My goodness I fill up the tank for my other boat in Spain for four hundred dollars more than I do here. You really should tell the government to do something about this Dr. Khaled”. Yes, yachts in Egypt are filling up with subsidized diesel, and I get this too. You see, as Egyptians we want everyone to have more fun on a yacht not like in those third world countries like Spain. If you spend less money on diesel you can throw one hell of a party on board with the money you saved fueling up the thing. Better French croissants, smoked salmon and caviar from Russia, imported nonalcoholic beer from the finest Irish breweries, all made possible by the subsidy on diesel oil courtesy of the Egyptian government that loves its people to a sickeningly lavish degree.

So, clearly we have difficulty differentiating the haves from the have not’s when it comes to allocating subsidies. It definitely makes sense to give the makers a little bit back from their taxes through subsidies on gasoline and diesel doesn’t it? After all, that’s only fair. You just have to love it when a 2013 Mercedes S class, a million dollar car in Egypt, goes into a gas station with its owner dressed in an Armani suit, wearing a Patek Phillipe, and Gucci shoes, and the state goes out of its way to make sure he doesn’t leave the pump without some sort of financial assistance. Fair, I guess, consider it a contribution towards the purchase price of the Patek and on the drive home why not stop at the corner store and get some subsidized bread because it always tastes so much better than the regularly priced kind. After all, isn’t it us that coined the phrase, “if it’s free take two”.

But, you know what really ticks me off? Everyone has a beef with Egypt’s subsidy program, after all the decades that we spent honing it. For the takers, what they get is still not enough. Free education, hogwash, how about free taxi coupons to get me to the university on time, or better still the state funding class trips to Paris and Spain once a year for everyone. And, once there we will demonstrate for our right to be free outside of an Egyptian embassy as long as we can get per diem to do it. We won’t take our exams, or let others take there’s, even if our schooling is free because you can put your degrees where the sun don’t shine. Just make sure to feed, house and employ us afterwards, OK?

The makers complain too, and loudly. You have people in the middle class like our friend who used to work for USAID incensed by the fact that 40 percent of his paycheck is deducted monthly for taxes for a social safety net that he knows fell apart years ago. He, like millions of others middle class Egyptians would stop paying taxes altogether because they see all their money going for naught. And, worse still their money is going to people that show absolutely no gratitude for any support they are getting from either tax payers, or the state. Of course, our well to do industrialists have their gripes too. They all argue that their factories need subsidized diesel and fuel oil, and have been very successful in decades past to make sure that even private sector firms get a litany of subsidies from the state. Don’t forget their tax holidays also, and for fifteen years, not ten, or they say bye-bye and move to Dubai.

Both the takers and the makers feel disenfranchised when it comes to Egypt’s subsidy program, but we can all pretty much agree on one thing, what a fine mess we’ve gotten ourselves into, what a fine mess. And, the problem with economics is that once you create a distortion, it becomes very difficult to correct. Once you create an entitlement, it is doubly difficult to take it away. With so many governments having failed to rectify this problem over the past three decades, and some of whom just exasperated the problem, I recall what Milton Berle once said years ago, “I feel like Zsa Zsa Gabor’s six husband. I know what I am supposed to do, but I don’t know how to make it interesting”. Egypt’s subsidy problem can be summed up the same way. Egypt’s current government knows exactly what to do to better target subsidies, coupled with the need to monetize them for those facing abject poverty, but they don’t know how to make it politically palatable. Until they do, successive governments will come and go, inheriting a problem that will only get bigger leaving them to feel exactly like Zsa Zsa Gabor’s six husband, they know exactly what to do, but they have absolutely no idea how to get it right.