Tunisia to address rising public debt and fiscal deficit

Tunisia’s fiscal deficit and public debt burden rose in the years following the country’s 2011 revolution, before coming down again from 2013 onwards as a result of subsidy cuts and other fiscal consolidation measures taken by the state. However, more modest than expected growth in 2016, along with upward pressure on the public sector wage bill in particular, have seen both the deficit and debt start to increase again.

In order to stabilise public finances, the 2017 budget, passed in December 2016, includes a range of initiatives aimed at limiting spending and raising revenues, including tax hikes, a public sector hiring freeze and various measures to improve tax collection – though continued pressure from unions and other civil society movements led to the scrapping of a number of other planned measures to boost receipts.

Having hovered in the region of 3% for most of the 2000s before falling to 1% in 2010, Tunisia’s fiscal deficit rose rapidly following the revolution, peaking at 6.9% in 2013, according to figures from the Ministry of Finance. As a result of the rise, the government’s debt burden, having consistently fallen across most of the first decade of the century from 67.4% in 2002 to 39.2% in 2010, began increasing again following the revolution, hitting 55.7% in 2015 and 60% in 2016, according to IMF figures. The IMF predicts continued fiscal reform will bring debt down over the medium term.

Government Response

In response to the worsening shape of public finances, the government took a range of measures to bring down spending, such as cuts to energy subsidies, which peaked at a cost of 4.7% of GDP in 2013. These included fuel and electricity price rises brought in from 2012 onwards and the abolition in June 2014 of energy subsidies for cement producers.

As a result of these and other factors, the deficit fell in the years following its 2013 peak, to 5% in 2014 and 4.8% the following year, and the 2016 Finance Law envisaged a further decrease to 3.9% in 2016. As a result, the budget envisaged that public debt as a share of GDP would fall in 2016 for the first time since the revolution, to 53.4% for the year.

Under Pressure

However, lower than expected growth in 2016 put upward pressure on the deficit over the course of the year, and at the end of October 2016 the deficit for the execution of the year’s budget to date was up sharply compared to the same period in 2015, from TD1.5bn (€643.3m) to TD3.7bn (€1.6bn).

As of late December 2016 Parliament was discussing a Complementary Finance Law to address an anticipated TD1.22bn (€523.2m) shortfall in the budget for the year as a whole, with the deficit expected to come in at around TD5bn (€2.1bn), or 5.7% of GDP, compared to an anticipated figure of TD3.66bn (€1.6bn), due to both lower than expected receipts and higher than budgeted outlays. Operational expenditure was up 8.7% for the first 10 months of the year – though subsidy payments declined by 30% to TD1.45bn (€621.9m) – while revenues were up just 3.6%, compared to a target under the 2016 Finance Law of 12.4% for the year. Most of the increase was accounted for by payments for 4G telecoms licences, while tax receipts were up just 0.1%, against a target of 11.4% in the budget.

Wage Bill

Public sector wages have been among the key factors putting upward pressure on the deficit in recent years, as the authorities try to keep a lid on social tensions. In absolute terms, the figure nearly doubled between 2010 and 2016 based on budgeted amounts for the latter, from TD6.8bn (€2.9bn) to TD13bn (€5.6bn), up from TD11.6bn (€5bn) in 2015. This raised the proportion of public spending accounted for by salary spending from 47.6% in 2010 and 43.6% in 2013 to 52.1% in 2015 and 53.9% under the 2016 budget.

The government agreed to two pay rises for public employees in 2015, leading to a 16.8% increase in the wage bill during the first 10 months of the following year. The IMF in 2015 said that the rising wage bill had partly offset the impact of reduced energy subsidies and has called the government to cut operational expenditures by keeping a lid on public sector wages and further cutting subsidy spending in order to fund increased public investment and thereby bolster growth and competitiveness across the economy.

Latest Measures

he 2017 Finance Law, which was approved by Parliament in mid-December 2016, contains a number of measures to stabilise the deficit, which it expected to come in at 5.4% for the year. Key among these are a 7.5% increase in corporate taxes and a freeze on public sector hiring, from which the security forces will be exempted. However, some other planned steps towards fiscal consolidation were removed or softened under pressure from influential trade unions. These include the watering down of plans to freeze public sector pay, over which the Tunisian General Labour Union had threatened a public sector general strike, as well as the removal of a planned tax on pharmacists.

The law also includes a number of measures to boost receipts by improving tax collection and cracking down on tax evasion, including the attribution of identifying numbers to all economic actors and abolishing previous requirements for the tax authorities to obtain a warrant from a judge to view taxpayer’s bank accounts. However, some proposed measures, such as a ban on cash transactions above TD5000 (€2140), were removed from the final version of the law.

Further Options

Another potential avenue for the government to raise revenues would be to limit the number of tax benefits and incentives it offers to companies in various sectors, the number of which the IMF describes as “significant”. In addition to incentives provided to offshore, export-oriented companies (see overview), sectors such as agriculture and those regarded as contributing generally to development also benefit from substantial benefits and exemptions.

The government appears to be considering this, with a draft organic budget law that is now under consideration calling for the annual budget law to contain a list of tax expenditures, including measures such as tax exemptions, credits and reduced rates, and the costs these entail in foregone revenue. While statistics on the cost of such expenditures are not currently available, IMF calculations suggest that the cost of various incentives amounted to at least TD1bn (€428.9m) between 2008 and 2011, including some TD826m (€354.2m) accorded to fully exporting industries.

Overseas Partners

As the country works to improve its public finances, multilateral institutions and international allies are providing it with support in the form of low-interest credit and loan guarantees as well as direct aid, which should help to contain debt-related spending until budgetary measures take effect.

A number of countries also pledged approximately $8bn worth of loans and aid to the country during an investment conference held by the government in November 2016 (see overview). However, the majority of the funds committed during the event focused on supporting specific projects rather than public finances.