Tunisia's fiscal policy emphasises reduction of public wage bill, subsidy cuts and tax reforms

Balancing a budget is made all the more challenging in times of low growth. However, Tunisia has had some remarkable success in addressing its fiscal shortfalls, and while debt has been inching upwards, it is still manageable. The government has more work to do to bring the budget closer to a surplus and will look to slow the rise in debt, but the country has certainly proved itself adept at balancing the books.

Rising & Falling

Tunisian government debt steadily declined in the first decade of the millennium, from 57% of GDP in 2001 to 41% in 2010. However, it has been on an upwards trajectory in recent years, hitting 49.2% of GDP in 2015. The 2016 budget is based on higher-still public debt of 53%. Despite the rise, the IMF describes current levels of Tunisian government debt as sustainable and forecasts that levels should start to fall from 2018 onwards, and the fiscal deficit has been dropping in recent years, standing at 5.1% in 2014, down from 6.9% the previous year. The 2015 supplementary finance law projected a deficit of 4.8% and the 2016 budget one of 3.9%.

In its latest Article IV consultation report, the IMF said that what it described as modest increases in public spending were appropriate in 2015 “to mitigate the fallout” from the Bardo and Sousse attacks – the authorities used the August Supplementary Finance Law to provide a range of relief measures to the struggling tourism sector and another package for small and medium-sized enterprises worth around 0.25% of GDP each – but said that “a resumption of fiscal consolidation in 2016 remains essential.”

Wages

A major source of pressure on state finances is public sector wages. According to the African Development Bank, government salaries have risen by 75% since the revolution, and the IMF in September 2015 said that spending on civil service pay was equivalent to 13.5% of GDP and around 50% of government expenditure, one of the highest levels in the world. Yet in September 2015, following talks with the Tunisian General Labour Union, the government agreed to the second public sector pay rise that year at an estimated cost of $1.2bn. The increase in salaries has pushed down investment spending, which stood at 4.2% of GDP in 2014, a record low. Investment is further hampered by a low project implementation rate caused by administrative bottlenecks. However, the government has said that the wage rises were necessary to reduce social tensions ahead of economic reforms, and that it will not increase wages again until 2018. The authorities also intend to introduce a civil service reform plan that will reduce the public wage bill to 11% of GDP.

Subsidies

The government has also been moving to cut subsidies, and energy subsidies in particular, in recent years. The cost of energy subsidies rose rapidly from the mid-2000s onwards, reaching 4.7% of GDP in 2013. In order to reduce the burden on government finances and to allow it to target social spending towards the poor (energy subsidies tend to disproportionately benefit wealthier households), the authorities began raising the price of fuel and electricity from 2012 onwards. January 2014 also saw the introduction of a new pricing formula for petrol to reflect moves in international oil prices, which is currently only triggered by price increases. As a result, the IMF states that the price of some fuel products are between 30% and 50% above international prices. However, the authorities plan to implement a broader pricing mechanism in 2016 that reflects falls in prices, while also achieving full cost recovery for fuels that remain subsidised, with the first adjustment to prices made under the formula to take place in July.

Tax Reform

The authorities also intend to boost government revenues, by approximately 1.5% of GDP a year in the medium term, through a tax reform due to be implemented in 2016 that will simplify the system and widen the tax base, as well as via a three-year modernisation programme for tax administration.