Read with interest the discussion on system of price subsidies and target/untargeted grants. The experience of Egypt might be interesting.
Just to give a background, despite of a period of sustained economic growth experienced in Egypt during the decade proceeding the uprising of 2011, incidence of poverty increased over the same period. Nevertheless, allocation to social protection in Egypt was very high and represented almost one third of the overall government expenditure in fiscal year 2011/2. The bulk of the social protection spending is on the system of subsidies, which was estimated at 8.47 percent of the GDP in 2011/2. It is also important to note that spending on key social sectors is one of the lowest in the region and very much below international recommended spending levels (Share of budget allocation to Education and Health stood at 10.5 and 4.7 percent for Education and Health, respectively). This imbalanced and distorted public spending pattern represents an area for active evidence based advocacy to arrive at the optimal policy mix that maximizes the society’s social welfare, especially at a critical time when there have been debates about future policy directions and opened space for discussion on the budgeting issues.
The experience of politically fragile systems, as the case of post-revaluation of 2011 in Egypt, highlights the importance to differentiate between the different types of subsidies and not lump them in the same basket. For instance, the food subsidy (bread, oil etc), which costed 1.2 percent of GDP in 2011/2, is not only popular, but also significantly contributed to keep poverty very shallow in Egypt (theoretically, it is only required 0.151 percent of GDP to eradicate poverty assuming costless and perfect targeting).
Closer look at the different subsidy schemes shows that allocation to the energy-products subsidy alone counts for 6.09 percent of GDP in 2011/2, which costs more than the combined spending on health and education for the same year. While it is tempting to call for reforming the energy-products subsidy, it is still important not lump all fuel items in the same basket. For instance, LP subsidy is important for the poor and constitutes about 5 percent of the value of consumption expenditure of the poor HH. Same for the kerosene subsidy (lowest 2 quintals capture more than 57 percent of the allocation). In the other end, the gasoline subsidy is highly regressive (93% goes to richest quintile).
I argued in a study for removing only the gasoline subsidy of the subsidized energy products. If it is lifted, poverty was estimated to increase by only 0.02 of one percent. The exact saving can be re-injected in the form of a universal system of child cash transfers (universal child grant age 0-6, and conditional universal grant on school attendance for age 6-14). The main findings were: the proposed measure has the potential to lift around one fifth of poor Egyptians out of poverty with greater impact on children (reduction of 28.2 percent among children age 0-14). Moreover, the cost of the system is projected to even decline as a percentage of GDP over time, benefiting from a favorable demographic profile. This is true when the value of the benefit amount is maintained in real term as well as a percentage to per-capita GDP. Against this evidence, my answer to whether the government 'should' do it is perhaps yes, but whether they 'will' depends on the process they chose (top down or inclusive dialogue and part of a social contract).
Chief, Social Policy & Economic Analysis Section
UNICEF Nepal, Country Office
UN House, Pulchowk
Phone: 5523200 Ext: 1139