Financial and economic experts are warning that the government’s decision to raise taxes to finance public-sector salary increases could intensify inflationary pressures and further strain an already fragile economy.

The Cabinet this week approved a package that includes a one-percentage-point increase in the value-added tax (VAT), bringing it to 12 percent, along with a 300,000 Lebanese lira hike in the price of 20 liters of gasoline. The measures are designed to fund six additional monthly salaries for public administration employees and full supplementary benefits for military personnel, at an estimated annual cost of $800 million.

While few dispute that public employees deserve relief after years of economic collapse, experts say the method of financing the raises carries serious economic risks.

Samir Hammoud, an adviser to the finance minister, described the country as “caught between a rock and a hard place.” In remarks to Nidaa Al-Watan newspaper, he said public-sector employees have legitimate grounds to demand higher wages to avoid hardship and preserve the functioning of state institutions. But he cautioned that the broader economy is ill-equipped to absorb new fiscal burdens amid persistent political and security uncertainty and Lebanon’s continued regional isolation.

Hammoud noted that the public sector faces acute staffing shortages and requires comprehensive rebuilding. A significant portion of those receiving the wage increases are in the military and education sectors, with retirees also accounting for a large share. He rejected arguments that these groups are economically unproductive, stressing that no functioning economy can exist without quality education and national security.

At the same time, he warned against using a temporary budget surplus to justify permanent salary adjustments.

“The surplus applies to one year only, while the raises are permanent and require permanent revenues,” he said, cautioning that the move could weigh heavily on the Treasury, erode state revenues and increase pressure on the broader economy.

According to Hammoud, the potential fallout includes economic contraction, higher prices, pressure on the exchange rate, rising unemployment and declining confidence in public finances. He argued that wages must be treated as part of overall production costs and increased only within a broader, sustainable economic plan.

“The correct salary scale must exist within a productive public sector of appropriate size, alongside price stability,” he said, adding that no economy can remain stable without a sound and trusted banking sector.

An economy lacking confidence, he warned, ultimately becomes dependent on unstable revenues and ever-expanding expenditures.

University professor and financial expert Marwan Al-Qutb said the VAT increase alone is likely to push prices higher across the board. At a minimum, he said, goods and services are expected to rise in line with the one-point tax increase. The real impact, however, could exceed that if some merchants take advantage of the measure to inflate prices beyond the tax adjustment, particularly in the absence of effective oversight.

Because VAT applies broadly, Al-Qutb noted, it affects all segments of society — including private-sector workers and others who will not benefit from the salary hikes. As a result, many households will face higher living costs without any corresponding increase in income.

He also warned that the move could prompt private-sector unions to demand similar wage increases and a higher minimum wage. Such pressures would add to the burden on businesses already grappling with economic stagnation, potentially deepening imbalances in the labor market.

On the gasoline tax, Al-Qutb said the additional 300,000 lira per 20 liters will directly or indirectly affect most citizens by driving up transportation costs. Higher transport costs, he explained, ripple through production and distribution chains, increasing the cost of goods and services and fueling broader inflation. Lower-income groups — particularly private-sector workers who did not receive salary adjustments — are likely to bear the brunt.

Risk strategist and economist Mohammad Fheili echoed those concerns, arguing that the government’s approach blends two policies that may appear contradictory but are, in effect, part of the same fiscal dynamic.

“It injects additional spending through salary increases while financing it through indirect taxes that affect everyone,” he said. “In reality, it is one path: expanding current state spending and funding it from citizens’ pockets.”

Fheili said the answer is neither to freeze wage increases nor to ignore the hardship facing public employees, but to realign spending priorities within a comprehensive reform framework.

He called for tying any rise in public spending to genuine administrative reform, including redistributing staff, closing unproductive institutions, digitizing government operations and introducing performance measurement. Raising wages without improving productivity, he said, would simply translate into higher inflation.

He also urged policymakers to broaden the tax base more equitably by cracking down on tax evasion, integrating the cash economy into the formal financial system, imposing a genuinely progressive tax on large profits and strengthening customs enforcement.

In addition, Fheili advocated establishing a targeted and transparent social safety net to support the most vulnerable households, rather than relying on temporary or ad hoc measures.

Ultimately, he said, none of these reforms will succeed without restructuring the banking sector and restoring confidence in the financial system.

“An economy without trust is inherently inflationary,” Fheili warned.