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Eric Bloch Column

Realistic and innovative budget needed

IT is less than a week until the acting Minister of Finance and Economic Development presents his 2005 budget before parliament, and the nation.

Inevitably, there is great speculation as to w

hat the key budgetary proposals will be, with much of that speculation being accompanied by cynical expectations that, in the main, the budget will be a “non-event”, with the only proposals of any possible significance being such as government perceives will influence the electorate in the forthcoming parliamentary elections, to support the ruling party.

Of course, the widely held hope is that the budget will be the launching of fiscal policies that will complement the monetary policies being pursued by Reserve Bank of Zimbabwe (RBZ) governor Gideon Gono to halt the seven-year long economic decline and set the economy on a recovery path. And, if it were in the exclusive hands of the acting minister to decide upon the fiscal policies and the budgetary proposals, his budget statement next week would probably exceed even the most far-fetched hopes and would be a catalyst of restored confidence and optimism that the prolonged economic recession will soon be halted and that a promising future lies ahead.

Regrettably despite his very real ability and his undoubted awareness of what is needed to kick-start the economy he undoubtedly does not have an unfettered ability to craft the budget.

Instead, whilst much of the working details will flow out of the Ministry of Finance and Economic Development, the fundamental policies will be determined by the cabinet, and not by the acting minister.

That is so tragic, for almost all of the cabinet have demonstrated ad nauseum an almost absolute inability to appreciate economic fundamentals. Instead, the Cabinet focus is consistently directed upon self-preservation. Compounding this unfortunate circumstance is the endless ability of most of Zimbabwe’s ministers to resort to wishful thinking, and then to delude themselves that the wishes are facts. Any endeavours to disillusion them and to confront them with realities yields a reaction of: “Don’t confuse us with facts!”

Were that not the unfortunate situation in which Zimbabwe finds itself, what could-and should-next Thursday’s budget statement contain? Space constraints preclude this column from identifying all the fiscal measures that Zimbabwe needs to help it extract itself from the quicksands of the economic morass it has created continuously since 1997.

However, first and foremost, the budget needs to respond to Zimbabwe’s continuing hyperinflation. Although Gono’s policies and actions have dramatically reduced inflation, nevertheless the extent of inflation is still devastatingly high. On the official, Consumer Price Index-based rates of inflation, year-on-year inflation has fallen from 622,8% in January to 209% in October, that is a more than 66% reduction. Even allowing for the fact that the “spending basket” applied to determine the rates of inflation is probably no longer fully

representative of consumer spending, the governor’s progress in reducing inflation is spectacular. If, as estimated by many, actual year-on-year inflation was approximately 700% last January, and was approximately 275% by last month, the rate of inflation has still fallen by about 60%, and the governor deserves commendation for such an astounding achievement.

But that does not detract from the fact that inflation is still untenably high, causing great hardships, intensifying poverty, and hindering export market competitiveness and local market viability. In recognising this (if it does!), government needs to curb its years of profligate spending and very substantially reduce its dependency upon borrowings. Its excessive and recurrent recourse to borrowings is a major activator of inflation.

There are only four areas wherein government should justifiably increase its expenditure (in real terms). They are health, education, economic development and infrastructure. For years, there has been insufficient funding for Zimbabwe’s health care needs, with inadequate remuneration for doctors, nurses and other health care workers, and for maintenance and purchase of equipment.

The result has been a mass exodus from Zimbabwe of vitally needed health personnel, and inability to give proper care to the critically ill. Similarly, education has long been deprived of adequate resources, little has been consumed to promote economic development, and expenditure on much needed infrastructure (including water

storage and distribution, telecommunications, roads, rail and air facilities, and much needed other infrastructure) has been abysmal.

In contradistinction, the magnitude of votes for defence, for information and publicity (comprising mainly the production of jingles, staging of concerts, promoting the ruling party and disparaging the opposition, and histrionic attacks of potentially friendly States and their leaders), and for foreign affairs is incomprehensible and against the best interests of the populace.

The same holds good for the size of the cabinet, which is greater than those of much greater populated countries, and undoubtedly much could be saved from the vote for the President and Cabinet if the cabinet were smaller, the president travelled less frequently, and the presidential cavalcades reduced. The first of the budget responses to inflation should, therefore, be a sharp cut in governmental spending.

However, other responses to inflation are also necessary. Very admirably, the acting minister increased the threshold at which individuals became subject to income tax mid-term in the 2004 fiscal year.

With inflation continuing at high levels, albeit lower than previously, it is necessary that the threshold be raised again. Inflation since the threshold was increased, and as is likely for November and December, 2004 will probably exceed 50%, and the Poverty Datum Line (PDL) for a family of five is likely to be greater than $1,5 million by month-end.

Both of these facts must be taken into account in fixing the new threshold. Concurrently, there must then be appropriate adjustment to the tax bands.

However, the acting minister should disregard the misguided call of the Zimbabwe Congress of Trade Union’s (ZCTU) for the corporate tax rate to be lifted to 45%. The ZCTU justifies its demand on the grounds that the maximum rate of tax for individuals is 45%, whilst corporates are taxed at a rate of 30%. But the ZCTU overlooks that when the corporates distribute their profits, a withholding tax on dividends declared in favour of individuals is levied at 20% of such dividends.

Cognisance of inflation also dictates that income tax credits for the elderly, blind, mentally and physically handicapped persons should be significantly increased from their present very niggardly and almost meaningless levels, as should be the tax-free portion of bonuses and the level of allowable deductions for pension fund contributions. The same recognition of inflation is necessary in reviewing the rebate of death duties and the ongoing iniquitous taxation of capital gains. Invariably those gains are wholly notional, being the result of inflation and not of appreciation in real terms.

And, if government is genuinely concerned about the wellbeing of the Zimbabwean people, the budget will bring about amendments to the Value Added Tax (Vat) Act to procure that health and education services cease to be Vat exempt and instead become Vat zero-rated. The effect of so doing is that providers of health and education services would be able to claim from Zimbabwe Revenue Authority (Zimra) a refund of Vat paid by them on their diverse operational inputs (such as stationary, telecommunication, cleaning materials, rentals, and the like) and therefore would not build that Vat into their costs to be recovered from patients and students by way of increased fees.

The acting minister also needs to have regard for the vigorous endeavours of the RBZ’s governor to motivate a lowering of interest rates.

This is certainly not the case when Zimra imposes interest charges in respect of income tax payments, where recently rates have been in excess of 275%. Surely it would be more equitable to align the interest rate to the Treasury Bill rate? After all, that is the rate government pays when it borrows from the public!

Much else needs to be addressed in the budget, and hopefully will be, but it will stretch credulity beyond breaking point to expect the 2005 Budget to contain much of an innovative, economic stimulatory nature. Past experience and track records suggest otherwise, no matter how valiantly the acting minister may have tried to convince his cabinet colleagues. I hope I’ll be proved wrong, but I’m not holding my breath!

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