Eric Bloch Column

Economic turnaround requires bold budget

By Eric Bloch

THE seemingly endless decline of the Zimbabwean economy since 1997, and the consequential continuing intensification of hardships for ever greater numbers, has resulted in almost all of the pop

ulation desperately craving change. In turn, the yearning for economic transformation has resulted in the population moving constantly from one crisis of expectations to another, anxiously striving to grasp some hope that the long-awaited economic upturn will be triggered into being.  

That is driven by government’s ceaseless assurances that an economic metamorphosis is imminent, notwithstanding that time after time those assurances have proved to be baseless and naught but empty words. So desirous is the populace for the critically needed change to the distraught economy that despite all government’s past promises and predictions of economic transformation having proved to be unfounded, nevertheless each time there is to be any governmental announcement of an economic nature, there is a surge of expectations.

That was the characteristic of most of Zimbabwe prior to the Reserve Bank’s third quarter monetary policy statement, presented by governor Gideon Gono on October 20, but no matter how substantive some of its measures, overnight economic revival could not materialise, and has not done so.

However, another potentially significant economic policy event now lies ahead, being the presentation to parliament (and thereafter to the unnecessarily created, and unjustifiably costly, senate) of Zimbabwe’s 2006 budget by the Minister of Finance, Herbert Murerwa.  He will be tabling that Budget in Parliament in less than a fortnight’s time, on December 1, and subsequently, on a yet to be determined date, to the senate, and rapidly more and more Zimbabweans are speculating upon its likely contents, their desperation fuelling their hopes for a budget which will constructively reform the economy and ease the lot of the distressed majority. But, at the same time, the numerous past crises of expectation failed to deliver, and therefore the present crisis of expectations is muted by a growing pre-conviction that the budget will, in practice, be a non-event.

In particular, there is a justifiably widespread belief that although Minister Murerwa undoubtedly knows what is necessary to be done, he will yet again be prevented from doing the necessary because governmental ideologies and political objectives will, as heretofore, override national need.

Interestingly, whilst in prior years there has been extensive pre-Budget consultation between the Ministry of Finance and numerous representative bodies of diverse economic sectors, the recent run-up to the Budget has not only included such consultations, but also interactions with “the man-on-the-street”.  Undoubtedly the minister has been given far greater insight than in the past into the public’s needs and expectations, but there is widespread scepticism that he will be able to react substantively to that insight, for political dogmatism of his masters will inevitably override the best interests of the poverty-stricken masses.

From a taxation point-of-view, the two most prevalent  “demands” are that the taxation thresholds and bands be realistically adjusted, and that in similar vein the tax credits and allowances be meaningfully increased.   At the present time, employees pay income tax on monthly income in excess of $1,5 million, at rates moving upwards from 20% to a ceiling of 40% on income in excess of $9 million per month. Inflation having pushed the Poverty Datum Line (PDL) for a family of six to over $12 million, such taxation is untenable. How can it conceivably be justified to exact tax on an income of only an eighth of PDL, and to apply a maximum, horrendous rate of 40% on income above three-quarters of PDL? 

It is unconscionable to extort such tax from the poor!  Moreover, much of the niggardly remaining after-tax income of the oppressed taxpayer then disappears in direct taxes, such as 17,5% value added tax (Vat) on much of the spending of those remnants of income, Customs Duties built into product prices, and the like.  Allowing for the probability of two income earners in poor families, the minimum tax threshold should be $6 million per month, but more justly at least $8 million per month, and even that does not give recognition to the inevitable inflation over the year ahead.

Similarly, tax credits and allowances require radical review.  How on earth can government justify limiting tax credits for blind persons, mentally and physically disabled, and the elderly to an amount equating to less than ten loaves of bread per annum? It is as unreasonable, and verging on the unjust, to limit the tax deduction for pension contributions to a niggardly $1 440 000.

But modification of Zimbabwean taxation should not relate only to impacts upon the poor. Very correctly, a year ago Murerwa motivated a change to allowances for capital gains tax, intending that the tax should apply to actual gains, as distinct from the notional gains occasioned by inflation. But, having fairly prescribed that each year’s allowance should equate to that year’s inflation, the legislation was (and still is) vague and capable of misinterpretation, in that Zimra restricts the allowances to each year’s inflation without applying the compounding effect that in fact pertains to inflation.  Equity dictates that this should be rectified (with retrospective effect).
In his 2005 budget statement, Minister Murerwa was emphatic that further representations for Vat exemptions and zero-ratings would not be entertained. However, economic circumstances dictate that he should reconsider that stance. In particular, medical and educational services should not be Vat exempt, but should be zero-rated. 

By so doing, health services providers and educationalists can recover Vat paid by them on goods and services, claiming those payments as input tax. In that event they would not have to treat the Vat they pay as operating costs which they must recover in the fees that they must charge.  So many Zimbabweans can no longer afford health services, and are calamitously embattled in trying to fund their children’s education. Government can give a little alleviation to them by zero-rating health and education.

Of overriding concern is that the 2006 budget should demonstrate a real intent by government to cut its spending markedly. The magnitude of government’s over-spend, year after year, and its resultant recourse to gargantuan borrowings, has been one of the greatest contributants to the intense hyperinflation that has plagued Zimbabwe.
 
Government needs to move towards a balanced budget, and to adherence to that budget.  It is all very well that it talks of reducing the swollen public service, but with 80% of civil servants being nurses, doctors, teachers and the like, the extent of possible reduction is limited.  

Moreover, unless the reduction is achieved by natural attrition, the retrenchment packages will be crippling.  Public service reduction must be pursued, but so should cut-backs in Defence spending, in supporting an excessive number of embassies abroad, in endless trips by monstrously large delegations, in huge cavalcades and the like. 

Zimbabwe must swallow its pride and accept food aid, instead, of funding massive imports from debt.

Government should also reconsider, yet again, its position on the privatisation of parastatals.  Not only would the economy benefit from the efficiencies and greater productivity generally forthcoming from privatisation (as proven in innumerable instances in the United Kingdom, much of mainland Europe, USA, Australia, South Africa, Malaysia and elsewhere),  but government would be progressively relieved of debt  and guarantees, and in some instances would generate revenue inflows from the disposals of assets.

Most of all, the 2006 budget statement needs to evidence a genuine intent of government to be investment facilitative. That would be a major factor in achieving the so long desired and greatly needed economic turnaround.
 
It would strengthen the taxation base, by the creation of more taxable entities, expansion of existing ones. It would create employment, resulting in more domestic trade.  That facilitation must include evidence of a real intent to honour Bilateral Investment Promotion and Protection Agreements (BIPPAs), to enter into further double taxation treaties, creation of meaningful investment incentives, reconciliation with the international community, and providing investment protection guarantee insurance through internationally-recognised facilities (such as the World Bank’s MIGA facility).

The crisis of expectations exists, but weakened by little hope that the expectations will be met.