Eric Bloch: Budget review, from the good to the ugly

A FEW weeks ago, this column foreshadowed that the Minister of Finance, Tendai Biti, would be faced with a monumental challenge when presenting his Mid-Term 2010 Budget Review. 

Substantially (but not wholly) driven by him, the once extremely emaciated economy had, in 2009, made some significant first steps to economic recovery.  However, from February 2010 onwards that recovery had not only been halted, but also considerably reversed.  The minister’s challenge was to arrest the resumption of economic decline, and to set the economy once again upon the path to recovery  and doing so would undoubtedly be extremely difficult.

On Wednesday last week the minister confronted the challenge.  In 135 minutes in some respects he very bravely did so, but in other respects not only did he fail, but created greater economic obstacles. To all intents and purposes, his 2010 Budget review should have been titled “The Good, The Bad and The Ugly!”  He unhesitatingly challenged some of the sacred cows of his many political opponents, but he also did some things wrongly.

The foundation of the economy had, for over a century, been agriculture, but ever since the millennium it has been almost naught but a shattered foundation.  The foolhardy manner in which government pursued a necessary, and long overdue, programme of land reform disastrously destroyed the agricultural sector.  Of the many “skills” of that programme’s methodology, one of the greatest was the total destruction of property rights.   Government practically acquired total ownership of all rural lands, completely destroying the principles of property rights.  In consequence, the thousands of “new farmers” had no collateral security upon which to access the working capital resources essential for viable farming operations. 

Biti unreservedly attacked this, strongly emphasising the need for a major and constructive revision and restructuring of the land reform, centred upon the creation of meaningful rights.  When doing so, he was severely heckled by a large number of parliamentarians, but courageously withstood that heckling.

In similar manner, he had no reservations in calling for Zimbabwe to pursue policies of indigenisation and economic empowerment in a manner that does not deter and alienate investment, for none but those with self-inflicted myopia can deny that ever since the promulgation of the Indigenous and Economic Empowerment Regulations on February 12, foreign direct investment and domestic investment were brought to a near-total halt.  Concurrently, the gravely weakened business confidence was almost totally destroyed, with inevitable economic decline the result.

The minister also correctly emphasised the urgent need to contain pronounced corruption and profligancy within most sectors of government, and for yet more stringent containment of government spending, especially so on unwarranted international and regional travel, vehicle hire, and the like.  The magnitude of the interjections and heckling of the minister’s fellow parliamentarians is testimony to the courage of the minister in outspokenly addressing these issues.

However, part of Biti’s budgetary statement was regrettably bad.  Pretending to be conscious of the hardship sustained by much of the population, he announced an increase in the income tax threshold for Pay As You Earn (Paye), from a meagre US$160 to US$175 per month.  Not only is such increase niggardly in the extreme, effectively placing a measly US$15 per month extra into the taxpayer pockets, but it also contemptuously disregards the magnitude of poverty suffered by most Zimbabweans, including a great majority of those in employment.  The Poverty Datum Line for a family of six approximates US$480 and, assuming that such family has two income earners, albeit not earning at equal levels, any taxation on income of less than US$300 is the extortion of taxes from those struggling to survive on incomes below the minimum necessary to avoid endangering life.

Ministerial recourse to token gestures, of virtually meaningless benefit, was also demonstrated by the announced change of the date by which commerce and industry must remit Value Added Tax (Vat) to the Zimbabwe Revenue Authority, from the 10th to the 15th day of the month.  That five day extension is of virtually no assistance to the financially constrained businesses that cannot afford to extend credit to customers when they have to pay Vat to government before receiving it from customers.  As a result, they do not extend credit, with the resultant further containment of consumer spending power, and of the ability of the distributive trades to source goods from the manufacturing sector.  That, in turn, minimises industrial production, with consequential fuelling of inflation. 

 In fact, a longer Vat payment period would have benefited the fiscus, for it would have fuelled increased trade volumes thereby generating greater Vat and customs and excise duties, and income tax on commercial profits.

These and other taxation measures announced by Biti, and fast-tracked through parliament on the following day, can only be regarded as bad.  Bad for the populace, bad for the economy, and bad for government.

And then there was that which was ugly.  Amongst the many weakened elements of the Zimbabwean economy are the clothing, textile and footwear industries.  Those industries have, in the past, been major contributors to Zimbabwe’s economic wellbeing, and had (or have) the potential to be key catalysts of economic recovery.  They can employ many, generate foreign exchange, contribute to downstream economic sectors and the fiscus. 

 Instead of recognising the massive extent that the viability and continuance of these industries have been threatened, he has strengthened the threats by reducing the customs duties payable on imports of competitive products.  Such action by the minister is ill-considered and disastrous.
Similarly, and despite the fact that the mining sector could be the foremost driver of Zimbabwean economic recovery,  Biti has once again focused upon that sector for more onerous taxation.
 Yet again he has increased the royalties payable by miners, and has declared the intention
 to reduce considerably, from 2011, the capital allowances benefits presently accorded the industry, as well as envisaging other onerous taxation measures.  Once again he is sending out a message which can only be construed, even if not so intended, as being “we don’t want mining investment”.

Especially ugly is that, despite talk of intended entry into Public Private Partnerships, which effectively is partial privatisation of parastatals, concurrently the minister disclosed government’s intent to establish two new parastatals. 

 The mining of diamonds in Marange is to be conducted by a governmental company, and similarly such a company is to have exclusive mining exploration rights.  How regressive can Zimbabwe be? 

Yet more parastatals — jobs for the boys, losses for the state!  This is masochistic economic destruction, and is a significant element of the ugly in the Budget review. 

By Eric Bloch