Of tax reforms and economic growth

With only a matter of months until the 2015 national Budget, debate is intensifying among economic observers over how sustainable growth can be returned to a depressed economy.

Victor Makanda

Another scary issue revolves around how government will generate its revenue in 2015, particularly concerning taxation issues.

This area has taken its toll, especially in light of the recent tax hikes that were announced in the Mid-Term Fiscal Policy statement a fortnight ago.

The most frightening part is the fact that the government may, and could possibly in the future hike taxes (in their different forms) in an environment where aggregate demand is already weakening subsequently leading to lower profits and disposable incomes for corporates and households, respectively.

With taxes even of air-time being reviewed upwards, one is forced to question the next move or hike in taxes as the government appears to be desperate to generate funding.

Furthermore, statements by the Ministry of Finance and Economic Development (MoFED) Patrick Chinamasa early this week after meeting the IMF head of mission, also supports this view.

According to the MoFED, government will make further reforms in the areas of tax policy and administration, debt management, the ease of doing business and the investment environment.

While acknowledging taxation as a key fiscal policy tool, it is becoming increasing likely for the locals to take such utterances as mainly referring to tax hikes rather than tax cuts. Against this background, evaluating such proposals may go a long way to trying to find sustainable solutions for the economy and government operations.

Taxation has and will always remain a key tool at the discretion of any government. For the domestic economy, there is a growing need for policymakers especially within the MoFED, not only to think of tax hikes but also to consider tax cuts.

There is a misconception among current policymakers in only thinking of the short-term benefits of tax hikes without considering the long-term impact of such measures.

With the probability of increases in taxes being high in the next budget, the government may need to consider the effect of such measures on aggregate demand.

For instance, the current measures where an excise duty on fuel and on airtime was proposed, the short term impact implies additional revenue for the Treasury.

Nonetheless, the long-term impact of these measures will then mean an additional cost for corporates and subsequently higher prices for finished goods and services. For individuals, with stagnant or even declining disposable incomes, this will see them being squeezed further.

In light of this, tax hikes for a depressed economy may only act to restrain economic growth.

Under the current set up, while acknowledging measures that have been introduced to improve compliance by corporates, the government may also need to find ways of improving transparency in collections mainly from the diamond sub-sector.

Though the consolidation of the diamond industry is not without its shortcomings, such a move will nonetheless significantly improve collections which have not been forthcoming.
As the Treasury is focussing on tax reforms, concurrently they may need to focus on addressing their recurrent expenditure.

This recommendation has been repeated quite often since the adoption of the multi-currency regime in 2009 but positive action or implementation has lagged. Yet it is the implementation that is required for the proper management of expenses.

Key to note is the fact when revenues are not growing, it pays handsomely to adopt cost cutting measures. For the government this area is critical as the wage bill alone accounted for 76,1% of total expenditure for the six months to June 2014.

The MoFED has however, only mentioned vaguely that they are considering initiatives to reduce the wage bill.

It is highly likely that these initiatives may not be adopted anytime soon especially when service chiefs were promised salary increases and vehicle purchases estimated to cost over US$7 million.

Such actions reflect the resistance by the government to reduce their bloated employment bill.

There is need for a restructuring of government operations and also a reduction in benefits, including expensive vehicles, for many public sector members.
As highlighted by the IMF head of mission recently, sound economic policies may be the better panacea for improving Zimbabwe’s coffers.

These policies include bringing clarity to the Indigenisation and Economic Empowerment Laws as a way of encouraging mutually beneficial partnerships between domestic and foreign investors. This step will go a long way towards allaying negative perceptions on the lack of security of investments and property rights.

In addition, such measures provide legal transparency and predictability, ultimately leading to capital inflows which is the critical ingredient for reviving Zimbabwe.

Critical is the fact that without revival of key industries, additional tax hikes will only lead to diminishing returns in so far as government coffers are concerned. This is especially true when the economy is saddled with a debt overhang of US$8,8 billion which translates to a debt to GDP ratio of 62%.

Overall, while growth in national coffers is critical, the government may need to consider sustainable ways of realising such a goal.

In doing so, consumption by households must not be thwarted as this plays a pivotal role especially when economic revival is concerned.

Availability of capital is required also as this is the oil that most industries and sectors are yearning for.

In addition, creating an enabling environment, especially for businesses will be beneficial especially for the growing informal sector rather than the imposition of increased taxes on such players.