In a clear sign of desperation triggered by limited fiscal space, government has proposed a US$4,1 billion budget funded by a raft of new taxes, including a 5% levy on airtime to fund health, and several austerity measures to reduce public spending amid dwindling revenue.
By Taurai Mangudhla
With wages accounting for 91% of revenue, Treasury is currently struggling to fund capital projects.
Finance minister Patrick Chinamasa proposed to lawmakers a freeze on public service employment and salary hikes.
Chinamasa said Zimbabwe’s economy will grow by a modest 0,6% in 2016 — his lowest since taking over as finance chief in 2013 — from an initial projection of 1,2% driven by improved agriculture and mining output.
The agricultural sector is seen recovering from the El Niño-induced drought decline of -3,7% to 1,2% growth buoyed by higher maize and tobacco output. The mining sector, which now anchors the economy, is expected to register modest growth of 0,9% on the back of firmer international prices and anticipated increased output.
Government expenditure, most of which is on wages, has successively resulted in budget overruns over the years and is expected to result in a US$1 billion budget deficit at the end of 2016.
“In tandem with the above, government will also start addressing the fiscal gap through a number of expenditure management measures backed by revenue increasing interventions anchored on stimulation of production,” Chinamasa said.
“Further to this, the restrictions on hiring, continuous monitoring and audits for flushing out ghost workers, as well as the restructuring of the public service are essential measures which will be maintained in order to manage the wage bill as a key component pushing up expenditures.”
To increase the tax base and meet his US$4,1 billion 2017 budget, which is flat on 2016, Chinamasa has introduced a Health Fund Levy of 5 US cents for every dollar of airtime and mobile data.
“The continued reliance on a shrinking formal tax base to fund critical sectors such as health is no longer sustainable, for both the taxpayer and government. It is, therefore, critical that all economically active individuals contribute towards funding health services,” Chinamasa said, adding the resources raised will be ring-fenced for the purchase of drugs and equipment for public hospitals and clinics.
In a move seen as a climbdown on the indigenisation law compelling foreign firms to cede 51% shareholding to locals, Chinamasa also proposed to provide tax incentives to enhance the attractiveness of the Special Economic Zones (SEZs) which were created by government in order to attract foreign direct investment and enhance the economy’s capacity to produce goods and services competitively.
He said businesses in the special zones will be exempted from corporate income tax for the first five years of operation. Thereafter, a corporate tax rate of 15% applies while capital equipment for SEZs will be imported duty free
“Specialised expatriate staff will be taxed at a flat rate of 15%,” he said. “The tax incentives will apply in demarcated geographical areas and are restricted to production for export.”
Chinamasa also proposed to increase road traffic fines by as much as 100% effective January as a means to raise revenues.
Government, Chinamasa said, also proposed to align excise duty on paraffin with diesel at a rate of 40 US cents per litre, with effect from January 1 2017.
This comes as government realised revenues of US$2,876 billion between January and October 2016 against a target of US$3,158 billion, representing a negative variance of 9,8%. Cumulative expenditure for January to October 2016 amounted to US$3,84 billion against a target of US$3,32 billion, representing a US$520 million gap. Employment costs gobble 91% of revenue.
The poor economic performance, shown by a projected growth rate of 0,6% in 2016, is attributed to massive de-industrialisation after hundreds of companies shut down due to a host of operational challenges ranging from scarcity of affordable capital and utilities.
This has seen imports amounting to US$5,35 billion against exports of US$3,365 billion in the ten months of 2016.
“In order to protect the tax base and eliminate non-taxation of income accruing to some foreign business enterprises, it is proposed to introduce the definition of ‘permanent establishment’, in the Income Tax Act,” he said.
On the consumption side, Chinamasa in 2017 accordingly proposed measures to gradually revert back to the cash budgeting framework, through ensuring that all line ministries adhere to allocations and spend prescribed resources.
Chinamasa said government will not be liable for commitments outside the budget and individuals responsible for creating such obligations will now be fined in order to manage expenditure.
“There are also payment arrears arising out of ministries’ incurring commitments outside the budget, increasing the obligations of government in violation of the Public Finance Management Act. In this regard, penalties will be imposed on those individuals responsible for creating such obligations outside the ambit of Treasury budget processes, in accordance with Public Finance Management Regulations developed by the Accountant-General,” Chinamasa said.
Furthermore, private sector entities that entice ministries and departments to incur liabilities on the budget outside Treasury guidelines will also be held accountable for such practices. Any commitments made outside the system will not be honoured, and a public statement will be made to alert service providers of this arrangement.”
The Treasury chief said all budget commitments for 2017 will be made through the Public Finance Management System in order to address the uncontrolled accumulation of arrears.