Making sense of the 2019 budget

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FINANCE and Economic Development minister Mthuli Ncube presented his long-awaited 2019 National Budget statement on November 22.

The budget comes exactly one year since the ushering in of a new government. 2018 has been a very difficult year economically with key economic indicators such as inflation, the parallel market premium, the budget deficit and the domestic debt taking a turn for the worse.

Shortages of foreign currency in the formal economic system have spawned shortages of basic commodities and have driven the parallel market premium to record highs. The minister has had to revise the economic growth rate for 2018 from the projected 6,3% in the Transitional Stabilisation Programme (TSP) to about 4%. The World Bank, the International Monetary Fund and the African Development Bank (AfDB) are projecting much lower estimates. The inauspicious economic trends and developments of 2018 have adversely impacted on the ordinary citizen who has borne the brunt.

The salient highlights from the 2019 National Budget include: reviewing 13th cheque payment criteria from 2018 by limiting payment to basic salary; rationalisation of foreign service missions, with effect from July 2019; retirement of youth officers, by December 2018; rationalisation of foreign service missions; biometric register for civil servants in 2019; stricter management of the government fleet; and public enterprises reform. In particular, the planned adoption of biometric payroll administration is a positive measure. I have vociferously advocated for the same since 2014 and my writings bear testimony to this.

Countries such as Kenya and Nigeria have also adopted biometric payroll administration with very positive results in terms of huge savings which savings have been deployed to improve the conditions of service of genuine civil servants. This is also an important step in the journey towards e-government which must be the centrepiece of government’s anti-corruption strategy and drive.

The major thrust of the 2019 National Budget is fiscal austerity and the minister announced a slew of measures aimed at realising this thrust. In my view, the 2019 National Budget theme of “Austerity for prosperity” is a misnomer. While I agree with the imperative of cutting down on non-productive costs and expenditures and improving the efficiency of government expenditures in general, I do not agree with increasing taxes, especially duty on fuel. We need lesser and lower taxes to incentivise strong economic activity. More and higher taxes only serve the purpose of increasing the cost of doing business while driving most businesses into the informal. A case in point is the Irish economy which grew by 26,3% in 2015 according to the Irish statistical agency. This was on the back of the introduction of 12,5% corporate tax which resulted in a number of multinationals moving their headquarters to Ireland.

Economic prosperity and sustainable development cannot be achieved on the back of fiscal austerity. The 2019 National Budget should have been correctly themed “Fiscal consolidation for prosperity.” The two phrases are not exactly the same. Fiscal austerity refers to a combination of spending cuts and tax increases while fiscal consolidation involves a policy aimed at reducing government deficits and debt accumulation. In fact, non-productive recurrent government expenditure is projected to increase from an estimated US$5 billion in 2018 to a projected US$5,7 billion in 2019. The increase is likely to be greater when you factor in a possible salary increment to civil servants which is highly likely in view of the severe erosion of their nominal incomes through inflation. Hence in my view the fiscal framework is not likely going to change much but will remain largely consumption-oriented. The minister is seeking to reduce the fiscal deficit from an estimated -11,7% in 2018 to about 5% in 2019. This may however prove a tall order given the possibility of a salary increase for civil servants and also given the possibility of a normal to below-normal rainfall season that is being forecast.

It is also not yet clear how government intends to finance the huge budget deficit of almost US$1,6 billion. How government finances the fiscal deficit determines its sustainability. Financing the deficit through the creation of virtual money is inflationary as we have seen. In the past, government has increasingly sought recourse to the overdraft facility with the Reserve Bank of Zimbabwe (RBZ), which has risen unsustainably. The overdraft increased by US$1,11 billion for the period January to September 2018 and is projected to close the year at US$2,5 billion, which is well above the stipulated statutory limit. During the period January to August 2018 alone, Government issued Treasury Bills and bonds worth US$2,5 billion. Resultantly, outstanding Government Securities stood at US$6,2 billion as at end of August 2018.

In terms of actual allocation to ministries, primary and secondary education received the highest vote of US$1,1 billion which constitutes about 15% of the total expenditure and net lending. This is below the Dakar Declaration benchmark of 20%. Employment costs however account for the lion’s share of the education vote at 93%. Ministry of Lands, Agriculture, Water, Climate and Rural Resettlement received the second biggest vote of US$989 million which constitutes about 12,7% of total expenditure and net lending. On a highly positive development, 86% of the total Agriculture vote will go towards financing critical capital expenditures.

Health sector allocation stands at 8,9% in 2019. Employment costs however constitute 66% of the total health budget. The Abuja target remains elusive to the country. The Sub-Saharan African average is 13%. Rwanda spends at least 23% of its budget on health care. Zimbabwe also spends a relatively small share of its GDP on healthcare. Per capita health allocation stands at about US$41 in 2019, up from US$31 in 2018. Lower levels of per capita health allocation mean health expenditure in the country is insufficient to guarantee adequate access and quality of healthcare. The inadequate public financing of health has resulted in an overreliance on out-of-pocket and external financing, which is highly unsustainable.

Defence and home affairs spending continue to account for a predominant share of the total budget, crowding out critical sectors such as health and social protection. In the 2019 National Budget, the Ministry of Defence was allocated US$547 million, up from US$420,4 million (constituting 7% of the total vote) while the Ministry of Home Affairs received US$518 million, up from US$435,5 million (representing 6,7% of the total vote).

Countries that are doing well both regionally and internationally are reducing defence and security to allow for the scaling up of pro-poor expenditure on human and infrastructure development. Military and security spending have been shown to retard development by diverting government resources that could be put to better use.

In my view, the gargantuan nature of the challenges we face is beyond the capacity of the National Budget or the minister alone to resolve. I am a strong advocate of a social contract. I believe a social contract is very critical at this stage in our polity as it helps to build trust, transparency, accountability, ensure ownership of policies and encourage social cohesion. It helps to reconcile competing interests and manage trade-offs and, importantly, unify the nation around a common vision.

Prosper Chitambara is scholar based in Harare. These weekly New Perspectives articles are co-ordinated by Lovemore Kadenge, president of the Zimbabwe Economics Society. Mobile: +263 772 382 852 and e-mail: kadenge.zes@gmail.com

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