Austere taxes behind Ncube’s budget surplus

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“GOVERNMENT is solvent, we are running surpluses and we have been doing average surpluses of $100 million since September last year when we came in. In January we had surplus of $102 million, February $85,5 million as we had to take into account cushioning of civil servants. In March, our surplus doubled to be just about $200 million,” said Finance minister Mthuli Ncube strongly claiming that government finances are sound.

Although it is still relatively too early to fully assess the developments on the fiscal front, indications are that the government continues to struggle to contain expenditure within its set budget levels. High inflationary pressures are also an added albatross to this fiscal consolidation. Indeed, the government has been recording surpluses, but much of it was revenue-induced as a result of high taxes in the form of excise duties, more specifically from tobacco, airtime, alcohol and fuels sub-sectors and also high indirect taxes coming from the Intermediated Money Transfer Tax (IMTT) commonly known as the 2% tax. Sadly, the government has been failing to rein-in its expenditure and it is in January alone when expenditure was within budget. In February, for instance, expenditure came in at $521,3 million which was 3,2% off the target of $505,7 million. Rising inflation which resulted in elevated prices across all segments of the economy have resulted in government facing elevated costs on its supplies as well as the cost of living adjustment offered to the civil service.

Going forward, containing expenditure will continue to be difficult against spiking inflation levels which are slowly approaching the 75% mark as per official figures. The higher prices, mainly tapping from the exchange rate disparities, make it difficult for government to maintain spending levels within budget levels. The February gesture of cushioning civil servants is already an indicator towards further stimulation in line with the spiking cost of living and general price increases in the market. Furthermore, in March the government approved a 29% civil service salary increase which from April onwards will reflect a big jump in expenditure which will definitely close the 2% tax and high excise duty driven surplus gap enjoyed since September18. The 38,5% unbudgeted for subsidy on maize and other crops will also add pressure on expenditure.

This indeed raises concerns as to whether the government’s chosen approach of addressing fiscal imbalances will really result in the desired outcomes. The only two ways to balance the budget are to spend less or to collect more. Spending less is the preferred method, but that is just not happening as it naturally has adverse political repercussions. As a result, the government chose raising taxes as the desired approach to dealing with the deficit.

High taxes reduce the return on investment and therefore discourage expansion. Zimbabwe already had one of the highest tax rates in the region and these are denting investment. Supply-side economists suggest that high taxes are a major disincentive to GDP growth and consequently predictive of a country’s economic health. This would imply that low tax rates should be a priority in any country hoping to inspire productivity. There is no surprise indeed as to why the International Monetary Fund predicts an economic recession of -5,2% this year.

Since raising taxes diminishes productivity that in turn reduces tax revenue, raising taxes does not help in balancing the budget in the long run. It can only give a short-lived smile. The authorities should understand that high taxes lower disposable income, constrain demand and reduce the incentive to produce. As such, high taxes hurt the economy more than helping it in the long run. The economy might be recording high taxes driven budget surpluses but are not helpful. High economic growth should be the priority. The economy can do well by keeping the supply-side economics in mind when addressing the resistant budget crisis. Low tax rates should be the first priority, with a balanced budget only the second. Taxes matter, and striving to keep them low is much more important.

Tinashe Kaduwo is a researcher and an economist. — kaduwot@gmail.com

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