29 December 2011

Zimbabwe: Country Suffers From Decimated Middle Income

Photo: Chris Kirchhoff/MediaClubSouthAfrica
Africa's middle class is a reality and widening by the day.

ONE of the most understated, but significant, consequences of the decade of economic debility that Zimbabwe underwent was the decimation of its middle class.

Due to the lack of a viable middle income, Zimbabwe's aggregate demand (total demand for final goods and services in the economy at a given time and price levels) is still very much constrained.

This is indicated by recent studies by institutions such as the Confederation of Zimbabwe Industries and this has had a negative impact on both consumption of locally manufactured goods and monetary flow patterns.

Generally experts believe that economies across the globe tend to be driven by the "middle income".

It is argued that it is the middle income that has the greatest response to both monetary and fiscal stimuli - in terms of the marginal spending increase.

It is also the middle income that, on balance adjusts spending, saving and import patterns in response to specific Government policy initiatives.

Local economist Mr Joseph Mverecha contends that although restoration of the middle income is largely a prerogative of the State via instruments such as fiscal planning, the Government lacks in terms of a deliberate strategy in this regard.

"For Zimbabwe, the middle income was decimated by hyperinflation and while it is true that the process of rebuilding the middle class takes time, Government, through the Budget has to undertake visible steps. This can be done by ensuring that tax adjustments lead to more disposable income for the lower and middle class - the people with greater spending for each additional dollar.

"This will boost aggregate demand, capacity utilisation, output and ultimately employment.

"The tax adjustments in the 2012 Budget only lead to very small incremental gains in this regard. It is more coincidental than deliberate," said Mr Mverecha.

An analysis of the extent to which the lower, middle and upper income will benefit (respectively) from the new tax bands proposed in the 2012 Budget shows that the lower income groups are benefiting less than the middle and upper tier groups - implying widening disposable incomes.

In respect of that analysis, Mr Mverecha elaborates: "The middle tier is the biggest beneficiary and thus consistent with building the middle class, however, this appears more coincidental than deliberate.

"All income groups will experience increases in disposable income at a rate less than nominal Gross Domestic Product growth - estimated at about 13,5 percent to 14 percent. What this means is that the level of aggregate demand increase arising from the new tax adjustments will remain low, at a time when the economy requires fresh impetus.

"There are only two sources of stimulus in a dollarised environment, that is, exports and fiscus - aside from donor funding." In the 2012 Budget, Minister Biti proposed to adjust the tax-free threshold from US$225 to US$250 per month in an effort to enhance "disposable income in the hands of taxpayers, thereby stimulating aggregate demand for goods and services".

At the same time he also widened the income tax bands to begin at US$250 and end at US$10 000 and above which income is taxed at the highest marginal tax rate of 45 percent.

Some experts believe, however, that the adjustments, especially the former, are superficial. Under a hypothetical situation, had the Finance Minister increased the minimum tax threshold to US$300 and 15 percent (as opposed to the proposed US250 and 20 percent), it can be projected that the lower and middle income groups gain measurably, more than the upper income levels.

The lower and middle income groups have higher spending power, implying a higher increase in domestic demand and hence more production, output and employment.

Although the Finance Ministry is rightly concerned that such a high tax threshold will lead to a big hole in the fiscus, chances are very high that a larger proportion of what is released will be collected through higher spending occasioned by higher disposable incomes.

Significantly, the lower and middle income groups typically have a lower propensity to import, implying more domestic spending.

To this extent, the Government gets to yield more revenue as greater spending cascades in the economy, generating additional demand, value-added tax (VAT), pay-as-you-earn (PAYE) and other taxes.

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