27 October 2017

Zimbabwe: Towards a People's National Budget

analysis

The national budget essentially entails the use of government spending and revenues to influence the economy. Governments typically use the national budget (also known as fiscal policy) to promote strong economic growth and reduce poverty.

The budget must influence both the process of generation and distribution of income in such a way as to disproportionately benefit the poor. The budget therefore is an instrument of resource allocation in order to ensure not just a rapid pace of GDP growth, but also the achievement of important development imperatives such as employment creation and poverty reduction.

A people's budget is one that prioritises people and their basic needs as well as ring-fencing expenditures thereto. A people's budget also known as a pro-poor and inclusive budget must promote employment intensive growth.

This is because decent employment is a key nexus between growth and development. A people's budget must boost public spending on health, education, agriculture and infrastructure without undermining fiscal sustainability.

Importantly, a people's budget must be strongly aligned with constitutional imperatives such that the bulk of resources are dedicated towards the realisation of constitutionally mandated people's rights.

The current fiscal framework remains severely constrained as a result of lacklustre performance of domestic revenues owing to informalisation against the background of rising recurrent expenditures. The country is in an unsustainable and invidious fiscal position with the bulk of the revenues financing recurrent expenditure. In particular, the public sector wage bill poses a serious threat to macro-economic stability as the country has one of the highest public employment costs in sub-Saharan Africa. The public sector wage bill has far exceeded growth in real GDP and is crowding out capital and social expenditures. This is exacerbated by the bloated government structure.

Consequently, the budget deficit has increased markedly and was estimated at US$1,042 billion (7,3% of GDP) in 2016. The deficit is being financed largely through domestic borrowings, which is not sustainable and is generating inflationary pressures and a serious cash crisis amidst a subdued productive base/capacity. The deficit is expected to worsen in 2017 owing to pressures on the expenditure side. Funding for the upcoming elections in 2018 will put serious pressure on expenditures.

To boost public spending on investments and social services without necessarily undermining fiscal sustainability, government must explore a number of options for sustainable domestic financing. These options include: broadening the tax base through introducing incentives to mainstream the informal sector into the formal economy as well as improving the overall doing business environment. The high level of informality has presented challenges for domestic resource mobilisation as it has eroded the tax base.

One reason for the high levels of informality is the onerous and distortionary tax regime (there are so many taxes, levies, statutory fees and other unofficial charges through corruption which increase the cost of doing business). This has discouraged formalisation while seriously eroding competitiveness. It has been demonstrated in empirical literature and country case studies that having so many taxes and levies encourages tax evasion and forces small businesses to go/remain, informal.

For instance, in the Democratic Republic of Congo, which has one of the highest recorded rates of business taxation, it is estimated that about half of manufacturing activity is informal. Evidence from Greece suggests that tax compliance rates rise as tax rates fall, with corporate tax revenue increasing to 5% of GDP from 4% after the rate of company tax was lowered in 2005. The plethora of taxes, levies and statutory fees must be reduced and streamlined through the adoption of a uniform and simplified tax regime.

Most importantly, government must create an enabling/supportive policy, institutional and regulatory framework that reduces the cost of doing business and improves the investment climate as well as lowering the barriers and high cost of transition to formality. Government must urgently fully embrace an e-government system that includes company registration and national procurement.

E-governance can also help to make public service provision and governance more efficient and effective and mitigate corruption by raising transparency and accountability through digital footprints and reducing face-to-face interaction. The e-governance system must also entail the adoption of biometric payroll registration of public sector workers and pensioners which has been found to be very effective in cleaning up the payroll and improving its administration.

Other options for increasing the fiscal space include the rationalisation of the bloated size and structure of our government and bureaucracy so that they are in line with the size of our economy and population. Zimbabweans have the unenviable infamy of being over-governed, over-regulated and over-taxed and yet the country is under-developed.

According to the 2017-18 Global Competitiveness Report, too many regulations, bureaucracy, instability and corruption are stifling business and economic confidence. What is needed, therefore, is a lean and efficient government and bureaucracy that is able to proactively respond to the needs and priorities of the people.

There is also scope to cut back on military spending while scaling up expenditure on social services and infrastructure. Professor Paul Collier from Oxford University shows that military expenditure retards development by diverting government resources that could be put to better development use. He argues that military expenditure is not an effective deterrent of rebellion, and, if it is reduced in a coordinated manner across a country then external security interests would be unaffected. The resources freed by reduced military expenditure can be used to enhance development which, in turn, would reduce the risk of internal conflict. Hence development, not military deterrence, is the best strategy for a safer society.

In Uganda, the government committed itself to implementing a reduction in expenditure on security, justice and governance from 39% of the national budget in 2008 to 36% in 2011 to allow for a scaling up of pro-poor expenditure on rural development, energy, road infrastructure and human development. This has resulted in Uganda scoring significant gains on the development front.

There is also scope to improve the fiscal space by reforming state enterprises and parastatals in a socially sensitive and inclusive manner. State enterprises and parastatals have remained a drag to the fiscus and government needs to expedite their restructuring. Leveraging remittances from the diaspora to finance sustainable development represents yet another option.

It has been shown that remittances are a significant and stable source of financing, accounting for as much as 30% of GDP in some developing economies, contributing immensely to development and poverty eradication. There is scope for the country to leverage greater remittance inflows for sustainable development by increasing incentives (e.g. giving them voting rights), reducing the cost of remittance services and improving the overall investment climate.

In conclusion, a people's budget must focus on increasing expenditures on infrastructure and basic social services (health and education), improving agricultural productivity and promoting private sector development as an engine for economic growth.

Government must take full financial responsibility for the development of the country by weaning the economy off the donor dependency syndrome, especially in terms of health care financing. In this regard, Government should consider introducing progressive taxes such as wealth taxes (e.g. on land barons), sin taxes as well as sugar taxes.

Chitambara is a development macro-economist, policy advisor and strategist based in Harare. These New Perspectives articles are co-ordinated by Lovemore Kadenge, president of the Zimbabwe Economics Society

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