Zimbabwe: 2021 National Budget - the Good, the Bad and the Ugly

opinion

A national budget can be defined as a statement of government's estimated revenue and proposed expenditure for the year. The national budget essentially entails the use of government spending and taxation to influence the economy. It 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 price stability, employment creation and poverty reduction.

Finance minister Mthuli Ncube presented the 2021 National Budget to parliament on November 26. The National Budget comes at a time when the country has achieved some measure of stability on the foreign exchange markets as well as on the inflationary front, thereby providing an important basis for growing the economy. However, the socio-economic context remains very challenging, for instance, the incidence of extreme poverty increased from 29% in 2018 to 34% by the end of 2019. This is expected to worsen on account of the Covid-19 pandemic.

The 2021 National Budget is based on the theme "Building Resilience and Sustainable Economic Recovery". It is anchored on the following seven thrusts/priorities: inclusive growth and macro-stability; developing and supporting productive value chains; optimising value in our natural resources; infrastructure, ICT and digital economy; social protection, human capital development and well-being; effective institution building and governance and engagement and re-engagement.

The economy is projected to grow by 7,4% in 2021 up from -4,1% in 2020, while annual inflation is projected to average 135%. These projections are however dependent on a good agricultural season, among others.

On a positive note, the 2021 National Budget has clear employment creation and poverty reduction targets. The Budget is also well aligned to the National Development Strategy 1 (NDS-1). The Minister announced compensation for losses incurred during the currency reform process undertaken last year. This compensation is targeting small and vulnerable depositors, who had US$1 000 and below, for the exchange rate movement loss from US$1:RTGS$1 to US$1:RTGS$2,5, with resources equivalent to US$75 million. The compensation will also extend to pensioners, who will be compensated with resources equivalent to US$75 million. This would help to enhance confidence in the financial sector.

The Youth Employment Tax Credit for each employee hired has also been reviewed upward from ZW$500 to ZW$1 500 per month, and the limit on the maximum credit from ZW$60 000 to ZW$180 000 in a year of assessment. This is expected to incentivise youth employment creation.

Positive measures that are aimed at enhancing local capacity include: a fertiliser manufacturers' rebate, whereby raw materials used in the production process will be imported tax and duty free by approved manufacturers; the expansion of the list of materials that qualify for importation under the shoe manufacturers rebate; the extension of the suspension of duty on motor vehicles used by safari and tour operators; and the directive that motor vehicles for use by line ministries and government departments be purchased from local assembly plants. The cannabis levy is also expected to generate additional revenues for the Government.

Government is projecting to spend not more than ZW$421,6 billion (US$5,1 billion) in 2021 (17,6% of GDP) up by 160% from a projected ZW$162,4 billion (US$1,98 billion) in 2020. Out of the ZW$421,6 billion budget, capital expenditures constitute ZW$131,6 billion (US$1,6 billion) (5,5% of GDP), while recurrent expenditures are expected to consume ZW$290 billion (US$3,5 billion) (12,1% of GDP) with employment costs projected at ZW$142,6 billion (US$1,74 billion) (5,9% of GDP). The African Union (AU) Declaration of 2009 stipulates that African countries must spend at least 9,6% of GDP on infrastructure.

In terms of vote allocations, Primary and Secondary Education was allocated the highest share at 13,1% down from 13,3% in 2020, followed by Health and Child Care at 13% up from 10,1% in 2020, and then Agriculture at 11% down from 17,5% in 2020. The allocations on Health and Basic Education are below the Abuja Declaration (2001) and the Education for All Initiative (2000) targets/benchmarks of 15% and 20% respectively.

The per capita health allocation is ZW$3 680,64, which is about US$45 up from about US$30 in 2020. According to the WHO, global spending on health averages US$1 080 (US$13) per capita, while across Low Income Countries, the average health spending is only US$41 a person.

Countries that invest a lot on health do better economically than countries that invest little. The country continues to overly rely on external funding to finance our healthcare. Donors are projected to provide about US$496 million towards health in 2021, far more than what the government has allocated. This is highly unsustainable.

Social protection was allocated about ZW$9,8 billion US$120 million) (0,4% of GDP) down from 0,7% in 2020. This is below the Social Policy for Africa (2008) benchmark of at least 4,5% of GDP. Water and sanitation on the other hand, received an allocation of about ZW$2,4 billion (US$29,3 million) which constitutes about 0,2% of GDP, down from 0,7% of GDP in 2020. On the other hand, the Ministry of Defence was allocated ZW$23,8 billion (US$291 million) (5,65% of the Budget), while the Ministry of Home Affairs was allocated ZW$23,6 billion (288 million) (5,6% of the Budget).

The increase in sin taxes is a welcome development. The Minister is proposing an upward review of excise duty on alcoholic beverages and cigarettes. This is in line with international best practice. These sin taxes which are essentially a consumptive tax on "demerit goods" are less "distortionary" and they will also help government to mobilise additional revenues.

Also given the rising incidence of non-communicable diseases (NCDs) in the country, this should help to put a check to that. However, the revenues raised through these sin taxes must be earmarked to the health sector. In fact, the country must urgently establish a National Health Insurance Fund that is publicly funded through a combination of sin taxes as well as sugar taxes to ensure primary health care to every Zimbabwean. Currently, only about 7% of Zimbabweans have access to medical insurance and this is too low. No country can prosper without a healthy citizenry.

The Minister is proposing to review the tax-free threshold from ZW$5 000 (US$61) per month to ZW$10 000 (US$122) per month and the bonus tax-free threshold from ZW$5 000 to ZW$25 000 (US$305). Furthermore, the minister is proposing to adjust the tax bands to begin at ZW$10 001 and end at ZW$250 000 per month, above which the highest marginal tax rate of 40% will apply. The PAYE tax free threshold should have been reviewed in line with the Poverty Datum Line (PDL) which is pegged at ZW$17 965,87 (US$219) as at September 2020 as a way of boosting disposable incomes. This is critical if we are to increase aggregate demand in the economy.

The Minister is proposing an upward review in the presumptive tax structure aimed at the informal economy to broaden the tax base. While the intention to mobilise resources domestically is understandable, these taxes in my view appear punitive and could do more harm than good.

One of the reasons why businesses choose to be informal is because of the onerous tax regime which increases the cost of compliance thereby disincentivising informal businesses from formalising. These taxes may end up driving these informal businesses further underground.

A basic stylised fact of economics is that, the higher and the more the taxes, the higher the levels of informality. High tax rates encourage tax evasion and force small businesses to go/remain, informal. For instance, in the Democratic Republic of Congo (DRC) which has one of the highest recorded rates of business taxation, it is estimated that about half of manufacturing activity is informal.

Empirical and case study evidence from many countries suggests that tax compliance rates rise as tax rates fall.

Dr Chitambara is a development economist based in Harare.

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