Fiscal measures: A case of barking up the wrong tree

Source: Fiscal measures: A case of barking up the wrong tree – The Zimbabwe Independent October 5, 2018

FINANCE minister Mthuli Ncube (pictured) took the easy way out — by taxing the overburdened and vulnerable masses in a bid to reduce the budget deficit in his first major policy move — rather than curbing reckless spending by the government living beyond its means.

By Kuda Chideme

Ncube, a Cambridge-trained economist, who took over the reins at Treasury amid great expectations for change when President Emmerson Mnangagwa appointed new faces to cabinet, was expected to tackle government profligacy, deal with corruption and implement austerity measures similar to those proposed by former finance minister Patrick Chinamasa in 2016, but were resisted by former president Robert Mugabe’s cabinet.

Chinamasa suggested closing a number of embassies, reducing foreign travel, freezing recruitment and cutting the size of the civil service which takes up more than 90% of the country’s revenue.

Despite being saddled with an unsustainable wage bill, government has continued to expand its workforce, resulting in the payroll rising steadily over the years. In 2012, the public service employed 235 000 workers while the wage bill amounted to US$248 million per month. The figure increased to US$260 million as government employed an additional 63 000 people in 2016.

The wage bill continued ballooning ahead of the July 30 elections when the government took a populist decision to increase police and army salaries by 22% and 22,5% respectively, while the rest of the civil servants got a 17,5% increment which added an extra US$40 million to the wage bill.

Government has also spent a lot on vehicles for senior government officials and splurged on cars for chiefs ahead of the general elections and travel.

In addition, government has been providing huge subsidies in agriculture, particularly through the Presidential Input Scheme and Command Agriculture.

According to a Treasury bulletin, support towards the agriculture input support schemes cost government US$616 million, while an additional US$81 million was used to finance grain procurement.

Instead of addressing government’s fiscal deficit expenditure, Ncube upped the tax cap on intermediated money transfers from the previous blanket charge of five US cents per transaction to two USc per US$1 transacted.
Given that some US$64,7 billion was processed through transfers, according to central bank data, government stands to rake in US$1,3 billion in six months, which is enough to plug the country’s budget deficit which stood at US$1,3 billion in the first half of the year against a cumulative target of US$265,7 million.

“Due to the increase in informalisation of the economy and huge increase in electronic and mobile phone-based financial transactions and RTGS transactions, there is need to expand the tax collection base and ensure that the tax collection points are aligned with electronic mobile payment transactions and RTGS system,” Ncube said.
Analysts say Ncube’s measures are necessary, but have unintended consequences.

Joseph Noko, a published economist and data scientist specialising in financial institutions, said the minister’s interventions were counterproductive.

“The measures taken by the minister trumpet growth, the necessity for creating an environment for it, and yet no specific measures are taken to ensure growth. The 2% tax on electronic transactions is a disincentive to transact and on the ease of doing business; it makes business more costly,” Noko said.

“Part of the problem is more time is spent addressing the needs of external lenders, and fundamentally, as with Greece’s debt resolution programme since the European sovereign debt crisis, the measures taken are for the benefit of lenders, at the expense of growth, and with the risk of recession and social dislocations. Given all this, the economy will contract if the government continues on this course.

“The tax on transactions counters growth. The rhetoric may hype growth, but the measures have one purpose: extracting the maximum revenue in every sphere of economic activity in order to cover the fiscal deficit and national debt.

“The debt must be paid, but the desire for fiscal shocks is recessionary. A balance must be struck with growth.”

Noko, who wrote Dollarisation: The Case of Zimbabwe (June 15, 2011) in the Cato Journal, Vol. 31, No. 2, 2011, added: “Zimbabwe is one of the 10 least economically free countries in the world. We need to open up. Dollarisation and not de-dollarisation should be the option. Dollarisation demands open markets, but the policies of government are inherently contradictory and self-defeating.

“When Zimbabwe dollarised, it was necessary for the government to maintain fiscal discipline and grow foreign currency reserves to defend the financial system in the absence of capacity to issue its own currency and in the event of stresses to the system; it was necessary to reform the central bank in light of its new role and reduce it to a regulatory and research body; and it was also critical to fully integrate into the global financial system.

These measures are standard practice in dollarisation and entry into monetary unions.”