Im­pli­ca­tions of bud­get aus­ter­ity mea­sures

The Sunday Mail (Zimbabwe) - - ANALYSIS / NEWS - Cor­nelius Dube

LAST Thurs­day, Fi­nance and Eco­nomic De­vel­op­ment Min­is­ter Pro­fes­sor Mthuli Ncube pre­sented his largely an­tic­i­pated maiden Na­tional Bud­get State­ment. The blue­print hap­pens to be the first pol­icy in­stru­ment to­wards im­ple­men­ta­tion of the Tran­si­tional Sta­bil­i­sa­tion Pro­gramme.

The TSP, to­gether with two other five-year eco­nomic blue­prints to be in­tro­duced from 2021 to 2030, con­sti­tutes the main im­ple­men­ta­tion tools to­wards the coun­try’s Na­tional Vi­sion of be­ing an up­per mid­dle-in­come coun­try by 2030.

Pre­sented un­der the theme “Aus­ter­ity for Pros­per­ity”, the 2019 Na­tional Bud­get State­ment is gen­er­ally aimed at cor­rect­ing the fis­cal im­bal­ance that is mainly re­spon­si­ble for high in­fla­tion, in­debt­ed­ness and for­eign cur­rency chal­lenges.

Aus­ter­ity mea­sures gen­er­ally mean a re­duc­tion of Gov­ern­ment spend­ing or an in­crease in taxes or both such mea­sures with the in­ten­tion of deal­ing with bud­get deficits.

How­ever, while it is Gov­ern­ment that is un­der­tak­ing aus­ter­ity mea­sures, the im­pact cas­cades to all cit­i­zens.

For ex­am­ple, a re­duc­tion in Gov­ern­ment spend­ing might im­ply that projects and pro­grammes which were ben­e­fit­ing some sec­tions of so­ci­ety are stopped while an in­crease in taxes would nat­u­rally re­duce in­comes.

The aus­ter­ity mea­sures in the 2019 Bud­get are gen­er­ally more aimed at the ex­pen­di­ture man­age­ment than rev­enue rais­ing.

This is largely be­cause the main tax rev­enue boost­ing mea­sure, namely the in­ter­me­di­ated money trans­fer tax of 2 per­cent, had al­ready been in­tro­duced.

The in­crease in ex­cise duty on cig­a­rettes from $20 per 1000 sticks to $25 per 1000 sticks; and the in­crease of ex­cise duty on fuel by 7c per litre on diesel and 6,5c for petrol are the two main new tax mea­sures.

The de­ci­sion to levy im­port duty on se­lected prod­ucts in for­eign cur­rency is also a mea­sure that will be painful on the con­sumer given the scarcity of for­eign cur­rency.

In par­tic­u­lar, the 2019 Na­tional Bud­get was pre­pared while con­scious of the twin deficit hy­poth­e­sis which pos­tu­lates that there is al­ways a causal re­la­tion­ship between a large cur­rent ac­count deficit and a large bud­get deficit.

In other words, deal­ing with the cur­rent ac­count prob­lem without deal­ing with the high bud­get deficit is a dif­fi­cult if not im­pos­si­ble task.

Thus, cen­tral to the 2019 Na­tional Bud­get is the de­sire to deal with the high fis­cal deficit, which will also even­tu­ally lessen pres­sure on the cur­rent ac­count deficit.

How­ever, levy­ing duty in for­eign cur­rency as well as re­quir­ing pay­ment of taxes in for­eign cur­rency for goods sold in for­eign cur­rency is also an at­tempt at en­hanc­ing for­eign cur­rency in­flow to the gov­ern­ment.

This also in­creases its ca­pac­ity to meet for­eign cur­rency de­nom­i­nated obli­ga­tions without re­sort­ing to the ex­porters’ pro­ceeds for every need.

A look at the 2019 Na­tional Bud­get State­ment also re­veals that Gov­ern­ment has re­alised that the 2018 GDP growth pro­jec­tion of 6,3 per­cent is un­achiev­able.

In that re­gard, the 2018 GDP growth rate is now pro­jected at about four per­cent.

In 2019, GDP growth is ex­pected at 3,1 per­cent, which is a fur­ther de­crease from the 2018 pro­jected rate.

The down­ward trend is mainly at­trib­uted to poor agri­cul­tural out­put due to an­tic­i­pated low rain­fall.

The an­tic­i­pated small growth rate of only 3,1 per­cent has huge im­pli­ca­tions on the abil­ity to at­tain up­per mid­dle-in­come sta­tus by 2030.

An up­per mid­dle-in­come econ­omy is de­fined as one with a gross na­tional in­come per capita of between $3 956 and $12 235.

Tak­ing into ac­count the re­based GDP of $22 bil­lion for 2017, and us­ing the Pop­u­la­tion Pro­jec­tions The­matic Re­port pro­duced by the Zim­babwe Statis­tics Agency in 2015, then GNI would need to in­crease by an an­nual av­er­age of about 9,1 per­cent between 2018 and 2030 to reach the Vi­sion 2030 ob­jec­tive.

This might also im­ply a higher growth rate for GDP, which is not equiv­a­lent to GNI.

It also means if the 2018 and 2019 GDP growth rates are only four per­cent and 3,1 per­cent re­spec­tively, then between 2020 and 2030 the econ­omy would need to grow tremen­dously, more than the 9,1 per­cent GNI av­er­age.

This also ex­plains why the min­is­ter in­tro­duced a short-term blue­print first, to be fol­lowed by rel­a­tively longer-term ones.

The short-term is only do­ing the ground­work, pre­par­ing the way for the longer term eco­nomic blue­prints.

If the 2019 and 2020 Na­tional Bud­gets are able to deal with the main stum­bling block, then sub­se­quent Na­tional Bud­gets have more re­al­is­tic growth en­hanc­ing prospects.

The 2019 Na­tional Bud­get is there­fore largely aimed at eco­nomic sta­bil­i­sa­tion; it seeks to po­si­tion the econ­omy in the right path by cor­rect­ing the lega­cies from the past, which have given rise to the cur­rent prob­lems.

The main cen­tral fo­cus of the 2019 Na­tional Bud­get is ex­pen­di­ture con­tain­ment and in­creas­ing rev­enue as a way of manag­ing fis­cal deficit. Ex­pen­di­ture for 2019 is pro­jected at about US$8,2 bil­lion while an­tic­i­pated rev­enues are about $6,6 bil­lion.

This means that the 2019 Bud­get has also failed to be a bal­anced bud­get; some­thing that is dif­fi­cult given the cur­rent size of the deficit.

The 2019 deficit is ex­pected to be about $1,6 bil­lion, which is a de­cline of al­most half from the 2018 level of about $2,9 bil­lion.

The cur­rent bud­get mea­sures would there­fore have three main achieve­ments if im­ple­mented suc­cess­fully.

Firstly, they would be able to re­duce the bud­get deficit to a man­age­able level of about five per­cent of GDP com­pared to al­most 12 per­cent in 2018.

A deficit of five per­cent of GDP gen­er­ally falls within rec­om­mended best prac­tices.

Sec­ondly, the 2019 Na­tional Bud­get would be able to in­crease rev­enues by about 24 per­cent com­pared to the 2018 level.

Thirdly, the 2019 Na­tional Bud­get would be able to con­tain ex­pen­di­ture at the 2018 level; only a small in­signif­i­cant in­crease of about 0,03 per­cent is ex­pected in ex­pen­di­ture in 2019 com­pared to 2018.

Un­der nor­mal cir­cum­stance, the abil­ity to raise rev­enues by 24 per­cent while con­tain­ing ex­pen­di­ture would have given rise to a bud­get sur­plus.

Un­for­tu­nately, there are lega­cies from the pre­vi­ous dis­pen­sa­tion to be taken into ac­count, hence past eco­nomic man­age­ment prin­ci­ples will con­tinue to be an al­ba­tross around our necks as we swim to safety.

De­spite be­ing able to in­crease rev­enues, in line with the theme, aus­ter­ity mea­sures are a pri­or­ity.

This is fur­ther un­der­lined by the com­mit­ment by Gov­ern­ment to bor­row from the Re­serve Bank of Zim­babwe a max­i­mum of only 5 per­cent of pre­vi­ous rev­enues even though the Statu­tory limit is 20 per­cent.

Hav­ing taken such a huge de­ci­sion, Gov­ern­ment also ex­pects its civil ser­vice to bear some pain for the aus­ter­ity mea­sures to be suc­cess­ful.

The mea­sures on ba­sic pay-based bonuses, re­tire­ment of youth of­fi­cers and a five per­cent salary cut on top gov­ern­ment of­fi­cials, rang­ing from prin­ci­pal di­rec­tors up to the Pre­sid­ium, are also painful de­ci­sions to sup­port the aus­ter­ity mea­sures.

There­fore, the aus­ter­ity mea­sures can only suc­ceed if all stake­hold­ers be­lieve that they are nec­es­sary to steer the econ­omy to­wards a stage where mea­sures to ex­pand the econ­omy would work.

This re­quires all stake­hold­ers to con­tinue to be in­no­va­tive and to per­form to the same out­put level or even bet­ter while us­ing lim­ited re­sources.

It is also an op­por­tu­nity for the pri­vate sec­tor to be in­no­va­tive and step up to grab the busi­ness op­por­tu­ni­ties that arise. Cor­nelius Dube has a Mas­ter’s in Eco­nom­ics from the Univer­sity of Zim­babwe, and more than 10 years re­search ex­pe­ri­ence in dif­fer­ent eco­nomic sec­tors. He works as a Se­nior Re­search Fel­low at a top eco­nomic think tank in Zim­babwe. The views ex­pressed above are per­sonal opin­ions and should not be as­so­ci­ated with the in­sti­tu­tion he is cur­rently af­fil­i­ated with

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