Opinion : Does the fiscus surplus really matter

Zimbabwe is presently enjoying a stint of month on month fiscal surpluses stretching 4 months, that is a period between December 2018 and March 2019. This is a breakaway performance from a protracted budgetary deficit position over the last, at least 5 years. In the respective years between 2016 and 2017 the budget deficits came in at $1.5 billion each year before swelling to about $2.8 billion in 2018. This unsustainable level of deficit equated to 12% of GDP. The desired and managed deficit threshold would range between 1% and 5%. It has been widely agreed that deficits either on budget or current account need to managed to stem a deepening economic crisis in Zimbabwe. The undesirability of deficits, emerge from the realisation that they come at a steep cost, mainly in the form of borrowings.

Having reengineered the fiscal leg of the economy in matters that will be discussed in this piece, government has reversed, over the last 4 months, the deficit position, posting an average surplus of $100 million a month, according to the Minister of Finance. The desired outcome is to constrain money supply growth and improve forex availability while simultaneously taming inflation and managing economic growth levels. Unrestricted money supply growth has the effect of spurring short term demand resulting in an economic overheat. It also has an impact on national debt levels and the side effects of private sector growth constraint as resources are channelled towards government needs.

Over the last 3 months, government, its cheerleaders and commentators have gone into overdrive, prematurely celebrating success in turning around the economy or at least in realigning the fiscus. Adherence to basic economic principles would discredit this fallacy or rather fantasy advanced by this viewpoint of ready consolidation success. In matters of economics, if one misses the principle of opportunity cost and fails to adhere to cost benefit analysis in in scenario evaluation, oftentimes the outcome is disappointing if not delusional.

Government’s stance in realigning the fiscus has been that of enhancing revenue and not cost containment. Cost containment which entails reforming parastatals to increase efficiency and rout out corruption, disposals and privatisation of some entities and reevaluation of the civil service, rationalisation and wage cuts, typically brings sustainable positive results with minimal downside. It however comes at a huge political cost of patronage loss and cronyism, and may actually results in loss of political power. Although gestures of reforms in this regard have been tabled and in some instances are being expedited, the gap remains wide given the gravity of economic mess Zimbabwe is in.

The clear path taken by the ED administration is that of massive contractionary fiscal policy involving high taxation and widening of the tax base typical of the failed ESAP in an exercise dubbed as austerity. Treasury coffers have since boosted by the 2% intermediated money transfer tax, an increase on fuel excise duty, inflated VAT’s arising from surging prices of goods in the economy. This buffer to the fiscus has cosmetically positioned the new administration and notably the treasury duo, as champions of austerity and economic reformation, even without them scratching their heads for a solution. These short term gains will sure be wiped off by cyclone inflation which is clearly wrecking havoc in the economy as rounds of price blitz take toll on the economy.

The danger of pursuing a contractionary policy infested with tax increase is that costs typically rerate upwards and producers pass on the cost to the consumer thus eventually constraining demand. Likewise, the objective of producers becomes that of defending margins as volumes come off and this means increasing prices. This dearth in production gradually results in constrained economic growth and a simultaneous inflation, a phenomena known as stagflation. Inflation is further propelled by the fragility in currency given that the interbank market is yet to find its equilibrium. Reliance on imports for finished goods as well as raw material estimated at 40% exposes most cost functions to the exchange rate and ultimately denotes a forex pegged product pricing to counter exchange losses. Although a weaker exchange rate would make local produce relatively cheaper to the region, industry is not readily equipped to exploit this gap to counter the erosion in local demand.

So of course government has enjoyed a surplus over the last 4 months, but these gains are not sustainable, in-fact they have a downside which will play catch up. This is why it is important to point out the expenditure performance of government relative to budget and not to revenue. In succeeding months we will witness the gradual closing in of the fiscal surplus as costs catch up. Government has already offered an unbudgeted for 28% increase in civil service wages to address rising prices and this will be reflected in April numbers. In April an unbudgeted for 38% subsidy was offered to farmers as a consequence of rising prices, with respect to the 2019 harvest and this too will impact expenditure.

A comparative perspective on the structure of tax heads and their contribution to revenue of Zimbabwe shows a structural shift in contribution of key tax heads (PAYE, VAT and Excise Duty). In 1995-98, when the economy was bit more stable and functional, PAYE was the largest contributor to Government revenue as more people were formally employed. De-industrialisation and the resultant rise in informal sector has seen a sharp decline in PAYE contribution. Increase in excise duty on beer, tobacco, airtime and other commodities have seen excise duty now being one of the key revenue drivers. The same can be noted of the 2% tax which is categorised in the “Other” category. For instance it is clear that Zambia relies much on VAT and PAYE as it still has some respectable formal employment numbers. Given the structure of the economy, it is clear that taxes in Zimbabwe are relatively high when compared to the region even our neighbour Zambia. The problem with high taxes is that people will lose incentive to take on the challenge of starting and running a business. Every business venture needs a significant expected return on investment to justify the risks involved in investing. High taxes reduce the return on investment and therefore discourages expansion. Since raising taxes diminishes productivity that in turn has a negative impact on tax revenue in the long run, raising taxes like what the Government of Zimbabwe pursued does not help balancing the budget in the long run. It can only give a short-lived surplus. Authorities should appreciate that high taxes, lowers disposable income, constrain demand and reduces the incentive to produce while making the poor poorer. Instead supply side driven growth can be a viable alternative. The economy can do well by keeping the supply-side economics in mind when addressing persistent budget crisis. Low tax rates should be the first priority, with a balanced budget only the second. Taxes matter, and striving to keep them low is much more important.            

– Equity Axis News  

Respect Gwenzi

Respect is the Lead Analyst and Managing Director at Equity Axis. He has 8 years experience in respective fields of finance and media. Particular areas of expertise include Asset Management, Stockbroking and Financial Media. Respect is on a mission to change the course of Financial Media in Africa through digitalization

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