Bill Watch 41 - 2018 The 2019 National Budget

BILL WATCH 41/2018

[25th November 2018]

2019 National Budget

Professor Mthuli Ncube, Minister of Finance and Economic Development, presented the 2019 National Budget Statement and the 2019 Estimates of Revenue and Expenditure [the “Blue Book”] to the National Assembly on the afternoon of Thursday 22nd November 2018.

Soft copies of documents available  The following documents are available on the Veritas website using the links provided:

  • the full Budget Statement, complete with charts, tables and annexures [254 pages] [link]
  • the Minister’s speech [98 pages] [link]
  • the 2019 Budget Highlights document produced by the Ministry of Finance and Economic Development [link] [and attached]
  • the Departmental Draft of the Finance Bill [link] – a preview of a Bill designed to give effect to the taxation and revenue proposals in the Budget Statement, including the new-style Intermediated Money Transfer Tax introduced by SI 205/2018, and to confirm as permanent law the amendments to the Money Laundering and Proceeds of Crime Act and Exchange Control Act made under the Presidential Powers (Temporary Measures) Act by SI 246/3018..

The Blue Book will be uploaded to the website as soon as it is available. 

NOTE: It is important to remember that the Annual Budget is not the sole responsibility of the Minister of Finance and Economic Development alone.  It is the budget of the entire Cabinet, made up of the President, both Vice-Presidents and Ministers. 

Main Figures

[Figures from the Ministry of Finance Budget Highlights – see attached document for more details]

Budget theme:  “Austerity for Prosperity”

Total expenditures for 2019 are projected at US$8.16 billion of which:-

Employment Costs US$4.05 billion;

Capital expenditure US$2.02 billion, 6.4% GDP;

 

 

Budget deficit projected at US$1.57 billion, 5% of GDP [the deficit for 2018 is already $2.4 billion and is expected to reach $2.86  billion by year-end]

 

Total revenues for 2019 are projected at US$6.6 billion of which:-

Tax revenue: US$6.04 billion;

Non-tax revenues: US$162 million;

Retentions: US$400 million.

Comment:  Readers are reminded that Gross Domestic Product [GDP] has recently been “rebased in line with international norms, as a result, the economy is deemed to be 40% bigger”. 

Top five Budget allocations

Of the total allocation of $6.492 billion, the top five allocations are:

Education [combined figure for two Ministries]: $1,53 billion

Lands, Agriculture, Water; etc. [new larger Ministry]: $989 million

Health: $694 million

Defence and War Veterans: $547 million

Home Affairs [including ZRP]: $518 million.

The National Prosecuting Authority gets $8 million, the Land Commission $10,490,000; the Anti-Corruption Commission $6 million and the Judicial Service Commission just under $28.  The President’s Office gets $295 million, but Parliament only $101 million.  Chapter XII Constitutional Commissions: ZEC $14,321,000; Human Rights Commission $3,335,000; National Peace and Reconciliation Commission  $2,463,000; Media Commission  $2,000,000; Gender Commission $2,000,000;

Fiscal Policy Measures

  • Reduction of the fiscal deficit
  • Treasury bill issuances only for budget deficit financing.
  • Quasi fiscal operations by Reserve Bank to be discontinued.
  • Government’s overdraft with Reserve Bank to be eliminated, save for 5% meant for smoothening cash flow management;
  • Public Service rationalisation – including  enforcement of applicable retirement age [; elimination of ghost workers, which will involve biometric registration of all civil servants [see comment below]; retrenchment of 3 000 youth officers irregularly engaged; reducing the civil servants’ year-end bonus by basing it on basic salary, excluding allowances; reduction in the number of foreign service missions.
  • 5% salary cut the President, Vice-Presidents, Ministers and Deputy Ministers, Senior Civil Servants  Civil servants affected will be Principal Directors upwards.  It will also apply to CEO’s of State Owned enterprises, Commissions and grant-aided institutions.
  • Other cost savings through efficiencies.
  • Public Finance Management system to be strengthened.

Revenue Measures

Excise duty on cigarettes – to be increased from US$20 to US$25 per 1000 sticks.

Excise duty on fuel – to be increased by 7 cents per litre on diesel & paraffin and 6.5 cents on petrol [to reduce the arbitrage opportunities presently enjoyed by transporters from outside Zimbabwe].

Payment of customs duty in foreign currency to be introduced on motor vehicles and other selected goods.

Note: This was, in fact, done while the Minister was speaking, by SI 252A/2018 [link] made by the Minister in terms of section 115 of the Customs and Excise Act, which took effect today 23rd November 2018.  This section empowers him to require the payment of duty in foreign currency on goods designated as “foreign exchange dutiable goods” in a statutory instrument. 

VAT or any other taxes collected in United States dollars or any other currency to be remitted to ZIMRA using the same mode of payment.

Retention of revenue by Government Ministries and Departments to stop – all such revenue will have to be remitted into the Consolidated Revenue Fund and be under the control of the Ministry of Finance and Economic Development.

Tax Relief Measures

Personal income tax – raise the tax-free threshold from US$300 to US$350 and further widen the tax bands from S$351 to US$20,000, above which income is taxed at the highest marginal tax rate of 45% [down from 50%].

2% Intermediated Money Transfer Tax – this will be maintained but there will be provision for further exemptions.

Sanitary wear products will benefit from a suspension of customs duty, and an exemption from VAT, for a period of 12 months.

Disabled persons will enjoy a suspension of customs duty on selected goods used by physically challenged persons.

Redirection of Third Party Insurance Cover to an Accident Compensation Fund.

General Comments

Currency Reform  This was a grave omission.  Zimbabwe cannot get on a firm economic footing until this issue is dealt with.  To go on pretending that the US $ and the bond note dollar are at a par is an insult to Zimbabweans’ intelligence.  This neglect of dealing with the currency means that all measures in the budget will hit the poor who are mostly reliant on bond notes and coins and local money transfers and have no access to foreign currency. It also hits the erstwhile middle class such as teachers, nurses and lower paid civil servants.  Not tackling the currency issue leads to a disconnect in the budget – on the one hand, the Minister maintains that the US dollar and bond notes and RTGS currencies are at par, while on the other hand he recognises that there is a vast difference in value – as demonstrated by the Minister’s justification for the increase in tax on petrol, diesel and paraffin, the measure requiring import duty on motor vehicles and a host of other commodities to be paid in US dollars [which is already in force courtesy of SI 252A/2018 [link]] and the idea that VAT collected in US dollars must be remitted to ZIMRA in US dollars.

The National Debt  Government committed itself to reduction of this, through the Transitional Stabilisation Programme, but the current budget has a projected excess of expenditure over revenue which will add to it.

ZAMCO [Zimbabwe Asset Management Company] With immediate effect, ZAMCO will no longer assume further debts.  In addition, Government will review ZAMCO’s mandate and consider winding up of its operations which are being supported by Treasury Bills. This step may be shifting the debt problem rather than solving it and may see more companies going bankrupt. 

Treasury Bills These have been responsible for much of the national debt and in future these will only be for short term financing through a transparent auction process.  This is a positive step but maturities in 2019 are estimated at US$2.2 billion, which is unsustainable in one year. In order to manage the maturities, Treasury is exploring options for restructuring this commitment, in consultations with market players.  It must be remembered however when this was done in a Latin American country it resulted in lawsuits dragging on for up to twenty years and proved very costly.

External Debt This is like a millstone round Zimbabwe’s neck when it comes to getting lower rate development loans from international monetary bodies.  Nothing in the Budget speech mentions how clearing the debt this is to be tackled other than “total public debt is expected to gradually decline, as Government advances the re-engagement efforts with the international institutions. The re-engagement is expected to resolve the external debt.

Measures to Attract Foreign Investors  Other than showing a resolve to cut expenses and renewed talk of a one-stop investment centre there and a token amount to compensate displaced farmers there not much to make Zimbabwe attractive to productive foreign investors again.   What is needed are stable policies and laws, ensuring protection of  property and investments and total transparency in the field of natural resources and other investment opportunities. 

Infrastructure The Budget outlines objectives and targets to develop infrastructure and the dissemination of an Infrastructure Investment Plan.  Budget allocations in the fiscus come under capital expenditure in the various ministries - roads, housing, education, health, etc.   There are also estimates of sizeable contributions from development partners, loans and public-private partnerships.

Agriculture  Expenditure on agriculture, which reached US$1.1 billion as at August 2018, against an annual Budget target of US$401 million, has been one of the major drivers of the budget deficit.  This is a reference to Command Agriculture which the Minister seems to view as unsustainable and wishes to replace by a financing mechanism sharing the burden between Government and the private sector.  There is also a raft of small allocations to improve farming and marketing.

Social Protection  The Budget refers to a National Social Protection Policy Framework (NSPPF) being finalised which and will harmonise social security programmes.  It mentions contributions being received from cooperating partners and that aid coordination is being reviewed.

Pensions  Following the Government’s adoption of the recommendations of the Justice Smith Commission, the Insurance and Pensions Commission was tasked with necessary reforms to improve governance of insurance and pension entities, as well as supervise implementation of the compensation framework to ensure that prejudiced members of the insurance and pension schemes get their benefits “without compromising stability and confidence in the industry”.  This does not seem very reassuring to the many that have lost their pensions.

Devolution is allocated $310 million to “kickstart” the process.  But far more resources will be needed to complete the process.  And the necessary Bills still have to be drafted.  The Budget did not address how devolution would be funded or the loss of revenue to the national fiscus if devolution is thorough, and handing responsibility for collection of revenue, such as motor vehicle licensing, and other tariffs and taxes to provincial and local authorities.  There can be no devolution of power without devolution of resources.

By-Elections  “The 2019 National Budget proposes amendment of the legislation to allow for either: • the conduct of By-Elections bi-annually, resulting in the harmonisation of operations and costs, or, • instead of Bi-annual Elections, mandate Political Parties to select replacements, that way avoiding expenditures inherent in the processes of electing a new Member.  Annual financial savings of around US$2.0 million are envisaged”.  This suggestion seems unbelievable – first it would mean altering the Constitution where it provides for by-elections; secondly the first alternative would leave constituencies without representation for months; the second would freeze party proportions for five years and go against the democratic principle of being able to show displeasure with the Government by electing MPs and councillors from another party.  It would probably be inconsistent with political rights in the Declaration of Rights, requiring approval by a referendum costing a great deal more that the Budget proposes as a saving.

Tokenism reducing top salaries  The 5% salary cut for the President, Vice-Presidents, Ministers, Permanent Secretaries and Principal Directors is negligible when it is the perks that go with the jobs that are responsible for excessive expenditure – on allowances, motor vehicles, fuel allocations, etc. 

Ghost Workers  Getting rid of these is to be applauded but care must be taken over a biometric registration including fingerprints, DNA, iris and retina pattern.  We do not yet have adequate data protection and protection of privacy laws to guard against the risk of identity theft.  This must come first.

Rise in Fuel Tax This will have a knock-on effect on all prices which are already soaring.

Traffic Fines  This section will have to be revisited as it is based on a misunderstanding of the relevant laws.  The Minister is wrong when he states that the maximum fine for common traffic offences is $30 – the $30 dollar maximum is the maximum admission of guilt fine that can be levied by a police officer [the so-called “spot fine”].  Courts can impose heavier fines and/or imprisonment for all offences in accordance with the Road Traffic Act and the regulations made under it.  Allowing police officers to issue fines of up to $700 may well lead to corruption.  The decision on imprisonment must remain a matter for the courts.  These proposals veer toward blurring the separation of powers.

In addition, security forces will be deployed to assist in the enforcement of traffic regulations This would be setting a very dangerous precedence and involving the military to enforce traffic laws would raise constitutional issues. 

Improving Access to Justice  Unfortunately this budget is far too small to improve access to justice for all the the population.

Constitutional Commissions – budgets are too small – also another indication of reliance on donors

Conclusion

  • Does the Government as a whole have the will to comply with austerity measures? 

The Minister said the austerity proposals in the budget are aimed at creating additional financial capacity to fund developmental expenditures and enhance delivery of essential services.  This additional financial capacity may not come to pass if the Budget proposals are not fully implemented.  Implementation depends, not on the Minister alone, but also on his Cabinet colleagues and the staff of their Ministries, and the State-owned enterprises for which they are responsible.   – something that does not depend on the Minister alone. Promises to curb runaway expenditure have been made before, but haven’t worked.

  • Measures that have been proposed before but haven’t been effective

Many of the measures proposed in this Budget have an all-too-familiar ring.  They have featured in previous Budgets, only to be ignored, hastily reversed and abandoned.  Examples are previous proposals: for limiting the Budget deficit [which despite promises has ballooned enormously due to unbudgeted expenditure under the “new dispensation” during this election year]; for suspension of the annual bonus for civil servants; for removing the 3 000-odd youth officers illegally engaged by Government, and for discontinuing quasi-fiscal activities by the Reserve Bank.

  • Not a Pro-Poor Budget

The proposed raising of the personal income tax threshold from $300 to $350 has been criticised as insufficient to make a real impact on the lives of wage-earners  –  especially if they are receiving their wages by RTGS or in bond notes currency.  The drop in the buying capacity of the bond currency will impact hugely on lowly paid workers – for example agricultural workers will earn in real US $s about $10 a month.  Teachers and nurses will be hard hit as will all those paid in S or bond notes.  The lives of ordinary people will also be the most adversely impacted by the price increases that are inevitable as a result of the retention of the 2% Intermediated Money Transfer Tax the accumulative effect of the tax on fuel on prices, the collection of import duty and VAT in US dollars and the proposal to siphon off a percentage of the Third Party insurance levy to a Road Accident Fund.   The broadening of the tax bands and the reduction of the highest personal income tax from 50% to 45% will help the better-off.  There is no change to corporate income tax, a factor which work against the creation of jobs that should follow improvements in the economy. 

Finally

The Minster avers that the Government’s vision includes the fundamental values of, Rule of Law, Freedoms of Expression and Association, Respect for Human and Property Rights, and Zero Tolerance to Corruption, among others.  The people will hold the Government to these words.

 

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