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2021 National Budget: The Good & the Bad

14 Dec 2020 at 13:54hrs | Views
Education got the largest chunk of the budget with ZW$69.6 billion
Zimbabwe's 2021 national budget set a taxing agenda with a 126% jump in budgeted revenues from ZW$173 billion (About US$2.12 billion) anticipated in 2020 to ZW$391.8 billion (US$4.8 billion) budgeted for 2021. The high revenue target is supported by sharp increases in sin taxes (Levied on wines, tobacco, spirits and beer), increase in fuel import duty, widening of presumptive taxes on selected self-employed professionals and Small to Medium Enterprises (SMEs) and Informal traders. In a departure from the previous budgets that were biased towards agricultural subsidies and defense, the 2021 allocations favored the education departments with primary and secondary education and Higher education getting ZW$55,221 billion and ZW$14,368 billion respectively. Similarly Health and Child Care will get ZW$54,705 billion.

After declining by 4.1% this year, Treasury expects the economy to grow by 7.4% in 2021 while creating 151 000 formal jobs in the process. The National Employment Council (NEC) pointed out that close to 1.2 million formal jobs have been lost in the economy in the last 18 months owing to a number of factors which range from COVID-19 inspired business shutdowns, drought, low industrial capacity, inflation and low consumer demand. The International Monetary Finance (IMF) expects the Zimbabwean economy to decline by 10.4% in 2020 before registering a 2.5% growth in 2021. Year on year inflation is projected to decline from the 2020 average of 655% to an average of 135%, before ending 2021 at 9%.

The budget targets to expand the revenue net in the informal sector of the economy which is estimated to be over 60.6% by IMF (Largest in Africa and second in the world to Bolivia's 62.3% in terms of percentage to the overall economy). The informal sector is home to most SMEs and sole traders that do not declare their incomes for tax compliance purposes, register for social security and contribute to the formal economy through insurance policies. The economic decline witnessed in the past 24 months has increased the level of informalization in Zimbabwe to unprecedented levels which poses a threat to revenue mobilization, thereby putting pressure on limited public services funded from a limited tax base. Therefore revenue mobilization from the informal sector was long overdue.
The budget hit the right codes on the following aspects.

More funding to Education & Health Care
The ministry of Health & Child Care got 13% of the overall budget allocation for 2021, 2% shy of the Abuja Declaration undertaken by African governments to spend at least 15% of the national budget on health care. The increased funding to the health sector is an improvement from 2020 where just above 10% was allocated to the sector. COVID-19 and subsequent job action by doctors and nurses has laid bare the poor state of Zimbabwe's public health institutions, hence the sector requires more funding and attention to address basic amenities and services required to meet the country's health needs. The education sector has also been paralyzed by teachers and lecturers industrial action which has seen most scholars not attending school since the beginning of the current academic term. More funding will therefore help restore sanity to the education sector and remove the burden for private lessons on poor families.

Investment in infrastructure

Government will spend ZW$31.6 billion on road infrastructure in 2021

A total of ZWL$131.6 billion (US$1.6 billion) which is over 31% of the budget and 5.5% of Zimbabwe's Gross Domestic Product (GDP) will be spend on capital projects with roads, toll infrastructure and dams being the major recipients of the funding. The Beitbridge-Harare highway will get an additional 200km rehabilitation in 2021 from the budget. Investment in infrastructure projects has a multiplier effect on the economy as it boosts production and consumption of goods and services. In the first half of 2020, only of ZW$2.1 billion was invested in infrastructure development with a number of road construction, dam and water projects across the country suspended due to lack of funds.

Tax Exemptions
The exemption from corporate income tax on income obtained from Real Estate Investment Trust (REIT) activities will have a positive impact on investment in housing, shopping malls and other high return real estate projects. On Independent Power Producers (IPPs), income accruing from power generation projects will be liable to a tax rate of 0%. This will allow various IPPs to carry forward assessed losses incurred during the project development phase and increase uptake of such projects in the country in line with the energy self-sufficiency target.

Incentives to Industry
The local fertilizer industry will benefit from rebate of duty on fertilizer manufacturers which will reduce the cost of producing fertilizers locally and subsequently the retail price of fertilizers. Zimbabwe imports fertilizers and agriculture chemicals worth US$295 million per year to sustain high demand from local farmers and industrial consumers. The same can also be said about shoe manufacturers such as Bata Shoe Company who will benefit from rebate on duty paid by local shoe manufacturers. Suspension of duty for vehicles imported by tour operators will also cushion tour operators impacted by the slump in visitors due to COVID-19. However the government needs to do more to support local bus and coach manufacturers instead of suspending duty on imported buses which makes imports cheaper than locally assembled buses.

The budget had a number of misses such as the ones singled out below:

Increase in Excise Duty on fuel
Proposed levy of USD0.05 per litre on both diesel and petrol imported via road haulage is counterproductive as it thwarts competition, encourages bottlenecks on pipeline deliveries and adds to the cost of importing fuel for petroleum retailers. Close to 90% of the fuel consumed in Zimbabwe is imported via the Feruka Pipeline, with 10% imported via road haulage. To encourage importation of fuel via the government pipeline and reduce the cost of fuel, government should reduce pipeline or handling costs at the Mabvuku Depot instead of punishing alternative models. Similarly the increase in excise duty on diesel to align with petrol will hit producers more as diesel is mainly used for production purposes. The increases in fuel exercise duties will increase the cost of doing business and marginally increase local prices.

No relief on low income earners
The rebasing of Tax-free threshold from the current ZW$5.000 to ZW$10.000 provides no relief to low income earners considering the fact that the lowest paid civil servant receives a monthly salary of ZW$14.258 (US$175 on auction market and US$130 on open market). The family basket of six was valued at ZW$21.000 by the Consumer Council of Zimbabwe (CCZ) in September 2020. This means that most low income earners who are currently pressed by inflation will pay more than double to government through Pay as You Earn (PAYE), Intermediated Monetary Transfer (IMT) Tax and other taxes levied on consumption. The tax free threshold should be reviewed in line with poverty datum line or consumer basket movements so that low income earners are cushioned from high levels of inflation.

Reaping from inflation
The 126% jump in budgeted revenues to ZW$391.8 billion budgeted for 2021 can only be achieved if Year on Year (Y-O-Y) inflation averages more than 300% in 2021. In 2020, Tax and non-tax revenue collections were budgeted at ZW$58.6 billion at the beginning of the year. However, high levels of inflation averaging 655% meant that the government has so far collected ZW$84.97 billion in 9 months from January to September 2020 and is on track to collect ZW$173 million. This means that treasury is banking on depreciation of the Zimbabwean Dollar against the greenback or further increase in inflation to grow its various tax heads and achieve the astronomic figures set for 2021.

The 2021 national budget aims to restore normalcy in the education and health sectors through allocating more to departments that have significant civil service head count. The government wage bill (anticipated to grow by 144% in 2021) will take a substantial amount of the budget. Capital projects will likely provide a stimulus to economic growth with over 31% of the budget earmarked for infrastructure projects, provided allocation follows the budget plans. Overall, the budget heaps more tax burden on citizens and corporates with increases in sin tax, presumptive taxes on various professionals and increase in excise duty for fuel imported via road.

Victor Bhoroma is an economic analyst. He holds an MBA from the University of Zimbabwe (UZ). Feedback: Email vbhoroma@gmail.com or Twitter @VictorBhoroma1.

Source - Victor Bhoroma
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