- Debt brakes
- Growing tax revenue by growing the economy not by raising tax rates
- Lowering tax rates
- Lowering the cost of doing business
- Smaller sustainable government
Much has been said about Zimbabwe's fiscal policy. Our fiscal policies have always been disastrous, year after year. Fiscal indiscipline occasionally leads to budget deficits, which then need to be monetized leading to extreme currency depreciation.
Currency depreciation leads to erosion of incomes. When incomes are eroded, civil servants strike and down their tools demanding better wages. Bowing into pressure, the Ministry of Finance increases the salaries of civil servants. This then strains an already-crippled budget leading to budget deficits. The budget deficits then need to be monetized. And the cycle repeats.
The wage bill gobbles above 80% of the tax revenue, leaving only 20% for capital expenditure and other non-operating items. The state is continuously incapacitated to perform anything outside operating expenses. It is existing in a hand-to-mouth mode. Its survival mode.
Programs geared towards escaping from the hand-to-mouth rut are usually financed by debt. The government has a very limited capacity to raise debt from outside Zimbabwe. Only Afrexim and PTA banks are the willing lenders, at exorbitant rates. Other than those two, and some shady loan sharks, the government has no external borrowing capacity. It is thus forced to borrow locally, which crowds out the private sector.
Debt proceeds are usually utilized in activities that do not capacitate the economy, boost GDP, or raise productivity levels. Thus, tax revenue levels do not increase due to the deployment of debt capital, thus the “expansionary” fiscal policies are not really expansionary.
Debt is not free money. It has to be paid. Afrexim loans attract high interest, which has to be paid in hard currency. These interest payments add another burden on the fiscus. The capital portion has to eventually be repaid as well. Repayments of these US Dollar loans exert pressure on the currency exchange rates, which then exert inflationary pressures on the economy since the economy relies on imports for many consumer and industrial goods.
Even domestic loans have to be repaid at some point in time. Some local debt is rolled over time after time. However, on some day of reckoning, the debt has to be monetized, leading to inflationary pressures in the economy.
Inflation not only steals from the public because it is taxation without representation, but it also destroys the economy. During inflationary periods, real GDP and tax revenues decrease dramatically. The economy contracts. in other words, rising inflation is a shock to the economy by itself. Inflation displaces a lot of economic activity.
Visually, you can literally observe with the naked eye as thousands of productive people abandon projects/businesses that produce real goods and services in favor of speculative activities that yield quick speculative gains. Businesses become reluctant to take risks, and some even cut production levels.
Some extreme businesses totally halt production, adopting a wait-and-see approach. The ones that have access to USD-paying clients continue producing. The ones forced to sell their products and services in local currency raise their prices, far above expected inflation levels, in order to hedge themselves from currency depreciation. But raising prices far above the normal level displaces a significant portion of demand.
Naughty businesses delay paying supplies leading to suppliers reducing their payment terms. Some totally scrap terms and go for COD. Debtors benefit from inflation, lenders lose. Thus no one is foolish enough to lend. Credit lines are closed. Debt markets are dysfunctional. Even banks become reluctant to lend. Thus, real liquidity dries up, even though the economy is awash with money. It creates an awkward situation where a country has both high inflation and a liquidity crisis at the same time.
All of this mess created by inflation destroys the economy. Real GDP contracts, though nominal GDP skyrockets. Our monetary problems are all rooted in fiscal indiscipline. Thus, the Fiscal Policy is the source of our monetary problems.
The rot had to stop. Mthuli Ncube’s Fiscal Policy has tried to stem the rot by raising taxes, borrowing, and suppressing the wage bill. The Fiscal Policy that you deserve is considerate of the people, you cannot raise taxes on an already overburdened tax-paying class.
The problem was rampant government expenditure and economic maladministration that turned the country into an economy dominated by the informal sector. The cure should have been slowing down government expenditure and proper economic administration that reverses the informalization tide. Raising the taxation levels is the easiest thing to do but is not always the right thing to do. In this case, it was the wrong thing to do.
The Fiscal Policy that you deserve would apply brakes on borrowing. When you find yourself in a hole, the first rule for survival is that you need to stop digging further. High indebtedness cannot be solved by borrowing more. Debt can be reduced by repayments or debt forgiveness.
Without applying brakes on debt (foreign and domestic) the cycle doesn't stop. You keep borrowing, justifying the debt with the basic logic that you need the money for ABC and D, reasons that would actually be valid.
In our case, the debt was for stabilization of the exchange rate, funding government expenditure gaps among other reasons. The foreign exchange rate really needed to be stabilized. But when you find yourself having to borrow to stabilize the exchange rate, then you are never going to come out of the rut because the imbalances you create by such a market intervention are going to come back swinging harder and knock you off-balance. You cannot rely on borrowing for such things. You have to do the hard work. You have to make the hard decisions and fully liberalize the FX regime.
Applying “debt brakes” is easier said than done. You need political balls of steel to successfully implement such a policy. A two-year “debt brake” would starve politicians of free money for their petty projects and corruption rings. Cartels and miscreants that suck the lifeblood from distorted exchange rates financed by debt meant to stabilize the exchange rate will find themselves with no easy money.
This is what ought to be done. This is what needs to be done. A three-year “debt brake”, coupled with regular payments would put the country on solid footing for Lima-type of plans and negotiations. At least the lenders would see that you are no longer adding more to the problem you already have.
Domestically, this would initially appear to be a tough pill to swallow, but it is akin to a system reset. Without domestic debt, the government has to eat only that which they can hunt and kill. No wanton increases in government expenditure.
Growing tax revenue by growing the economy not by raising tax rates
There is a dire need to create a stable and capable government. Higher tax revenues, in the absence of debt, are the magic that makes things happen.
Instead of raising taxation levels and creating all sorts of new forms of taxation, the Fiscal Policy should simply grow the size of the pie and formalize the economy.
The IMMT was intended to widen the net, but it has the effect of discouraging a specific form of payment, adding a burden to the cost of doing business, without necessarily growing the size of the pie. It is not the solution. Informal businesses have several ways of escaping that tax.
Searching for ways to tax the informal sector is a sorry endeavor. A better solution is the one that formalizes the informal sector. The government is not getting any tax revenue from vendors. How about you create policies that enable fruit and veg chains to set shops across Harare, outcompeting the vendors. Good policies are the solution.
Bad policies turned the country into a vendor's paradise. Good policies will turn it back into a bastion of formal businesses. This will benefit everyone. Bring back formality. Bring back an organized society. Bring back an organized transport system. Bring back organized markets for goods and services. The change needs to start with the fiscal policy. The policy should not treat the informal sector as enemies. It should not view them as unscrupulous non-compliant business operators. It should view them as products of bad fiscal policies in prior years.
Formalization and better organization of society would create an environment that makes it easier for the economy to grow. A growing economy is a growing pie. When the size of the pie grows, the portion that is sliced by the Commissioner-General of ZIMRA automatically grows. This is what needs to be done. If the economy grows by 10%, tax collections would grow by more than 10% because the rate of compliance is also increasing.
When you are collecting under USD5 billion from a few complaint businesses, the worst thing that you can do is to penalize those compliant ones by raising taxation levels, adding new taxes, and making compliance an impossible mission with lengthy and contentious processes for VAT refunds. This is precisely what is not to be done. It is essentially exacerbating the problem. It's pushing some peripheral businesses within that compliant cohort into non-compliance and informalization. What is it that makes our policymakers do more of what has failed spectacularly? Is it ignorance or defiance?
Even without a growing economy, just the formalization part would enable the revenue authorities to tax a wider net, resulting in higher tax revenues without necessarily increasing taxation levels.
Lowering tax rates
When viewed in isolation, lowering tax rates seems like a dubious thing to do because the government will collect less revenue. That conclusion is wrong and it's shallow thinking, usually associated with politicians.
The opposite is true. Lowering taxes, when done reasonably, actually results in an increase in government revenue over time. The keyword here is time. It won’t happen within one fiscal period. It's a multi-year theme.
Firstly, lowering tax rates is a compliance masterstroke. When tax is not a very big burden that cripples the cashflows of businesses across the country, it becomes relatively easier for companies to comply. The informal operators that we scared into non-compliance due to over-taxation are lured back into the compliance net. More compliant businesses will lead to a fatter Government Treasury Account, leading to a capable state. Instead of collecting $5 billion, the government will be able to collect for example $7 billion per year in taxes.
Secondly, lowering tax rates is an FDI masterstroke. Taxation is one of the main reasons why companies choose to locate in a certain area. It's a dog-eat-dog world. Countries with lower tax rates attract capital. Countries with higher tax rates do not attract capital.
Hot money can quickly flow into the country temporarily covering our nakedness regarding foreign currency shortages. We won't need to borrow forex for currency stabilization purposes. Hot money will do that for us. Over time actually, FDI will flow into the country, thus solving both our foreign currency and production issues at the same time.
Our tax rates have to be significantly lower than South Africa’s. This is non-negotiable. It has to be a no-brainer for a South African company to choose to operate in Zimbabwe. From a tax perspective, the decision has to be very easy. Our tax rates have to be lower than Zambia’s. This is negotiable.
FDI is good for the country. LDI is even better. Local Direct Investments will increase if we lower our tax rates.
Lowering the cost of doing business
Everything that needs to be said has been said regarding this. But everything that needs to be done has not been done. It's all talk and no action.
The Fiscal Policy that you deserve has to author the lowering of the cost of doing business. It begins at that level. The compliance burdens have to be reduced. Compliance processes have to be modernized. Local cost structures have to be superior to those of our peers in sub-Saharan Africa.
The changes have to start at the Fiscal Policy level. You deserve this.
Smaller sustainable government
There is nothing fundamentally wrong with a large government. It is good to have a large government when you can afford it. Given the stage of development our country is at, I believe a small government is more sustainable and thus more stable.
Thousands of ghost workers have to be removed from the government's payroll. The government of Zimbabwe is outsized and bloated. It puts a very heavy strain on the economy. Remember the government is not the provider in the value-creation equation. The government is the parasite draining blood from the economy. The government survives by taxing the private sector.
A bigger government that generates a lot of value for the country is a good thing. However, many times, the government is poor at generating value. Instead of draining resources, it is better to have a small efficient government than to have a large bureaucratic outsized government that fails to deliver.
The Fiscal policy you deserve has to make an active choice of controlling the size of the government so that it is always in sync with the size of the economy.