The 2020 budget statement presented by Finance and Economic Development Minister Professor Mthuli Ncube on Thursday the 14th of November had a few highlights. Minor tax breaks, tax band adjustments, removal of subsidies on grain and the plan to launch a satellite among others. The needs of the nation were well known and documented prior to the budget statement and now the question that remains is what happens next? So we will look at the likely impact of some of these proposed policies, the salient issues that may affect them and how this shapes up for the economy going forward.
Tax-free threshold adjustments
The adjustment of tax-free thresholds surely came as welcome news. Up from $700 a month to $2000 a month, this will definitely see more money in the pockets of the ordinary Zimbabwean, at least for now. In all honesty, this is more of an inflation adjustment than anything else. While right now $2000 is a lot of money, will it be the same in 3 months time? How about 6 months? The tax-free amount on bonuses was also increased from $1500 to $5000 coupled with the news that civil servants will receive bonuses this year. Aggregate demand in the nation is down. Almost all retailers and manufacturers have reported significant drops in volumes. Even poverty proof bastions such as opaque beer are reporting volume declines. Mthuli Ncube’s goal here is to stimulate aggregate demand by increasing disposable income in the hands of citizens.
Corporate tax cut 1%
A tax cut of 1% leaving corporate tax at 24%was also seen as a welcome sign of relief. Yes’ 1% is not much but you will find it certainly counts towards corporate bottom lines. Zimbabwean businesses have had it tough and any amount of extra income retained is worth having. It’s difficult to ascertain whether this will be enough to keep businesses open but it certainly is a step in the right direction.
VAT cut 0.5%
Another tax that affects businesses was cut’ albeit by only 0.5%. The VAT will reduce to 14.5% from the previous 15%. VAT, of course, does not affect businesses alone as end consumers bear the ultimate weight of the tax. In an economy so tight that small reduction is appreciated and can spur spending.
Grain subsidies out
The budget was always going to be a tight affair with not much room to operate for our finance minister. While consumers will be relieved by greater disposable incomes and a smaller VAT burden they must prepare for higher prices of grain as the government has elected to do away with subsidies. This follows the liberalisation of grain imports. This will, however, reduce the government’s burden and may make up for the income the government will forego through cuts in income tax, VAT and PAYE.
Targeted subsidies on roller meal, cooking oil and bread via reimbursement system
The government will, however, institute targeted subsidies for producers of basics such as roller meal, cooking oil and bread. This will be done through a yet to be disclosed reimbursement system via tax credits. The minister perhaps showing signs of heading continuous calls by Zimbabweans for the need to stimulate production in the nation.
2% tax to remain
The tax cuts, though small, we’re a little different from what we expected but the 2% tax remaining in place was not a surprise. While the minimum amount on which the tax applies was increased from $20 to $100 this represents an inflation adjustment. The budget still requires balancing and the 2% tax has proven a very effective way of doing this.
Inflation 2% with tight money targeting framework
The minister also announced the desire to keep inflation at around 2%. This would require a remarkable reduction from the current (implied) 440% year on year inflation rate. This is an ambitious goal, to say the least. While the idea of a tight monetary targeting framework is the correct approach to achieving the desired control on inflation the events of the previous week surrounding the new notes should serve as evidence that our systems are corrupt and compromised and the idea would be difficult to execute.
Free Sanitary wear for school-goers
The minister also announced the provision of $200 million for sanitary wear for school going girls grade 4 to upper 6. This is a long-fought victory for menstrual health campaigners who have continued to highlight this need. Details are yet to come but this hopefully represents a grand opportunity for local manufacturers to step up or new ones to step in.
Overall the budget showed the goal of being expansionary; it needed to be. The economy is set to shrink by 3 to 7.1% this year depending on.who you believe. Next years forecasts are already being cut to as signs point to a below-normal rainfall season. In that regard, the minister did well. He did not have much to give, the surpluses of the early months have been replaced by Treasury bill auctions for “government programmes”. All the while we have other lofty goals to achieve such as launching a satellite but that will warrant it’s own analysis.