By Florence Banda-Muleya
As the Honourable Minister of Finance read out the 2017 budget speech on 11th November, he echoed the theme Restoring Fiscal Fitness for Sustained Inclusive Growth and Development several times. What does fiscal fitness mean for government budgets, and how can Government achieve it in 2017?
For starters, the budget presents national proposals of income and spending for the next year. It is a financial statement expressing Government’s intentions and what it hopes to achieve – like New-Year resolutions for individuals. Government derives revenues primarily from taxes, levies, charges and fees while its expenditure includes outlays on goods and services, infrastructure and social sector investment, debt repayments etc.
The budget may either be ‘balanced’ with revenue equal to expenditure; in ‘surplus’ with revenue greater than expenditure, or conversely in ‘deficit’. For many years, Zambia has recorded fiscal deficits, with revenues being less than expenditures. With government spending persistently outpacing revenues, Government borrows money to cover the difference. Zambia’s deficit – expressed as a percentage of gross domestic product (GDP) – has grown from 1.6% in 2011 to a projected 10% at the end of 2016.
Fiscal fitness like physical fitness is the ability to carry out tasks without undue stress. It is achieved through a combination of effective spending or sacrifice likened to having a good diet and increased income likened to exercise. Getting to fiscal fitness entails reduction of debt as increased revenue buffers both expenses and debt payments. However, gaining fitness does not come in a flash. It requires working towards building good drills such as reducing unplanned spending and increasing income by automating the collection of non-tax revenues. This gradual exercise ensures that targets – such as a lower fiscal deficit of 7% – are achieved at end of the fiscal year.
Accumulation of debt can be likened to excessive weight gain; it arises from undue spending in the absence of enough revenue. The bigger the difference, the more debt is acquired leading to fiscal unfitness. The consequences of this could be ailment of the economy manifested in a costly business environment, high interest rates and slow or no growth. This might lead to default on debt, similar to a heart attack, or a near collapse of the economy as it happened in Greece.
In 2017, overall expenditures are set to increase to K64.5 billion from K53.1 billion in 2016. Despite this, some good habits have been adopted towards fiscal fitness including reduced allocations in certain budget items with necessary expenses maintained whilst downsizing others. An example of downsizing adopted in the 2017 budget is the cut on general public services from 9.3% of GDP in 2016 to 7.7% of GDP. The partial wage freeze imposed on civil service hires is another sacrifice that is likely to slow growth of the wage bill hence expenditure.
Nevertheless, more could be done to achieve fiscal fitness in 2017. Thinking hard on subsidies like electricity imports, reducing the allocation to the Farmer Input Support Programme and reprogramming some of the K2.9 billion to storage facilities for instance, and streamlining amounts such as road infrastructure (proposed to increase to K8.6 billion from K6.6 billion in 2016) to economic roads first, would all be crucial. If not revisited, these items will likely bulge the deficit in 2017 and compromise the economy’s prospects for fiscal fitness.
Another necessity for fiscal fitness is increasing revenue. It works to supplement expenditure control, helping to clear off debt faster. The fiscal measures proposed for 2017 are intended to yield 18.1% of GDP in revenue, reducing from 20.1% of GDP in 2016. This realistically reflects the current economic malaise, however, steps towards revamping the VAT regime, expanding the rental income tax base, increasing advanced income tax and improving collections in trade tax among others have been taken.
Just as exercise requires variety and increased intensity so does the fiscus for it to be more efficient and sustainable; by improving voluntary compliance, intensifying automation and introducing further measures to widen the tax base. Going forward Government should, for example, promote use of debit cards in formal transactions and link the tax-online system to bank accounts including mobile money accounts. Additionally, incomes not currently taxed, such as proceeds from sale of shares on the stock market could be taxed. A 2% rate on such income would raise approximately K1.1 billion for Government.
The road to fiscal fitness is underway even though the 2017 budget seems to tolerate increased spending against less revenue. Fiscal fitness requires discipline to triumph over spending cravings. If Government incorporates gradual realistic changes by persistently applying spending controls and intensifying revenue collection, fiscal fitness can begin to be restored in 2017. Then as the Minister said, we will not spend what we do not have and we will not borrow what we cannot repay; that will improve our fiscal fitness going forward and the elusive debt reduction could begin.