4.3 MILLENIUM BUDGET: RESPONSE OF BUSINESS AND INDUSTRY
Presented by Elton S. Mangoma, Partner, Kudenga and Co.


• INTRODUCTION
• MACRO ECONOMIC ENVIRONMENT
  • Tax Rates
  • Penalties on PAYE and Sales Tax
  • Restrictions on Motor Vehicle Deductions
  • Export Incentives
• MACRO ECONOMIC IMPACT
  • Budget Deficit
  • Recurrent Expenditure
  • Inflation
  • Conclusion

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4.3 MILLENIUM BUDGET: RESPONSE OF BUSINESS AND INDUSTRY
Presented by Elton S. Mangoma, Partner, Kudenga and Co.

INTRODUCTION

The millennium budget has nothing but bad news for business and industry. It shows no innovation and no incentives to spur business performance. It reinforces the direction towards the de-industrialisation of the economy and impoverishment of the population at large (who are the customers). The budget further destabilises the macro-economic environment and fuels the already high inflation and interest rates.

A critical analysis of the budget reveals that it is a poorly conceived „numbers game", with very little link to the reality of the country’s economy.

MACRO ECONOMIC ENVIRONMENT

Tax Rates

With regards to tax rates, the basic rate for 1999 and 2000 was set at 35%. This has now been increased by the proposed 3% AIDS levy. This increases the tax rate, resulting in negative cashflows. Such action by Government affects business confidence.

Business and industry do not see the merits of the proposed AIDS levy, but rather view it as increasing the tax rates.

Penalties on PAYE and Sales Tax

The collection of PAYE and sales tax improved dramatically over the last two years. This effort has now been capped with the enforcement of penalties on tax defaulters and late submissions. The payment of PAYE and sales tax is expected within 15 days of the following month for which it is being paid. For instance, a company is expected to remit sales tax on its November sales by the 15^th December.

This requirement totally ignores the generally accepted trading terms and the reality within which most companies in Zimbabwe operate. For instance, most companies offer 30 day terms, and between 45 and 60 days are often given for settlement of debts. This means a sale made in November is likely to be settled at the earliest by the end of December and most probably by the end of January. This implies that the company has to borrow in order to pay the sales tax to Government. This puts a severe cashflow strain on businesses. It is therefore recommended that sales tax should be paid by the end of the second month following the sale. This way, there will be less defaulters and companies will have positive cash-flows which they can use to grow.

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Restrictions on Motor Vehicle Deductions

The amount allowed as capital expenditure on passenger motor vehicles is limited to $200 000 and it is spread equally over 4 years.

The cheapest car on the market is $450 000. This implies that businesses that require vehicles to enable them to service the market better, are penalised at least 100% on their investments in vehicles. Business would prefer a situation where the capital allowance is at least equal to the cheapest car on the market. The idea that motor vehicles are a luxury is myopic and hampers business growth and development and should be discouraged.

Export Incentives

Export incentives have been chopped and changed so many times. The current proposal in the 2000 budget of a reduction in the tax rate for the portion of the profit related to the exports is impossible to work out with any accuracy. Apart from this difficulty, it is difficult to see the real incentive in this move. An incentive based on actual export receipts would be more relevant and of direct benefit to the critical balance of payment position.

MACRO ECONOMIC IMPACT

Budget Deficit

The budget deficit in the 2000 budget is grossly understated. The understatement results from both the overstatement of revenues and the understatement of expenditure. The actual budget deficit will be at least twice that reflected in the budget.

The economy cannot raise the $75 billion in revenues as projected in the millennium budget. This is because the tax base in the country is being eroded. Companies are closing daily, including big ones such as the BHP and more are getting less viable. Even blue chip companies such as Delta are beginning to show a slow down in profits despite inflation.

At the employee level, more people are being retrenched, and tax bands have been widened. Most tax arrears have now been collected. As such it is very clear that the revenue target is grossly overstated and unrealistic.

Budget allocations are understated in many critical areas. The establishment figures are hardly coming down and salaries are likely to go up by around 30%. The figures in the budget hardly indicate any likely increases, and the net result is that the expenditure figures will grow. With inflation currently around 70%, this will translate into increased costs. This has been hardly factored in the 2000 budget.

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As such, the budget becomes a „numbers game" used to deceive people into believing that the budget deficit is under control, when in fact it is getting worse and the gap will be financed through domestic borrowing. This will lead to the overcrowding of the business sector and increases in interest rates and even higher inflation rates.

Recurrent Expenditure

The majority of the Government expenditure is recurrent in nature and this will result in the further deterioration of the infrastructure. This is already noticeable in the poor state of the roads, lack of vehicles for the police, the decay in the health system and inadequate education facilities.

A major part of the budget allocated to the army is being spent outside Zimbabwean borders, which takes away the demand for goods from the country. This increases inflation, and at the same time reduces local demand.

There is an urgent need to reprioritise Government expenditure towards development.

Inflation

The 2000 budget, as already demonstrated, is highly inflationary. An inflationary environment is hostile to business growth and development. It requires business to raise more capital to support working capital. This can be seen through the high number of rights and new issues in recent years. All this money is essentially working capital, with very little for growth. Those that cannot raise the additional capital are forced either to borrow or downsize. With the high cost of borrowing, more and more businesses are forced to downsize, resulting in more unemployment.

Conclusion

The millennium budget does not offer a change of direction in the economy for the better. It is the same bad medicine but only in large doses. If this budget is not drastically adjusted, the country will suffer negative growth, high unemployment, poor health facilities and extreme poverty. The largest impact will be felt by the urban poor, the disabled, and other vulnerable social groups.