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Low Capital Budget Renders Budget ‘unsustainable’

AN important attribute of any budget is that tax revenues must cover recurrent expenditures. 

If tax revenues are not enough to cover recurrent expenditures it means the country is living beyond its means and will develop serious economic challenges and eventually import more while its domestic and foreign debts continue to rise, as has been the case with Zimbabwe since 2000. 
Analysts said for the first time in over nine years, the primary budget was positive at US$76,3 million.  This is for the first 10 months of the year. 
Even the total budget balance is US$47,9 million.  This means Zimbabwe has been living within its means through “eating what we kill or gather”.
Kingdom Stock Brokers (KSB) however said the current 2009 budget had one big flaw.
“It is not sustainable because the capital budget is extremely low.  Having planned to raise the capital budget to at least 18%, the 2009 budget outturn for the period to October 31 has produced a laughable 4%, which means 96% went to recurrent expenditure,” KSB said. 
KSB said a capital budget that is continuously being squeezed by recurrent expenditure does not promote national investment through gross fixed capital formation. 
They said the budget ceases to be growth-promoting and fiscal policy will definitely fail to positively impact the macroeconomic objectives. 
“We are living within our means but we are not investing in infrastructure to provide an enabling environment for business to thrive so that the tax base and tax revenue rise, making it easier to finance the secondary deficit which is created by expenditure on capital projects,” said KSB.
Analysts said the “worrying” aspect about the 2009 budget is that a greater portion of the recurrent expenditure are employment costs such as wages and salaries which constitute about 60% of total costs. 
Given that these costs are non-discretionary, Finance minister Tendai Biti has little room to manoeuvre which, means Zimbabwe is likely to experience the same structure being perpetuated in the 2010 Budget and beyond.
The ideal split between recurrent and capital budget should be at least 75-25% with a bias towards the capital budget. 
Surprisingly the 2007 budget performed well on the capital budget.  This probably reflects the massive farm mechanisation drive that government pursued although a large chunk of it was financed outside the budget through quasi-fiscal activities of the Reserve Bank.
Using this analytical thrust, the 2010 budget will perform badly on the primary budget as it shows a deficit of US$238, 2 million but is well on the capital budget of 22,42% of total expenditure. 
Zimbabwe Allied Banking Group (ZABG) said the cardinal rule which must be observed at all times is that a country must not live beyond its means. 
“It is okay to have an overall deficit as long as the primary budget balance is positive because it means the deficit has been incurred through the capital expenditures which promote growth,” ZABG said. 
This puts a question on the cash-budgeting policy.  Biti expects to finance the deficit of US$810 million through support from donors.
Questions have been raised as to what guarantees, there are that he will get the support which amounts to 36% of the budget given that the international community has demanded progress on the political front, especially the full implementation of the Global Political Agreement before they can loosen their purses 
The observation by Biti that the bulk of our taxes are coming from indirect instead of direct sources is a worrisome economic anomaly. 
Indirect taxes are placed on goods and services whilst direct taxes are levied on income and wealth.  Since indirect taxes are paid only when a particular purchase is made, they are therefore taxes on consumption hence they are also called outlay taxes. 
An increase in indirect taxes shows an increase in consumption by the nation.
On the other hand direct taxes are taxes on production as income and wealth can only be earned by engaging oneself in productive ways.  An increase in direct taxes indicates an increase in economic activity and vice-versa.
“Zimbabwe is a nation of consumers because government is getting most of its revenue from indirect taxes and less from direct taxes. Indirect taxes such as Value Added Tax (Vat), customs and excise duties, constituted 75% of total government revenue during the 2009 whereas direct taxes such as Pay As You Earn accounted for only 19%,” said KBS.
According to the Reserve Bank of Zimbabwe, the economy’s deposit base is estimated at US$1,061 billion as at October 31 2009. It remains too low for financial institutions to effectively execute their intermediary role on the economy. 
Contributing to the thin deposit base is a decrease in the savings due to low disposable incomes coupled with financial disintermediation emanating from the now unshakable informal economy. 
Low interest rates on deposits of between 0% and 3% do not encourage one to keep their money in a bank as the opportunity cost is very low. 
According to the Reserve Bank the reasons for the decline in savings have been complicated by the fact that about 90% of the total deposits are transitory in nature and cannot be utilised by financial institutions to create long term-credit for the deficit units.
Analysts said the budget could be used to restructure asset and liabilities of financial institutions so that they become long-term through floating longer-dated stock to finance the deficits in a bid to match the long-term funding requirements of industry.


Paul Nyakazeya

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