Govt seeks to reduce revenue shortfall by a third
GOVERNMENT expects to reduce the revenue shortfall currently obtaining by about one third by raising selected tax rates and extending VAT to parts of the insurance sector.
In a letter of intent to the International Monetary Fund dated September 30, 2015, Finance and Economic Development Minister Patrick Chinamasa admitted the shortfall in revenue collection had intensified fiscal pressures thereby making expenditure rationalisation an urgent priority.
He said that Government was committed to improving the fiscal position by strengthening revenue collection and rationalising expenditures including savings on employment costs. “The objective is to improve our capacity to service debt, deliver better services and increase funding for critical social and infrastructure projects.”
Government, Chinamasa said was fully committed to achieving a balance primary fiscal position in spite of the revenue shortfalls. “We intend to lower the primary deficit to below 0,5 percent of GDP and aim at a balance in 2016. The shortfall reflects the country’s widespread economic difficulties, shrinking corporate profits and earnings, limited ability of companies to pay taxes on time, and an increasingly informal economic activity.”
In the Mid-Year Fiscal Policy Review, Government announced measures to generate revenues by removing exemptions, raising tax rates, and extending the VAT to parts of the insurance sector.
In order to meet the target of reducing the revenue shortfall by a third, Chinamasa said Government was enforcing tax payments by agreeing with clients on repayment schedules to eliminate overdue tax obligations.
“We are strengthening revenue administration, in collaboration with our international partners. Moreover, we plan to implement the recommendations of the recently completed AFRITAC South technical assistance mission focusing on improving risk mitigation techniques in customs. Going forward, we plan to rationalize the tax expenditure regime. We also plan to review the design of our tax system with a view to making it more business friendly and to halt the recent slide in tax collection as a percentage of GDP”
He said Government had made efforts to reduce its employment costs by tightening controls and starting to rationalize the civil service. “We will keep the 2015 employment costs below budget projections. Cabinet is currently considering the report by the Civil Service Commission (CSC), containing proposals to streamline public sector employment. In line with the recently completed audit of the civil service, we have started to eliminate duplications and redundancies.”
A Wage Bill Management Committee had been set up to make proposals to reduce the wage bill to the accepted level of 40 percent of expenditure over the next few years. Chinamasa said Government expects to have completed by end-2015 complete decentralization and modernization of the Salary Service Bureau, which would place a payroll assistant in every district, strengthening control over the wage bill and minimizing irregularities.
In their report after the completion of the SMP review, IMF applauded the commitment by Government to redress the fiscal position. “They (Government) have made good on their earlier commitment to seek savings in employment costs in the event a revenue shortfall materialized. It is now clear that the country cannot afford employment costs that absorb 73 percent of the fiscal resources. Their reduction is essential to free up resources for much needed infrastructure investment and social spending.”
The IMF said there was need for Government to make its strategy for reducing employment costs concrete by indicating the measures and time frame for their implementation.
“The 2016 budget should include already the savings resulting from an early implementation of these measures, which should help achieve the 2016 fiscal target.
“On the revenue side, there are concerns that the recent decline in VAT collections reflects not only weakening economic activity, but also issues in its design (e.g. mushrooming exemptions) and administration.
“Thus, staff welcomes the authorities’ intention to seek Fund TA for a comprehensive review of the VAT.
The IMF said conditions for sustained growth require not only solving the external arrears but also addressing structural impediments, increasing productivity and enhancing competitiveness.
The fund said the SMP will continue to be monitored based on quantitative targets and structural
benchmarks although with modifications.
“The floor on the stock of reserves has been adjusted to take account of the lower than originally programmed fiscal balance and external flows. The remaining structural benchmarks continue to focus on further improving fiscal transparency and accountability, enhancing PFM, and improving the business climate.”
In the just ended June review of the SMP, Zimbabwe met four of the five quantitative targets, despite the economic and financial difficulties. The country met the end-June primary balance target, while protecting social spending, and managed to improve its international reserve position.
“However, a recently contracted $200 million non-concessional loan was not in line with our commitment under the program. The funds were used mainly to restructure existing obligations —including for key economic sectors— to prevent them from becoming non-performing, and to avoid accumulation of additional external arrears, said Chinamasa.