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Fiscal Policy Review submission to the Ministry of Finance and Economic Development
Zimbabwe Congress of Trade Unions (ZCTU)
June 22, 2004

Introduction
The 2004 National Budget presented the challenges for the economy in terms of containing inflation, increasing the capacity to generate more foreign currency, supporting the productive and export sectors, enhancing conditions for increased private sector involvement, improving infrastructure, job creation, economic empowerment, the delivery of social services, promoting efficient use of public resources and the elimination of corruption in both private and public sectors. Inflation is identified as the number one enemy and it is highlighted that its containment requires "…total and unwavering commitment and collaboration of all stakeholders," (paragraph 10, page 3).

The current inflation target is to reduce it to 200% by year (2004) end. To achieve this intention, the Minister of Finance and Economic Development in his 2004 budget statement stated that government would ‘rigorously’ implement fiscal and monetary stabilization measures, complemented by structural measures to invoke "an immediate positive supply response from the productive sectors of the economy," (paragraph 11, page 3). The statement goes further to identify fiscal discipline and increased focus on the efficient use of resources as critical to the attainment of macroeconomic stabilization.

The perennial pledge with respect to fiscal policy is to match recurrent expenditures to current revenues, allowing budget borrowings only for capital expenditures as well as infrastructural development, with unbudgeted for expenditures restricted to national emergencies (2004 National Budget). So far, government, through the Reserve Bank of Zimbabwe has implemented a vigorous monetary policy. The monetary policy has managed to bring back sanity into the financial sector, reducing inflation from its peak level of 623% in January 2003 to 395448% by May 2004 and funnelling foreign exchange transactions through official channels. However, the monetary policy thrust has not been complemented by equally aggressive and progressive reforms in other policy areas, including the fiscus, hence the importance of the current fiscal review.

ZCTU'S Submission
Fiscal policy relates principally to public revenue and spending. Government revenues derive mainly from direct taxes (income and company taxes) and indirect taxes (VAT, import duties, surtaxes and other taxes).

2.1 Government Revenue
2.1.1 Review of Taxation Policy
Zimbabwe's tax regime remains onerous and regressive. While the measures taken in the 2004 National Budget to increase the tax threshold from Z$15,000 to Z$200,000 per month and other tax relief measures with respect to pensions were welcome, they have been nullified by inflation. The principle adopted by the Tripartite Negotiating Forum in mid-2001 is to link the tax threshold to the Poverty Datum Line (PDL), which at June 2004 prices stands at Z$440,000, implying the need to readjust the current threshold. In an inflationary environment, it is critical to review the tax threshold more regularly, e.g. quarterly. In addition, the tax bands are very narrow, starting at Z$200,000, with the highest tax rate of 45% applying to salaries at as low as Z$375,000 per month. Such narrow tax bands easily nullify wage increases as workers are pushed into a higher tax band. Especially under hyperinflation, wider tax bands generate higher disposable incomes. In the context of Zimbabwe, where minimum wages average Z$335,000 per month in the private sector, equivalent to 76% of the PDL, it is critical that tax policy be reviewed to increase disposable incomes. Other tax thresholds for retrenchment, pensions and other benefits should also be reviewed to ensure that working people have more money in their pockets.

2.2 Public Expenditure
2.2.1 Redefining the Role of Ministries
At independence in 1980, Government sought to provide requisite services to its citizens and correct historical injustices. However, by the late 1980s, this had resulted in an unsustainable budget deficit in excess of 10% of GDP. However, the required readjustment of the role of the State has not been undertaken. This is not necessarily a call for the rolling back of the State. Rather, it is a call for the development of a strategic role of the State. The State cannot simply do everything for everyone, thus requiring the ring-fencing of strategic activities. A strategic role of the State requires that it targets those activities with the greatest social and economic return.

From a rights approach, this implies focusing on food security, provision of adequate health care at affordable prices, education, housing, transport, and basic utilities (electricity and water). At various stages of its development, Zimbabwe has been able to provide these, especially during the 1980s. A modest land redistribution then, supported by the provision of requisite services such as financial, extension, fertiliser and other inputs resulted in an agrarian revolution in the 1980s. With a strategic focus, this can be repeated at a larger scale. It is informative that during the period after independence, before the Economic Structural Adjustment Programme (ESAP), Zimbabwe had never imported grain, relying on its own reserves during periods of drought.

A human-centred approach dictates that people's priorities for food security, good health care, education, housing, transport and basic utilities ought to be ring-fenced and adequately financed. Subsidies should be provided for the basic commodities (mainly maize, bread, sugar and flour) to ensure affordability. The necessary resources can be released through a redefinition and targeting of Government. This therefore requires a redefinition of the role of the various Ministries.

To achieve efficiency in the use of public resources, regular value audits should be undertaken involving all key stakeholders.

2.2.2 Public Enterprise Reform
As for public enterprises, the 2004 National Budget directs them to charge economic and viable prices to ensure financial autonomy from it, with their borrowings from the market based on their balance sheets and not government guarantees. While the need for economic pricing is understandable, it is not clear how this would redress the problems of management deficiencies and operational inefficiencies identified in the 2004 budget statement. In addition, the need to balance the need for viability and the issue of affordability is a critical issue for sustainability, as highlighted in the Prices and Incomes Stabilisation Protocol. This directive on its own will see inefficient public entities pushing the service or product price beyond the reach of ordinary Zimbabweans. These are the policy conflicts that a Social Contract / Accord is designed to address.

A strategic assessment of each parastatal's role should be undertaken in consultation with all key stakeholders. Public enterprises require a radical approach that places a premium on good performance and penalises poor performance. Clear targets should be set for each public sector enterprise. Management decisions should be independent of Ministerial interferences so that public enterprise management is made accountable.

2.2.3 Fiscal Incentives
Fiscal incentives should target the resuscitation of closed mining areas and other development centres. These incentives should also be provided for employment levels above a stipulated level (e.g. 1,500) to encourage employment creation and discourage unnecessary retrenchments. This should also apply for the employment of disadvantaged groups such as people who are physically challenged. Fiscal incentives should also be put in place to encourage Employee Share Ownership Schemes (ESOPs).

There is therefore need for a new development strategy that integrates the hitherto dual and enclave structure of the Zimbabwean economy. Figure 1 below illustrates the structure of the Zimbabwean economy that has been reinforced by past budgets.

2.2.4 Public-Private Sector and Civil Society Partnerships
Synergies should be explored in terms of public-private and civil society partnerships. In the area of vocational education and training for example, stakeholder funded Boards have taken over the provision of technical, vocational education and training. South Africa, Zambia, Botswana, Tanzania, Uganda among others have introduced such partnerships in the area of vocational education and training, significantly reducing the role of the public sector in the process. In the case of South Africa, the Skills Development Act provides for the establishment of Sectoral Education and Training Authorities (SETAs), which are funded by the private sector. These are responsible for skills training at sectoral level. These are funded through a levy, 20% of which is retained at the national level by Government for specific / strategic training, while the remaining 80% is distributed to the SETAs.

The development of infrastructure is another area where such partnerships have helped reduce the role of the State. The tunnel-channel in Europe was constructed with funding from the private sector in the late 1980s. It is therefore necessary as a first step to come up with an international profile of good (and bad) practices in terms of public-private sector partnerships in infrastructural development.

Another good example of public-private and civil society partnership is with respect to delivery of services. Successfully poverty-reduction initiatives have left delivery to the private sector and civil society, while Government remained responsible only for policy and co-ordination. In the case of South Africa, a Government Agency, the National Development Agency allocates resources to the accredited NGOs, which in turn are responsible for delivery. Uganda has successfully harnessed civil society in its poverty eradication initiatives. This means Government then focuses on policy issues and co-ordination of activities. The Department of Industry in South Africa uses a similar approach to the development of Small and Medium Scale Enterprises.

2.2.5 Fighting Corruption
Corruption is a cancer that kills the national economy. It is therefore important for all stakeholders to participate in the fight against this vice. The promulgation of an Anti-Corruption Act, as in other countries that have successfully dealt with the vice, is critical to the fight against corruption. The establishment of an Anti-Corruption Commission led by exemplary eminent persons is also critical. The SADC Anti-Corruption Protocol and other international guidelines provide a useful framework for the fight against corruption.

2.3 Pursuing an Inclusive, Broad-Based Growth Strategy
At independence in 1980, Zimbabwe inherited a dual and enclave economic structure built on the basis of an ideology of white-supremacy. While the formal sector, employing 20% of the labour force was relatively developed; the majority of the people were locked in an underdeveloped peasant sector.

Figure 1: The Dual and Enclave Structure of the Zimbabwean economy

By focusing on the formal sector, which is male-dominated, past policies and budgets have neglected the non-formal (including informal) sectors that accommodate the majority of the population, and especially women. They have therefore reinforced the inherited dual (separate) and enclave (isolated) structure of the inherited economy. With this structure, the economy cannot rely on the formal economy alone to meet the development needs of the people. The expected 'trickle down' from the formal to the non-formal economy has not, and will not occur, implying the need for conscious policies of integrating the non-formal economy into the mainstream of the economy.

Professor Guy Mhone summarised these anomalies into four distortions or inefficiencies, viz, distributive, allocative, microeconomic and dynamic inefficiencies. Distributive inefficiencies refer to the unequal or restricted access to key economic assets (such as land, education and training, finance), which undermine the participation of the majority in productive activities. Such a distortion conditions the extent of participation and benefit from growth in the economy. The structure of the asset base therefore determines the nature of growth. The narrow base whereby a small elite owns the bulk of resources delivers a skewed distribution of income, resulting in jobless, ruthless, voiceless, rootless and futureless growth. On the other extreme, a broad based structure will ensure that an inclusive growth pattern, which is driven by, and benefits the majority, emerges.

Allocative inefficiency refers to the situation whereby a significant proportion of the labour force is under or unemployed. This suggests resources are being wasted. Over time, it is argued that such under or unused resources will depreciate in value and consequently productivity. This under or unused labour represents foregone productive potential and incomes. Unleashing an inclusive growth path releases this potential productive energy and unravels a 'virtuous cycle' of self-reinforcing growth.

Microeconomic inefficiencies relate to the distortions at the enterprise level that undermine economic efficiency, ompetitiveness and employment absorption. An example is the limitation imposed by the inherited inward-looking development strategy, and the inefficiencies of the non-formal sector. In such situations, human capabilities, value channels (work, production, management and marketing processes and capabilities) and value chains (linkages in distribution of inputs and outputs, marketing structures, financial intermediaries) undermine the productive potential of the economy. This undermines capital accumulation and overall development. This largely constrains employment creation and reinforces the enclave relationship of the sectors.

Dynamic inefficiencies result from all the other inefficiencies. These hinder the movement to an inclusive and sustainable growth pattern as the economy becomes trapped in a low income, low demand, low savings, low investment, low growth, and low employment vicious cycle. The inequitable distribution of resources will result in the fulfilment of the needs (mainly luxuries) of the privileged (e.g. importation of luxuries) at the expense of the basic eeds of the majority.

It is therefore important to remove these distortions to ensure that a broad-based, inclusive and sustainable growth path is taken, which ultimately promotes sustainable human development. In its latest budget, South Africa has undertaken a new approach through which it is targeting the marginalized groups and sectors (the so-called other South Africa) to create an inclusive and broad-based growth strategy. The empowerment of the majority of Zimbabweans, through the reallocation of resources (land, skills, capital, appropriate technology, entrepreneurship) is critical to empower the majority of the people to participate in growing the economy.

2.4 Budgetary Process
The budgetary process is limited in many ways. It brings groups selectively and independently and is carried out in a very limited time frame. A better system would take advantage of existing institutional frameworks, reform them to make them inclusive and use them for budget input. Zimbabwe should learn from the example of the countries implementing PRSPs that established Thematic Working Groups (TWGs) that then developed positions that were adopted by Government.

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