Fiscal policy is the use of government spending and taxation to influence the economy. When the government decides on the goods and services it purchases, the transfer payments it distributes, or the taxes it collects, it is engaging in fiscal policy. The primary economic impact of any change in the government budget is felt by particular groups—a tax cut for families with children, for example, raises their disposable income.

Fiscal policy is said to be tight or contractionary when revenue is higher than spending (i.e., the government budget is in surplus) and loose or expansionary when spending is higher than revenue (i.e., the budget is in deficit). Often, the focus is not on the level of the deficit, but on the change in the deficit. Thus, a reduction of the deficit from $200 billion to $100 billion is said to be contractionary fiscal policy, even though the budget is still in deficit.

In Zimbabwe the Ministry of Finance and Economic Development through its responsible Minister Mthuli Ncube presents the policies every November which is popularly known as the National Budget to many.

Zimbabwe's 2020 Macro-Fiscal Framework

The Government of Zimbabwe through the Ministry of Finance and Economic Development projected economic recovery of 3% in 2020 which was premised on the following key assumptions:

  • Expected better rainfall season supported by increased support towards rehabilitation and development of irrigation infrastructure to sustain agriculture activities. Better planning for increased agricultural production will also be crucial for food security and foreign currency generation;
  • Improved macroeconomic stability through continued fiscal and monetary discipline, as well as a substantial improvement in the balance of payments following;
  • Improved electricity supply through imports and other alternative sources of energy. These include harnessing of emergency power generation capacity from Independent Power Projects;
  • Extension of supportive tax and non-tax incentives to stimulate domestic production;
  • Advancing implementation of the ongoing ease of doing business reforms to improve the investment environment; and
  • Increased investments by both Government and the private sector.

The estimated revenue collections for 2020 were estimated at ZWL$58.6 billion. In order to avoid the undesirable impact of deficits on money supply and macroeconomic stability, the 2020 Macro Fiscal Framework espouses a low budget deficit of around 1.5% of GDP implying expenditures of ZWL$63.6 billion, excluding retentions.

Government Expenditure Excerpt as at 30 April 2020:

Excerpt: Government Expenditure as at 30 April 2020

Objective

The main fiscal policy objective in 2020 is directed at managing expenditure within the allocated supported by non-inflationary financing and complemented by a tight monetary policy framework.

Strict adherence to the procedures laid out in the Public Finance Management Act [Chapter 22:19], including the issuance of warrants by the Accountant General prior to any spending commitment made by an accounting officer will also be strictly enforced. Rule of law will be the order of the day under my watch.

The Ministry made it clear that for the success of the 2020 budget the following specific risks would receive amplified mitigation attention:

  • Spending Outside Budget - In 2019, spending outside the Budget and macro-economic shocks disrupted the attainment of some of the Transitional Stabilisation Programme (TSP) targets. Refraining from unbudgeted operations and borrowing from the Central Bank will, therefore, constitute a key obligation for both Treasury and the Central Bank Authorities.
  • Wage Pressures - The prevailing inflationary environment has eroded incomes for all most workers. Wage compression has affected aggregate demand with its negative effect on the GDP. Government is committed to ensuring a decent standard of living for its public servants, and will take into account inflationary developments in the ongoing cost-of-living-adjustment (COLA) wage negotiations.
  • Subsidies and other Market Distortions - Market distortions associated with subsidies present an additional risk to macroeconomic and fiscal stability. In particular, subsidies on fuel, electricity and agriculture have, in the past, led to large and often unpredictable expenses.
  • Financing Modalities for Agriculture - In line with the smart agriculture thrust which seeks to promote productivity and sustainable financing, Government reiterates the policy position of financing commercial agriculture, including Command from being Government-led to bank-led, with Government providing guarantees to banks.

2021 National Budget Highlights

  • Government reduced the corporate income tax rate from 25 to 24 percent with effect from 1 January 2020. The decision was motivated by the desire to enhance the return on equity, a key success factor in the drive towards improving investment flows.
  • Review of the Tax-Free Threshold from ZWL$5 000 per month to ZWL$10 000 per month.
  • Revival of the tourism industry is set to achieve a US$5 billion by 2025, anchored on the country’s abundant natural resources, rich cultural heritage and diverse scenery.
  • Government launched the Cultural and Creative Industries Strategy 2020-30 (CCIS) which is a roadmap that guides the development and growth of the cultural and creative industries sector.
  • Govt is committed to empowering the disadvantaged and marginalised members of the society. Govt is setting aside resources equivalent to US$37.5 million for the benefit of women and US$37.5 million for youth entrepreneurs, plus US$37.5 million for war veterans.
  • The country targets to grow manufactured exports by 4.1% in 2021 from an estimate of 3.6% in 2020. This will be achieved through focusing on diversifying exports into non-traditional markets and exploiting existing preferential trading agreements with various countries.
  • Total external debt is estimated at US$8.2 billion, as at end September 2020. This is an increase by US$106 million from the end 2019 amount of US$8.09 billion and was mainly on account of penalties and interest arrears.
  • Domestic Debt as at 30 September 2020 was ZWL$12.5 billion, which is 1.2% of GDP and 1.8% of the total public debt.
  • Major contributors to total revenue collections were Tax on Income and Profits (TIP), 35%. Tax on Income and Profits’ contribution to total revenue is followed by (VAT) at 25% and the Excise duties at 14%.
  • Blended year-on-year inflation, which measures the combined price changes of goods and services in both the ZWL$ and US$ declined to 249% from 376% during the same period, while blended month-on-month inflation stood at 1.4% by October 2020.
  • Economic growth is expected to rebound in 2021 from the consecutive two-year slump to record 7.4%. From supply side, this growth will be driven by strong recovery in agriculture, mining, electricity, construction, transport and communication as well as finance and insurance.[1]



References

  1. [1], Ministry of Finance and Economic Development, Published: 26 November, 2020, Accessed: 26 November, 2020