Budget 2020 | Mthuli cuts growth forecast, gives little tax relief

Finance Minister Mthuli Ncube has tempered his economic growth expectations for 2020, forecasting the economy to recover 3%, lower than his initial projection of 4.6%.

The economy is still expected to shrink by 6.5% this year, the first recession since 2008. The IMF expects the economy to fall 7.1% in 2019, and a modest recovery of 2.5% in 2020.

Presenting his Z$63.6 billion budget statement on Thursday, Ncube acknowledged that the economy will remain under pressure in 2020, as another season of low rainfall is expected. He estimates revenues at ZWL$58.6 billion.

In his budget, Ncube pushed his new narrative that the period of austerity is over, to be replaced by one of growth.

“The reforms, which were centred on “Austerity for Prosperity” were in no way a retribution, especially in view of the fact that our public finances were not balancing, following years of unsustainable fiscal deficits. To correct that, the New Dispensation had to put aside the notion of short cuts, magic solutions, and loose funding, by strengthening fiscal discipline and tightening monetary policy, in order to start rebuilding the economy,” said Ncube.

However, despite this, Ncube was still conservative on granting the level of relief that many had hoped to see. Here is some of what’s in the budget for consumers.

Key moves:

  • The tax free threshold has been raised from Z$700 to Z$2,000 per month. Tax bands will now begin at Z$2,001 and end at Z$50,000, above which the highest marginal tax rate of 40%, with effect from 1 January 2020. The tax free bonus has been changed from Z$1,000 to Z$5,000, with effect from 1 November 2019.
  • The 2% tax remains. However, Ncube has reviewed the tax-free threshold from the current Z$20 to Z$100 and the maximum tax payable per transaction by companies from the current Z$15 000 to Z$25 000 for transactions with values over Z$1.25 million.
  • The VAT standard rate has been cut from 15% to 14.5%, with effect from 1 January 2020, which Ncube says is “in order to stimulate aggregate demand”. Basing on ZIMRA’s third quarter revenues, the VAT measure would imply tax relief of Z$60 million per quarter, or Z$20 million a month.
  • Civil servants are to receive their bonus this year. The bonuses will include transport and housing allowances, which Ncube said is a once off variation to current policy, which base these payments to basic salary only.
  • Corporate income tax rate has been cut from 25% to 24%, with effect from 1 January 2020
  • Excise duty on fuel has been Treasury’s biggest revenue earner, accounting for a large percentage of the Z$1 billion that ZIMRA collected in the third quarter. Treasury is to use 5% of excise duty collected on fuel for the rehabilitation of the long-delayed Beitbridge-Harare-Chirundu highway, with effective from 1 January 2020.
  • With another drought looming, Government is creating a “fiscal buffer” of Z$$165 million to cater for drought shocks, as well as strengthening the early warning systems.

Price hikes ahead: No more grain subsidies

However, Ncube has taken a major step that could add more pressure on consumers. The government, he announced, is doing away with subsidies on maize and wheat, whose prices will now be determined by the market.

Up to now, government had been funding the procurement of grain at market price, then selling it to grain millers at subsidised price. This, Ncube says, open to abuse and placed a huge burden on the fiscus, and will now be done away with.

“To address these distortions, Government, will, with effect from January 2020 remove the existing grain marketing subsidies for maize and wheat, that were being provided to Grain Millers through the Grain Marketing Board. The intervention will see GMB selling wheat and maize at market prices, with Grain Millers having an option to either import or purchase grain from GMB. This means the prices of basic commodities such as bread and mealie meal may adjust,” Ncube says.

This move means the price of maize meal and bread will rise significantly. Natfoods, one of the country’s largest millers, last week said volumes from its grain division had already fallen 5% due to price hikes. Sales were only saved from bigger drops because of the government subsidy that limited price hikes.

Ncube has however kept what he called “targeted subsidies” on the production of roller meal, cooking oil and the standard loaf of bread.

“A reimbursement system will be implemented in order to extend the subsidy to the producers of roller meal, cooking oil and standard bread through tax set off arrangements where possible and voucher schemes,” he said. There is no elaboration on how this subsidy will work.

On inflation, Ncube gives ambitious forecasts, projecting monthly inflation to fall to single digits from the first quarter of 2020 to close the year around 2%. he says this will happen “on the back of commitment by the RBZ to implement tight reserve money targeting framework as announced in the second 2019 Monetary Policy Statement”.