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“Thanks For Growth, But Where Is The Strategy On Jobs and the
Equity in Taxes?” Says CSPR
1.0
Introduction
The Civil Society for Poverty Reduction (CSPR) welcomes the
spirit of the 2006 budget to translate the pains endured during
the HIPC process into welfare gains that must result into
advances in access to education, health care and economic
provisioning. It is CSPR’s hope that the sacrifices Zambians
made will soon translate into lasting freedom - the emancipation
from the yoke of poverty. CSPR is particularly enthused with the
budget’s move to focus on economically empowering Zambians,
especially the youth, as a sustainable way of fighting poverty
and ensuring the country’s future prosperity. CSPR is confident
that government’s continued thrust for fiscal prudence and tight
monetary policy will steer the national economy towards greater
prosperity. We implore business houses and industry to respond
in ways that will ensure increased national output and thus,
improved incomes and standards of living for the ordinary
Zambian citizens.
The
2006 budget is not without weakness, however. Within this
context, CSPR is concerned that the budget has not addressed
itself to the employment problem nor offered meaningful tax
relief for the working population. Our expectations on
employment creation and tax relief have therefore not been meet.
Strangely, could it be by coincidence that the budget has not
paid serious attention to issues directly affecting labour? The
answer is complicated, at best, beyond the scope of our
statement.
CSPR’s statement on the 2006 national budget is informed by the
network’s vision for “a Zambia in which all of its people enjoy
all basic needs.” The network’s mission is to be a leading civil
society network contributing to pro-poor development at all
levels in Zambia. These are the lenses; the values and
convictions CSPR shall use to look at the 2006 budget. So, while
saying thank you to government for positive growth, declining
inflation and improved fiscal discipline, CSPR is led to ask:
where is the strategy on jobs and the equity in taxes?
This statement is in five parts. The next section looks at the
proposed macroeconomic framework in the context of poverty
eradication and job creation. The third section concerns itself
with aspects of the proposed budget expenditure framework. The
fourth section interrogates aspects of the budget’s proposed tax
regime. The fifth section makes some recommendations. The last
section concludes the statement.
II.The Macroeconomic Framework: Geared For Job Creation? Taken
as a whole, there are several reasons to give a good grade to
macroeconomic performance in the recent years. The budget
reports that the economy has consistently recorded positive
growth over the last six years, averaging 4.6 percent. In 2005,
however, real GDP growth, though positive, declined from 5.4
percent in 2004 to 5.1 percent in 2005. This decline may not at
all be surprising given some supply constraints such as oil
shocks and labour disputes in the mines during 2005. Thus, on
the basis of a year-to-year comparison, nearly all the key
sectors: agriculture, mining, construction and manufacturing
recorded declined growth rates in 2005 compared to the previous
year. Only tourism posted better growth in 2005 than in 2004.
However, the end of year inflation in 2005 closed at 15.9
percent and was reported to be the lowest rate achieved since
the advent of the liberalisation of the economy in 1991. In
addition, the economy posted an increase in gross international
reserves to an equivalent of 1.8 percent of import cover – which
was higher than the target of 1.3 percent of import cover in
2005. These are all significant gains that inspire hope and
create a basis for optimism that a better Zambia is possible.
Thus, CSPR commends government efforts at macroeconomic
stability, fiscal discipline and efforts at improved balance of
payment viability. We also generally welcome the key
macroeconomic objectives set for 2006 though we think that
interest rates are still too high and that the projected GDP
growth rate (6%) is rather modest given the incentives allotted
to business and industry. Figure 1 below captures the favourable
trends in GDP growth rates and inflation recorded in the recent
years.
But
more fundamentally, our contention is that positive GDP growth
rates, stable inflation, and fiscal discipline are in themselves
not enough. These are just means to the end. There is need for a
deliberate and substantial redistribution of expenditures in
favour of poverty-reducing programmes and activities1. In CSPR,
improved social and economic welfare and enabling people lead
the kind of lives they value is what we long for. For this
reason, CSPR would like to see visible correlations between
macroeconomic variables and the daily experiences of the people
of Zambia. There would be no denying that poverty remains the
greatest challenge Zambia is facing. Today, 68 percent of the
total population is below the poverty line with the majority
living in extreme poverty. Infant mortality rate averages 115
per thousand live births while narrow unemployment is to the
tune of 13 percent of the labour force. These human development
indicators do not make good reading. Table 1 below summarises
the state of human development in Zambia using selected
‘ultimate’ development indicators.
Table 1: Selected ‘Ultimate’ Development Indicators, 1993 – 2004
1980
-1985
1990-1995
2003
2004
Poverty incidence (%)
**
68
73
67
Per
Capita Income ($ in 2002 dollars)
630
370
320
320
Adult illiteracy rate (%)
37
32
21
21
Infant Mortality Rate
103
109
115
115
Source: World Bank (2004)
**
Denotes official statistics unavailable
As
can be seen from the table above, the state of human development
portrays the most worrisome picture and calls for expeditious
actions.
CSPR
further notices that in setting the momentum for macroeconomic
policies for 2006, the budget clearly acknowledges that, “to
address the high poverty levels, we should not only sustain the
recent positive economic strides that we have made, but also
raise further economic growth to more than six percent per annum
in the coming years.2 CSPR agrees with the Minister’s sentiments
and posits that higher economic growth rates, in the range of 8
percent per annum, are desirable for poverty reduction. Taking
this point further, CSPR reiterates that the current poverty
situation in Zambia warrants a reconsideration of the policy of
“growth first, distribution later.” With existing high poverty
levels, it becomes compelling that there should be a substantial
redistribution of expenditures in favour of poverty reducing
programmes and activities. To wait for poverty reduction to
occur mainly through growth may be too risky.
Building on the need for sustained growth, the 2006 budget
rightly acknowledges that, “we need to ensure that the growth
process benefits more of our people by integrating them in
economic activities”3. CSPR welcome this policy thrust. But,
perhaps a more fundamental question is: how can more people be
integrated in economic activities? From CSPR’s standpoint, a
useful starting point is job creation. As argued in CSPR’s
submissions to the fifth National Development Plan (NDP), “low
income households possess few assets of their own. Instead, the
most abundant resource the poor have at their disposal is their
labour. Thus, a macroeconomic strategy that more fully employs a
country’s human resources and raises the returns to labour
becomes a powerful tool for reducing poverty”4. In other words,
when employment expands along with production, the benefits of
economic growth will be widely shared. Indeed, better employment
opportunities provide people with new, and often improved,
sources of income. In this way, improving the quality and
quantity of employment opportunities directly links economic
growth to poverty reduction.
As such, in a country where over 90 percent of the labour force
is outside the formal employment sector such as Zambia is, the
national budget must act to place employment creation at the
centre of the macroeconomic framework, not as a residual of it.
Unfortunately, the strategy for employment generation in the
2006 budget is, at best, unclear. This is worrying. CSPR urges
government to adopt a more direct and integrated approach to
employment promotion in order for more people to share in the
benefits of growth. We want to see employment creation as one of
the key macroeconomic objectives in this budget and subsequent
ones.
III Budget Expenditure Measures
Education and Health
Looking at expenditure measures, particularly as they relate to
the pattern of expenditure by function, CSPR welcomes the 2006
budget proposition to spend 30 percent of the budget on the
social sectors. However, when looked at from a normative
perspective, it is the case that social sector allocations are
still falling below internationally agreed norms. For instance,
taking the health sector as a point of reference, the Abuja
Commitment to which our Government is a signatory stipulates an
allocation to the health sector of not less than 15 percent of
the total budget. Comparing this with the 10.7 percent the
health sector has received in the 2006 budget; it becomes clear
that there is still need to do better.
The
800 medical personnel earmarked for recruitment in 2006 is too
infinitesimal, especially when it is considered that the newly
launched strategic plan for the Human Resources in Health
informs that the manpower deficit in the health sector is in the
range of over 20,000. Certainly health and education allocations
are still falling short of desired levels.
Anyhow, the consolation presents itself in the noticeable
increase in the share of the health and education sectors in the
discretionary component of the budget. Evidently, the percentage
share of the education sector in the discretionary budget has
risen from 24 percent in 2005 to about 27 percent in 2006.
Similarly, the percentage share of the health sector in the
discretionary budget has increased from 12 percent in 2005 to 18
percent in 2006. Obviously, this upward movement constitutes an
important signpost that points to the efficacy of getting
national priorities right and telling. This can only mean well,
especially if the pattern is sustained.
Social Protection
The
allocation to social protection at less that 1 percent of the
total budget is inadequate. This needs to be raised to at least
2 percent of the total budget. The reality in Zambia is that
many households are falling in destitution from which they are
unable to recover without assistance. Addressing vulnerability
is, therefore, an integral part of addressing poverty. CSPR
therefore urges government to show greater commitment to poverty
reduction by allocating more resources to social protection.
This will enable vulnerable groups such as the elderly, orphans
and the disabled access social services.
Agriculture
In
the agriculture sector, CSPR is concerned that the proposed
expenditure of 5.7 percent of the total budget fall short of the
Maputo commitment to allocate not less than 10 percent of the
total budget to the agriculture sector. In the same vein, CSPR
urges government to review the Fertilizer Support Program (FSP)
in line with its intended objectives. The FSP has taken up
around 30 percent of the entire agriculture budgetary allocation
but there is very little impact in terms of reducing food
shortages, increasing household income and reducing poverty.
General Public Services
Within the context of budget expenditure, CSPR is concerned that
the budget line called General Public Services, which, has taken
up about 41 percent of the total budget, remains vague about its
actual composition. Our recommendation is that this budget
line’s composition must be made more explicit.
Youth Empowerment
With
respect to youth empowerment, CSPR commends government for the
K40 billion allocations to youth empowerment programmes in the
2006 budget. Indeed, youth in Zambia have been disempowered for
far too long and it is refreshing to see that government is
coming up with specifically youth targeted measures.
Roads
The
allocation of K904.5 billion to roads in the budget is welcome.
However, CSPR's view is that there are a number of challenges
currently facing construction and upgrading of roads in the
country. These include poor workmanship largely resulting from
contracting persons without sufficient knowledge and equipment
in road construction; wrong timing (e.g. awarding contracts
during the wet season), late disbursement of resources; among
others. Our view is that if these constraints are not addressed,
government will continue spending tax payers’ money in a
bottomless pit, especially in rural areas.
IV Tax Regime: Where’s the Equity?
Regarding tax measures in the budget, CSPR’s reaction is
specific to three principle areas of concern, namely, the income
tax exemption threshold, the Pay As You Earn (P.A.Y.E) and the
V.A.T on agriculture products. Noticeably, the 2006 budget has
proposed to increase the current exempt threshold of P.A.Y.E
from K280, 000 per month to K320, 000 representing a 14
percentage point increase. The contention of CSPR is that the
proposed increase in the exempt income from K2800,000 to
K320,000 per month is too insignificant to provide meaningful
relief to the working population.
The
reasons would be clear and well understood. First, the increase
in the income tax exempt threshold does not account for the
erosion due to inflation that closed the year at 15.9 percent.
Second, the increase in the threshold of exempt income does not
relate to the reality of the minimum amount required to afford a
monthly food basket or indeed the poverty line as defined by
both the Jesuit Centre for Theological Reflection(JCTR) and the
Central Statistics Office (CSO).
The
contention here is that the basis for the income tax exempt
threshold must be linked to objective criteria that must exempt
from tax income levels equivalent to the minimum amount of money
required to meet basic needs of a Zambian household of an
average size.
Our specific recommendation, therefore, is that the threshold of
tax-exempt income should be increased to at least K500, 000.
This increase will effectively exempt income levels below the
poverty line as defined by both the Jesuit Centre for
Theological Reflection (JCTR) and the Central Statistics Office
(CSO).
On
the proposed structure of tax income bands, the announced budget
change offers less than significant tax relief. For instance,
the announced changes mean that a 35 percent rate will apply to
incomes above K1.1m per month; and a top rate of 37.5 percent
will apply to incomes above K5.7m per month since the budget has
maintained the existing personal tax rates of 30 percent, 35
percent and 37.5 percent for low, middle and higher income
categories, respectively. Table 2 shows current and proposed
income bands and respective tax rates.
Table 2: Proposed 2006 Tax Structure
Current Rates Per Annum
Proposed Rates Per Annum
First K3, 360,000 per annum @ 0%
First K3, 840,000 per annum @ 0%
Next
K8, 640,000 per annum @30%
Next
K9, 858,240 per annum @30%
Next
K48, 000,000 per annum @35%
Next
K54, 768,000 per annum @35%
Above K60, 000,000 per annum @ 37.5%
Above K68, 466,240 per annum @37.5%
Source: ZRA Tax Advice Centre
This
means that the majority of the working population will not
benefit from efforts at tax relief. Besides, the nature of the
existing tax structure implies that the heavier burden of tax
will fall on low-income categories compared to high-income
groups within the personal income tax net. This can never be
fair. Where is the equity?
Overall, the proposed personal tax rates are certain to have
adverse implications for the productivity of workers. Indeed,
there is irrefutable evidence that there is a close link between
the tax system and a nation’s productive capacity. In labour
dependent countries such as Zambia, the link between the tax
system, worker remuneration, economic growth and poverty is
critical. More worker effort means more output, more output
means more savings and more profit. This in turn means more
growth and less unemployment and less poverty. The converse is
true: higher taxes means less effort and less incentive to
invest in productive assets ( including labour) and less growth.
In the ultimate, this means less growth than is possible and
more unemployment and more poverty.
Besides, the effects of a destructive tax system can also be
seen in terms of corruption, poor service delivery which
ultimately lock the country into a vicious cycle of poverty and
underdevelopment. Our recommendation is that the entire P.A.Y.E
regime must be restructured to comply with the canons of equity.
Otherwise, cosmetic tax relief measures can only feed more rent
seeking and fraud.
CSPR is also concerned that capturing of animal products; milk,
fish, agricultural supplies and products in the value added tax
(VAT) net will negatively affect small scale farmers. Small
farmers will not be able to claim VAT on their inputs because
they are not VAT registered, which means that they will pay more
for farm inputs and supplies. In turn, food prices will rise
thereby hampering accessibility for the majority of ordinary
citizens. Inevitably, the measure to standard rate animal
products, milk, fish, agriculture supplies and products will
negate efforts at poverty reduction. CSPR urges government to
re-look at this tax measure in the interest of both consumers
and producer.
V
Summary Recommendations
To ensure that the 2006 budget benefits many and meets the
expectations of the poor and needy, CSPR makes the following
recommendations:
i)There should be substantial redistribution of expenditures in
favour of poverty reducing programmes and activities. Thus,
allocations to health, education and social protection must be
raised up. Within this context, the budget allocation to defence
must be reduced;
ii)Employment creation must be adopted as one of the
macroeconomic objectives with clearly quantifiable outputs for
the year - end;
iii)Government must act to bring down interest rates consistent
with the declining trend in the inflation rate;
iv)The income tax exempt threshold must be increased to K500,
000 per month in line with the poverty line as defined by both
JCTR and CSO;
v)Government must consider scrapping off the standard rating of
animal products, milk, fish, agricultural supplies and
agriculture product for VAT purposes in order to protect the
small scale farmers and consumers;
vi)Government must consider restructuring the entire Pay As You
Earn (P.A.Y.E) income tax regime to make it more equitable and
productive.
VI
Conclusion
The
2006 Budget provides a unique opportunity for the country, as it
is the first post HIPC Initiative budget. CSPR urges government
to reflect total commitment to disbursement towards poverty
reduction since poverty reduction was central to the attainment
of HIPC completion. This year’s Budget is, for CSPR, a litmus
test as to how government is going to plough savings from the
HIPC Initiative. CSPR looks forward to effective implementation
of the 2006 Budget. This should be reflected in timely release
of social sector allocation and full disbursement of budgeted
resources for poverty reducing programmes. We urge Government to
continue pursuing public expenditure reforms that promote
transparency, accountability and prudence in the usage of public
resources. Government should also stay the course on
macroeconomic stability.
Lastly, while the Budget may have been well crafted, it is the
actual implementation that is vital to eradicate poverty. A
moral and committed approach to poverty reduction can begin to
manifest itself in Zambia if the 2006 Budget can truly act to
Rank Poverty Eradication First!
Delivered by
Grayson Koyi
Board Member, Civil Society for Poverty Reduction (CSPR)
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13th
February 2006 |
