A tough-to-reach 90 percent target

So, government’s long-term fiscal target is that by 2025—10 years from now—domestic resources should finance 90 percent of the national budget, well, at least the recurrent side of total expenditure!

Now, that is a noble goal, especially when the announcement came just three days after celebrating 51 years of ‘independence’.

This independence thing is a cosmetic affair because I can’t see anything independent when our ability to elect our own leaders is largely dependent on external funding in each and every electoral cycle.

Even our policy making—both social and economic—is heavily influenced by foreign capitals and multilateral financial institutions in the mould of the Bretton Wood twins—the International Monetary Fund (IMF) and the World Bank.

I will spare the European Union (EU) on this one because they are not as nosy as their Washington Consensus cousins.

But I digress.

On Wednesday, Peter Simbani, director of Debt and Aid Management in the Ministry of Finance, Economic Planning and Development, unveiled the ambitious fiscal consolidation plan in Lilongwe during a High-level Forum on Development Effectiveness held under the theme ‘Towards a Transformed and Self-reliant Malawi’.

Among other measures, said Simbani, government will intensify the broadening of the country’s tax base (increasing the portion of income that is taxable), strengthening the capacity and systems in revenue collecting agencies and reducing the cost of collecting and improving service provision to taxpayers.

Government, he added, will also increase transparency and tackle corruption to build public confidence in the fairness and competence of revenue collecting agencies; facilitate economic growth by simplifying policies and processes, removing red tape and administering the rules consistently and coherently while modernising administrative processes aimed at reducing the cost of collecting tax revenue.

Now, I know and respect Peter Simbani. He was one of the directors I worked very closely with at Treasury. He is a very earnest fellow and there is no doubt he believes this target can be reached. After all, our friends in Kenya have done it, right?

Look, raising domestic revenue is, or should be, an important policy objective of any government to enable it redistribute wealth, supply public services and increase domestic investments. I also I agree that we need to stabilise the fiscus while maintaining a tax system that is fair, efficient and progressive.

But I think that before we get excited with the lofty 90 percent target, we need to come down to earth and ask this very important question: Why do we collect so little domestic revenue?

The answers to that question should inform the national conversation we surely must have as we try to devise a realistic strategy for reaching our goal.

I can summarise the reasons for our low nominal gross tax revenue into three.

First, we have a tiny private sector that we milk until it collapses. We then resuscitate it with a few drops of water and porridge, dump it in a filthy environment, milk it dry again and the cycle goes on and on and expect more milk, really?

Until government can improve the macroeconomic environment through sound fiscal and monetary policies; until companies can compete fairly for business from government without going to bed with politicians and crooked civil servants, until business facilitating agencies begin to do their jobs, the Malawi private sector will not grow, certainly not in the broad-based manner that is needed to expand tax revenue for government.

I have never seen a country where start-ups struggle so much to get off the ground. How then can we increase private sector players who can pay taxes if we cannot make it easy for them to get into the market?

The second reason for the miserable domestic revenue mobilisation is that we have a large informal economy with a dominant agriculture sector. This situation must be reversed.

There are too many people earning income that is not captured by the system and, therefore, not taxed.

Take, for example, those individuals who erect weighing scales at Chimbiya, Thete, Nkando and other agro-market centres scattered across the country who buy and sell farm produce.

Those folks are filthy millionaires. Where do they pay their taxes to? Has anyone even bothered to make them pay what belongs to Caesar? I can go on and on, but space will not allow me.

The third and last, but not least, factor is the low performance and administration of tax collection at the Malawi Revenue Authority (MRA).

That behemoth of an institution needs serious restructuring for it to help government meet its 90 percent goal otherwise we are all wasting our time.

Related to the above is the gross inefficiency in non-tax revenue, especially in departmental fees collection and management.

For example, Chikangawa has been shaved bare. Where is the revenue from there? Most of it has either gone into civil servants’ pockets or remains uncollected from operators there.

Now that is one tiny outpost of a very large Ministry of Natural Resources, Energy and Mining. What do you think is the situation in the other government ministries, departments and agencies?

And for goodness’ sake, seal those damn loopholes in the public finance management system to save the 30 percent that goes down the drain through dubious payouts!