The K1.2 trillion 2016/17 National Budget that Finance, Economic Planning and Development Minister Goodall Gondwe tabled in Parliament yesterday is either pragmatic or politically brave.
Discarding political correctness in favour of what makes economic and public finance sense, Gondwe’s budget statement signals a sharp reduction in the role of government in your life as Capital Hill shrinks the ‘welfare state’ to achieve long-term fiscal health.
For example, in chopping 600 000 potential voters off the beneficially list of the politically popular, and suffocating Farm Input Subsidy Programme (Fisp) that is the legacy of his brother Bingu wa Mutharika, President Peter Mutharika may be demonstrating that he has a strong backbone after all.
Or it could simply be that he has no choice, having pragmatically taken a hard look at the country’s fiscal position and decided that his political standing is expendable when it comes to Malawi’s long-term financial sustainability. It is a tough choice to make.
Either way, the number of Fisp beneficiaries has fallen to 900 000 from the traditional 1.5 million, which represents a 40 percent cut.
The Fisp budget itself is down by more than half, falling to K31.4 billion in the next budget from the 2015/16 revised estimate of K63.9 billion.
But if trends are anything to go by, the new Fisp bill may not be realistic given that it has always been overspent.
Again, the fact that Gondwe omitted to detail the pricing model for the remaining beneficiaries also points to a push of more burden on the beneficiary.
Furthermore, the cement and iron sheets subsidy programme—one of President Mutharika’s pet projects which got K7 billion in the 2015/16 fiscal year—has been conspicuously, if not tactfully, ignored in the budget statement.
While that could be a positive response to critics’ concerns that the programme is not a priority, again, fiscal realities could mean that the administration plans to either put the initiative on hold or quietly drop it.
These moves to restrict government’s direct role in people’s welfare could be a tough sale, but it will contribute to reducing the budget deficit to around 3.9 percent of gross domestic product (GDP) in the next budget from around 6.2 percent.
But Gondwe’s call for less pay—both in the public and private sector where he has condemned the heavy Western style bonus culture—could be seen as an attempt at punishing success even as he warns against unsustainable wage bills.
“At this point, Mr. Speaker, Sir, I would also like to discourage what has emerged as a persistent culture of demanding more and more of the limited Government resources among the leaderships of some of our public institutions, through enhanced conditions of service. These demands are increasingly becoming insensitive to the economic depression that the country is passing though and, therefore, unpatriotic,” he said.
At a broader level, the 2016/7 budget is signaling that government wants to return to the basics to stabilise the economy and achieve growth rates high enough to have a dent on the country’s poverty levels.
That is clear in what Gondwe calls strategic policy issues that show serious intent to invest in irrigation farming through the Greenbelt Authority, addressing the short term food insecurity with a K35 billion allocation for buying food; boosting rural incomes through an expanded public works programme and reforming Fisp, among others.
In addition, the creation of the National Planning Commission is a reflection of the growing need for more centralised long-term planning and follow-up while the continued focus on public finance management reforms and the renewed emphasis on programme; and performance-based budgeting would be critical in ensuring the effectiveness and efficiency of fiscal policy.
But while the budget shows pragmatism on the expenditure side of the equation, the revenue part is swimming in unrealistic optimism.
Total revenue and grants during the 2016/17 fiscal year are estimated at K965.2 billion or 22.2 percent of nominal GDP.
Of this, K774.8 billion or 80.3 percent will be generated locally, while the balance or 19.7 percent will come from donors.
Taxes alone—which are collected by the Malawi Revenue Authority (MRA)—are expected to contribute K708.8 billion while K66 billion will be non-tax revenue.
The 2016/17 tax revenue projection is—in nominal terms—21.8 percent higher than last year.
This is an ambitious estimate made on the assumption that nominal GDP-which Gondwe said is the base for most taxes—will grow by 24 percent. Real GDP is projected at 5.1 percent in 2016 from 3.1 percent in 2015.
Unfortunately, Gondwe neglected to state where this growth will come from, especially given that agricultural output has shrunk on the back of harsh weather conditions. The outlook in other critical sectors such as mining, manufacturing, retail, financial services and telecommunications remains too murky to make any informed projections.
With most companies affected by inflation and exchange rate volatilities high interest rates and the sharp rise in the cost of utilities such as water and electricity, it could mean that taxes from incomes and profits may take a beating as company down-sizing becomes a necessity.
Such down-sizing also gnaws at disposable incomes, therefore, purchasing power shrinks, which could erode taxes derived from consumption.
Yet, according to Gondwe, tax on income and profits will account for 55.4 percent of total tax revenue, while tax on goods and services (dominated by Value Added Tax), will generate 37.2 percent.
But on balance the 2016/7 national budget—centered around the four priorities of increasing domestic resource mobilisation, food purchasing and irrigation farming, maintaining the wage bill to below seven percent and commitment to predictably finance key social sectors such as health and education—could just be the beginning of a foundation on which a strong economy can be built. n