Budget cuts planned to push down deficit
Mbongeni Mguni | Friday January 8, 2021 17:27
In October, the draft Budget Strategy Paper, an annual budget blueprint, had forecast the 2021/22 deficit at P12.6 billion or 5.9% of GDP, above the prescribed fiscal limit of four percent. Each deficit requires additional funding by government but Covid-19 expenditure in the current financial year has left its reserves at the Bank of Botswana at historic lows.
A budget memo that circulated earlier this month indicates that the official deficit will be pushed down from the 5.9% of GDP estimate to below four percent by slashing spending and raising revenues through, among others, increasing Value Added Tax (VAT) and Withholding Tax (WHT) as well as introducing a new sugar tax.
BusinessWeek previously reported on the VAT adjustment last year, as well as the introduction of the sugar tax which government expects to raise up to P200 million annually. The budget revisions are part of the Economic Recovery and Transformation Plan approved by Parliament in September to stabilise the economy through Covid-19 and reset medium term priorities to 2023.
According to the recent memo, recurrent spending for 2021/22 is forecast to drop to P50.7 billion from P55 billion in the Budget Strategy Paper, while development spending will be cut to 14.8 billion from P16.4 billion in the budget blueprint.
The memo states that besides VAT and WHT which will increase to 14% and 10% in the upcoming financial year, the fuel levy will be adjusted to P1.12 per litre from P1.00, while a sugar tax of two thebe per gramme of sugar content above four grammes per millilitre will be introduced. Collection of the plastic levy will also be enforced.
The increased VAT, WHT, fuel levy and introduction of the sugar tax are part of “domestic resource mobilisation” initiatives that government is implementing to boost revenues, while also slashing spending, in order to reduce the need to fund the deficit.
“There is need to develop a robust domestic revenue mobilisation initiative, which will be key in the expansion of the revenue base, given the current high level of dependence on external revenues such as minerals and SACU revenues,” the Budget Strategy Paper reads. “This will involve raising some tax rates, reducing exemptions and allowances, improving tax compliance and revenue mobilisation efficiency. “The 2021 Budget will include initiatives in all of these areas.”
The memo circulating indicates that 50% of the vacant position in the central and local government will be abolished in the upcoming financial year in order to reduce the public sector wage bill. A separate memo from the Ministry of Local Government and Rural Development to all local authorities says strict belt tightening will be implemented in the remainder of the 2020/21 financial year.
“No external travel by ministries, departments and agencies including state owned entities and local authorities (will be permitted),” the memo reads.
The Local Government memo also states that no meetings, seminars, workshops, retreats, annual ceremonies, hospital events and others will be held in person and these should instead be held virtually to save on the costs of venues and catering.
“Government is facing unprecedented budgetary challenges for financial year 2021/22,” the memo reads. “This has necessitated measures to be put in place to conserve cash and ensure that government is able to honour its financial obligations in the remaining three months of the year.”
Finance ministry technocrats have said in as much as the higher taxes, fewer subsidies and reduced tax exemptions are certain to squeeze Batswana at a time when many are struggling due to COVID-19, the changes are impossible to avoid given the funding requirements of the response to the pandemic.
“If revenues under-perform relative to the budget projections, it may be necessary to cut recurrent or capital spending in order to maintain fiscal stability,” the Budget Strategy Paper warned in October.
Government’s traditional go-to reserves, the Government Investment Account (GIA) held as part of the foreign reserves by the BoB, has depleted to uncomfortable levels. In 2009, government guided the economy through the then record recession by tapping into the GIA, but this time authorities say this is not an option.
External borrowings, meanwhile, carry the foreign exchange repayment risk known as the Original Sin, while domestic borrowings are limited by both the size of the capital market and the need to avoid crowding out the private sector.