eBusiness Weekly
Alfred M. Mthimkhulu
Recently, President Mahmoud Abbas of Palestine fired 10 of his advisers. He reckoned having so many people around him was a waste of public funds.
Meanwhile, across the Zambezi, Finance Minister Dr Ng’andu restated Zambia’s commitment to austerity. It seems President Lungu is determined to see austerity through. This is evident in even modest directives such as barring all government officials except when duly authorised from issuing statements on economic affairs — so reducing sources of policy confusion.
To the south of the Limpopo, the economy is not doing well but for now, it is perhaps Zimbabweans than South Africans that are feeling the brunt of it. The usually benevolent Eskom has become some kind of Shylock of Venice asserting without word: pay-up or I’ll cut you off.
Some in South Africa are talking of an IMF bailout. If a bailout is in play, Argentinians will confirm the imminence of austerity.
Last year, they adopted austerity receiving US$57 billion, the largest advance ever to a country by the IMF. But social tensions have not abated and inflation is still creeping up.
Some ten months ago, austerity conveyed hope to many Zimbabweans. At best, the word now invites jests that mask ridicule or dejection. But what is austerity? The online definition says it is “difficult economic conditions created by government measures to reduce public expenditure”. That is neither quite right, nor very wrong.
Austerity policies seek to reduce government expenditure, increase revenues by raising taxes and become efficient in using funds in hand. In the short term, the goal is to save so as to repay debts. In the long term, it is to fund infrastructures that improve productivity. Does it work? Has it worked? Should Palestinians, Zambians and Zimbabweans be hopeful?
The UK has been on austerity since 2010. A study of UK’s austerity by Professor Fetzer of University of Warwick shows that austerity-related cuts in benefits on housing, social welfare, and tax credits have reduced real per capita income by 16 percent.
The goal of the ruling party is to save £45 billion by 2021 and on this they are on target. Several local authorities’ expenditures are down 46 percent and this should translate to the 2020 national expenditure being 15 percent lower than it was in 2010. Ordinary Brits can’t be happy.
Professor Fetzer’s study suggests that the Brexit vote was driven by austerity. From the outset, austerity was associated with financially imprudent countries in Europe hence the appeal of leaving as the solution. Unfortunately, livelihoods are worse and services such as health and education have become expensive.
This does not mean austerity never works. A lot more studies from many countries are necessary to make such a conclusion. In any case, what would be informative are measures that have changed fortunes of ailing economies — policies such as the New Deal in the US during 1930s Great Depression where consumers received significant support from the state. An economy cannot recover if people have little to spend unless the economy is built entirely on exporting industries.
Unfortunately, austerity in the global south focuses on cutting costs and raising taxes. While cutting costs as president Abbas is doing is great, it is unlikely that such typical austerity approaches as in the UK can work in the south. It must be emphasised with all persuasiveness that the essence of economic development in the south is to nurture the emergence of a dependable social safety system. Reducing incomes of the poor by taxing them cannot be developmental. The focus must be on reducing taxes as was for instance intended by President Ivan Duque of Colombia on assuming office in August 2018.
President Duque wanted to reduce VAT from 19 to 17 percent. To that end, he would include more goods under VAT. He also wanted to increase the number of people paying Income Tax by almost two million. His plan is still subject of heated contestations with his vice president lobbying that taxes raised thus far must be returned because the underlying Bill violated the constitution. Per President Duque’s campaign plan, the tax cuts could have raised at least 1.1 percent of GDP in extra revenue.
Colombians are wrestling with tax reforms, initially rejecting the reforms in 2018. Zimbabweans squealed about the 2 percent Intermediated Money Transfer Tax and have paid it from day one. Other than government itself, what really can stop tax reform in Zimbabwe?
In the England of 1817, landowners blocked tax reforms. In the 1840s, they saw the light. Prime Minister Robert Peel instituted a series of banking and tax reforms and from the reforms and other innovations, long and glorious was the reign of Queen Victoria. Importantly, tariffs on grains which had caused misery for decades were slashed easing social tensions and boosting disposable incomes.
If they leave Europe, Prime Minister Boris Johnson and his successors are likely to follow their predecessors: catalyse local demand with tax cuts and attract foreign capital with tax concessions. It is the way of all progress. Colombia is wrestling with it and so must all in the global south. Taxes in most of Africa are still as extractive and predatory as they were set out to be in regimes past. We must address this. A tax regime must incite development.
