Institute for Public
Policy Research
Development is best promoted through free and critical debate informed by quality research
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Development is best promoted through free and critical debate informed by quality research |
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IPPR
Opinion No. 17, May 2005 National
Budget 2005/06: The Continuity Candidate’s Budget Robin
Sherbourne In
the first budget of the new government, Finance Minister Saara
Kuugongelwa-Amadhila deserves credit for trying to rein in public spending and
borrowing after the budget deficit threatened to run out of control in 2003/04.
Optimistically she forecasts a budget surplus by next year but there is little
to suggest she will achieve that by squeezing spending which remains stubbornly
stuck at 35% of GDP. No one can accuse the Minister of economic populism. This
budget contains cuts in spending on combating crime, primary education and
health care and no increase in the social pension – government programmes that
directly touch the lives of the majority. Allocations to higher education and
vocational training remain virtually unchanged despite the new Prime
Minister’s wish to create a “knowledge economy”. Instead defence once
again comes out the big winner. Namibia now spends more of its budget on
security than on health. It
is said that the secret of being a successful minister of finance is to leave at
the right time. It seems to have been good timing on the part of Nangolo Mbumba
to leave his post as Namibia’s Minister of Finance in a year when the budget
deficit rocketed to an unprecedented 7.5% of Gross Domestic Product (GDP) in
2003/04. His successor Saara Kuugongelwa-Amadhila has been left to pick up the
pieces. Those who thought she might not have the bottle to make her mark have to
recognise that she has already gone down as the first minister of finance to
abandon the practice of doling out cash half way through the financial year when
she took the bold step of cancelling the traditional additional round of
spending last December. It looks as if she intends to carry on reining in
spending and debt. Spending is set to rise by just a third of a percent this
year. A
weighty budget This
year’s budget was accompanied by even thicker documentation than last year.
The Medium Term Expenditure Framework (MTEF) document continues to grow by the
year. For outsiders it is hard to say what difference the MTEF is making to the
budget process or budget outcomes. In her speech the Minister found plenty of
time to talk about Namibia’s financial sector, lambaste the private sector,
and wave the threat of new taxes about, but spent virtually no time at all
explaining to the public why spending allocations are the way they are and how
the MTEF has achieved this. In
the past the IPPR has expressed scepticism about the fiscal targets introduced
by the previous minister of finance in 2001. Missing fiscal targets is regularly
explained away to everyone’s satisfaction by the Minister of Finance so it is
hard to believe line ministers will not present similarly plausible reasons why
they failed to achieve particular outcomes, even if they can be and are in fact
measured. Despite this scepticism, it is worth taking a look at the overall
fiscal stance presented in the MTEF for clues on the future direction of fiscal
policy. This
is now the fifth successive year that the Minister of Finance has presented a
three-year perspective on revenue, spending and the deficit, which is called the
Medium Term Expenditure Framework or MTEF. Table 1 presents an updated version
of the comparison of these five three-year perspectives presented in last
year’s IPPR opinion piece. It includes actual out-turns for 2001/02, 2002/03,
2003/04 as well as revised budget estimates for 2004/05 in the shaded boxes. The
following points are worth noting:
Table
1: Medium Term Expenditure Framework Projections 2001/02-2007/08 in % of GDP
Source:
MTEF documents 2001/02-2005/06, Ministry of Finance The
budget deficits for the next three financial years announced by Minister
Kuugongelwa-Amadhila are the lowest forecast deficits since the MTEF began.
Indeed, the Minister is now forecasting budget surpluses, albeit only from next
year onwards. In doing this, the Minister has set herself even more demanding
targets than her predecessor. Setting targets is a useful exercise if a serious
attempt is made to meet them. If not, all that happens is that credibility is
lost. While it can reasonably be claimed that the Ministry has less than perfect
control over revenues, it is not unreasonable to argue that, in theory at least,
it has far more control over expenditure. Because the deficit is the difference
between revenue and expenditure and revenue is uncertain, the Ministry can again
reasonably claim that the deficit is also harder to forecast with any degree of
accuracy. However, the very clear pattern emerging is that, while the Minister
and her predecessor have consistently presented a picture of declining
expenditure as a proportion of GDP, spending shows no sign of falling and
remains stubbornly at or above the 35% of GDP mark, in other words 5% above the
target. Given this record, it is hard to believe public spending will fall by
more than 5% of GDP between the 2004/05 and 2006/07 financial years, especially
if revenues hold up. These forecasts become rather less believable when it is
remembered that government’s own target is 30%, raising the question as to why
government is targeting lower spending in the MTEF. Table
2 shows how government measures up to the fiscal targets it set itself during
2001. It shows the latest available estimates for each target at the end of
2003/04. The stock of public debt excludes government loan guarantees, which,
according to the Minister, has already declined to 6.8% of GDP in 2004/05 from a
high of 11.8% of GDP in 2001/02. Table
2: Government’s fiscal targets as % of GDP
*excludes
government loan guarantees estimated at 6.8% of GDP in MTEF 2005/06-2007/08 Revenue
highlights… For
some years now ministers of finance have talked about the need to improve
revenue collection, tax compliance and tax administration and this budget is no
different. In her speech, the Minister talked rather vaguely about tax
“ring-fencing” mentioning in particular that taxpayers were offsetting
losses from farming against salary income but stopped short of promising to end
this practice. She promised to introduce withholding tax on interest from
investments, stop abuse of VAT refunds, reintroduce the luxury 30% VAT rat on
luxury items (which was abolished only in 2002), introduce “environmental
taxes”, get rid of the tax exemption on unit trusts, tackle transfer pricing
and focus on raising non-tax revenue. She also raised excise duties on alcoholic
drinks and tobacco. As in the past, the threat to introduce “environmental
taxes” without giving any idea of what these might be is only likely to cause
uncertainty and raise questions among business and investors. There appears to
be little evidence from the revenue estimates presented that their introduction
is imminent. The
following paragraphs examine revenue highlights contained in the main budget
document. Worryingly, the budget document contains serious mistakes in the
increase/decrease columns which compare this year’s estimates with last
year’s. In
stark contrast to last year’s budget in which individual income tax receipts
were estimated to fall in an environment of relatively robust GDP growth, this
year the Minister is forecasting an astonishing increase in revenue approaching
25%. However, it is certainly open to question how realistic this is and once
again raises doubt about the ministry’s ability to accurately forecast
revenue. While
corporate tax revenue from the mining sector is set to come in under last
year’s rather poor performance, non-mining corporate tax revenue is estimated
at N$1,062 million. Just five years ago non-mining corporate tax revenue
totalled less than half of this figure at N$464.9 million which seems to suggest
an astonishing increase in tax collections has taken place. Equally encouraging
for government is that Non-Resident Shareholders Tax is set to more than double
this year from N$36 million to N$87.9 million. Receipts
from the Southern African Customs Union (SACU) revenue pool are forecast to drop
steeply from N$4.2 billion to N$3.7 billion. While the MTEF suggests SACU
revenues are set to rise again next year, the following year (2007/08) sees
another steep fall. Out
of the 50 or so parastatal companies that now exist, six provide just under N$33
million in dividend revenue this year. It is, however, questionable to what
extent state-owned monopolies should be required to raise revenue for central
government in this way. Namibia Post and Telecommunications is expected to
generate N$15 million for the fiscus in 2005/06. Diamond
royalties are expected to fall by more than half this year from N$500 million to
N$242 million. This is surprising since diamond production from Namdeb is
expected to increase significantly, diamond prices are rising and the exchange
rate is not expected to deviate dramatically from its value over the last
financial year. Government
claims that it is revenue constrained so it is not surprising that, at first
sight, the Minister has made an effort to raise more revenue from administrative
fees and charges which rises from N$372.3 million to N$397.9 million. However,
much of this can be put down to a mysterious “miscellaneous” revenue item
under Vote 08 Defence of N$121.8 million. There appears to be no revenue stream
under Vote 15 Mines and Energy where government is known to have required
non-diamond mining companies to pay a 4% or 5% turnover tax from 1 December
2004. The Minister made no mention of this major tax change in her speech. Nor
does additional revenue appear under Vote 25 Lands and Resettlement where the
Minister announced the land tax would raise further resources for land reform.
Park entrance fees under Vote 18 Environment and Tourism is estimated at N$15
million compared to last year’s N$18 million which represented a quantum leap
on the previous year’s N$2.4 million. The sale of government houses under Vote
23 Works appears to have been put on hold with no revenue expected this year
compared to the N$72 million in 2004/05. The
European Union (EU) and the Swedish International Development Agency (SIDA)
expect to put a total of N$153.2 million through this year’s budget to support
education, public finance management, rural water and rural roads. All
in all total revenue is expected to rise by just 2% with tax revenues rising by
over 4% and non-tax revenues falling by 25%. Clearly, more could be done to
raise revenue by concentrating on non-tax revenue. Expenditure
highlights by vote… The
following paragraphs highlight what we believe to be the issues of greatest
importance in each of the expenditure votes contained in the budget document.
Following the inauguration of the new government on 21 March 2005 several
ministries and votes were reorganised so care must be taken comparing this
year’s with last year’s budget. Furthermore, an even larger MTEF document
was presented with this year’s budget. However, it is hard to know how the
numbers presented in the MTEF document should be regarded since they differ with
those presented in the main budget document. Certainly some of the new
information, such as a selection of parastatal financial statements, is a
welcome addition to the budget information presented even if it is slightly
half-hearted and not explained. In other ways the MTEF confuses rather than
clarifies. For instance, the Special Field Force, surely a major expenditure
programme, is not mentioned in any of the programmes that fall under Vote 06. Vote
01 Office of the President For
some years now, the largest single item of expenditure under Vote 01 has been
the new state house under Main Division 02. This year is no different. The MTEF
document states that the building is the number one priority under a programme
called “Protection and defence of the constitution” putting expenditure at
N$90 million while the budget document puts the same figure at N$100 million. A
new Main Division 03 Office of the Founding President has been created and
receives N$5.7 million. This compares with N$2.5 million for the new
Anti-Corruption Commission (Vote 02 Main Division 02) and N$4.6 million for the
Office of the Ombudsman (Vote 16 Main Division 06) Nowhere
in the MTEF document is national intelligence mentioned as a priority yet
spending on intelligence is set to rise from N$56.2 million this year to N$93.0
million by 2007/08, almost half the total spending on the entire vote. The
budget document puts spending on the National Intelligence Security Agency this
year at an almost unchanged N$46.2 million. The
President’s Economic Advisory Council moves to Vote 01 and receives N$0.9
million including the now traditional amount for furniture although it is
expected to be slimmed down to “four wise men”. Vote
02 Office of the Prime Minister Main
Division 02 has been renamed and is now called Governance of State-Owned
Enterprises, Anti-Corruption and Disaster Management. It includes N$8.8 million
for the Central Governance Agency, N$2.5 million for the Anti-Corruption
Commission and N$150,000 for the National Emergency Disaster Fund so hopefully
any disasters this year will be small ones. The Office of the Deputy Prime
Minister mysteriously disappears. Vote
03 National Assembly Assistance
to political parties again falls slightly from N$15.9 million to N$15.4 million.
Library and Computer Services (Main Division 03) receives a healthy increase in
its allocation. Vote
06 Police The
allocation to Main Division 02 Combating of Crime is cut from N$361.6 million to
N$328.5 million, mainly because last year saw a large allocation for the
purchase of vehicles. However, the longer-term outlook is bleak with spending
set to fall to N$297.7 million by 2007/08. The spending on the Special Field
Force (SFF) increases from N$267.4 million to N$279.9 million this year while
VIP Security increases from N$34.6 million to N$38.6 million. A total of 1,078
police constables are employed guarding VIPs compared to 2,288 who are out
combatting crime while a further 5,580 are employed in the SFF. Main Division 07
Control of Road Traffic has been discontinued under Vote 06. Vote
08 Defence
A
much higher N$64.6 million under Main Division 07 is allocated for pensions to
members of the National Assembly this year compared to N$16 million last year.
The contingency provision of N$150 million under Main Division 10 is maintained
into 2005/06. Air Namibia receives a further N$116 million as “equity
participation” under Main Division 12 while the Development Bank of Namibia
receives a further N$91.5 million. The Minister states that “reform efforts at
Air Namibia are generating positive results” but the financial statement
presented in the MTEF shows operating losses actually rose to N$163.1 million in
2004. Statutory payments made under Main Division 14 fall slightly from N$1,176
million to N$1,147 million partly due to a fall in the payment of loan
guarantees. Vote
10 Education The
new unified Ministry of Education brings together parts of the previous Ministry
of Basic Education, Sport and Culture and the Ministry of Higher Education,
Training and Employment Creation and this has given rise to the reorganisation
of main divisions under this vote. Yet again spending on primary education
falls, this time from N$1,203 million to N$1,132 million while spending on
secondary education rises from N$502.9 million to N$552.6 million thanks mainly
to a N$55 million injection of donor funds for classrooms under “construction,
renovation and improvement”. Unam and the Polytechnic receive approximately
what they received in 2004/05 with the former continuing to receive more than
twice what the latter receives. Vocational Training under Main Division 10
remains almost unchanged with N$550,000 continuing to be allocated to training
for Ramatex. It looks as if education’s days as the favoured sector is
numbered. The MTEF foresees nominal spending remaining pretty much constant over
the next three years. Vote
12 Gender Equality and Child Welfare The
total allocation to maintenance grants and foster parent allowances under Main
Division 06 rises dramatically from N$53.3 million to N$89.7 million. Vote
13 Health, Social Services and Rehabilitation The
allocation to primary health care under Main Division 05 falls slightly from
N$19.2 million to N$18.6 million. Spending on the social pension rises from
N$462.5 million to N$474.1 million although the monthly value of the pension
remains at N$300 a month. Vote
14 Labour and Social Welfare There
appears to be some confusion since social pensions are now included under Vote
14 in Main Division 06 Social Assistance as well as under Vote 13. In the former
a total of N$455.1 million is allocated to social pensions and N$14.0 million to
war veterans compared to N$474.1 million and N$15.4 million respectively under
Vote 13. Vote
18 Environment and Tourism The
Namibia Tourism Board (NTB) is allocated N$21.3 million under Main Division 05,
an increase on last year’s allocation despite the introduction of the tourism
levy, which was to be the NTB’s main source of income. Vote
19 Trade and Industry Industrial
incentives stay at N$2.5 million and training reimbursements for Export
Processing Zones (EPZs) rise marginally to N$2.6 million. Vote
20 Agriculture, Water and Forestry Forestry
moves from Vote 18 to Vote 20. While the amount allocated to Affirmative Action
Loan (AAL) Scheme interest rate subsidies is almost halved from N$26.2 million
to N$15.4 million, an additional N$37.5 million is allocated to arrears on AALs
under Main Division 07. The Namibian ostrich industry receives a hefty N$11.8
million compared to N$6.3 million last year. Vote
25 Lands and Resettlement This
year a further N$50 million is allocated for land purchases under the National
Resettlement Policy. Budgeted amounts will be paid into the Land Acquisition and
Development Fund where they will remain if unspent at the end of the financial
year. The budget document shows that in 2003/04 only N$3.9 million was actually
spent out of the budgeted N$50 million. The Minister once again promised that
the land tax would start to be collected this year which should add to the
resources available for purchasing land for redistribution. Vote
29 Information and Broadcasting NBC
sees its subsidy slashed from N$81.7 million to N$59.3 million while Nampa and
New Era also see their subsidies reduced but not eliminated despite supposed
commercialisation. A total of N$53 million is allocated to the Film and Video
Development Fund compared to N$10.3 million last year. The
continuity candidate’s budget As
far as the broad fiscal framework is concerned, this year’s budget follows in
the footsteps of the Minister’s last budget and her statement to parliament on
1 December when she cancelled additional rounds of spending for the 2004/05
financial year. Her overall strategy seems to be to try to restrain spending and
squeeze more tax revenue out of the economy without resorting to headline
grabbing rises in income or personal tax rates in order to balance the budget.
However, the reason for pursuing this course of action appears to be an ongoing
fear that revenues are set to decline as a proportion of GDP (mainly because of
falls in SACU receipts) rendering current levels of spending unsustainable. The
medium-term view is that revenues are set to decline to well under 30% of GDP.
The strategy does not seem to be founded on the view that government is taking
far too big a tax take from the economy and that this is hampering growth. While
it could be argued that the outcome is the same, the belief that underlies the
strategy will make a difference. If spending is to be cut simply because
revenues are lacking, spending is unlikely to fall from 35% of GDP if current
levels of revenue are sustained. In short, government will continue to spend
provided the money is available. This is in fact what has occurred since
2001/02. For
some years, the IPPR has stressed that the real challenge to the Minister is on
the spending side of the budget, getting more effective public services for the
vast amounts of money spent. Spending seems stubbornly stuck at above 35% of GDP
despite government’s stated intention to bring it down to 30%. In her speech,
the Minister talked about restructuring spending but there is precious little
evidence of this happening. So far the much mentioned Performance and
Effectiveness Management Programme (PEMP) appears to have made little difference
to allocations. Instead, there are plenty of examples of past trends continuing,
especially of spending on what can only be regarded as economically unproductive
activities while programmes that directly help to improve the majority of
people’s lives receive less. If this continues the massive resources taken out
of the economy by government will continue to be spent in ways that will not
lead to long-term growth. |
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IPPR 2005 14
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