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BALANCING THE ECONOMY AND ‘PRO-POOR’ POLICIES

“The best thing a society can do to increase its prosperity is to wise up. This means, in turn, that it is very important that economists, inside government and out, get things right. When we are wrong, we do a lot of harm. When we are right – and have the clarity needed to prevail against the special interests and the quacks – we make an extraordinary contribution to the amelioration of poverty and the progress of humanity,” said Mancur Olson, a leading American economist and social scientist.

 

 

Zambia today is confronted by immense challenges. More than 60 per cent of our people are living below the poverty line, which means they lack basic human needs. This is a shame and an aberration on the leadership of this country of great wealth potential. Money is the life blood of any economy. You can tolerate some inflation and not deflation or stagnation. When you invoke deflationary measures, then you do not want economic growth, and you continue soaring the public debt – simple logic which does not seem to be available. You cannot continue living on debt as you must graduate to self-financing via increased tax revenue. Thus, the defining challenge of our time is higher inclusive economic growth.

 

The government of Zambia must be careful not to over regulate or increase taxes further as that alone defeats its program that aims to foster job creation. If Zambians cannot benefit, then they will not only have been denied a share of the cake, but they will also have been excluded from participating in the economic rebuilding of the country. The current uncertainty and widespread debate on recent major policy shifts is creating a lot of tension within the business community.

 

Government uses tax policy to generate revenue and places the burden where it believes it will have the least effect. However, the “flypaper theory” of taxation (the belief that the burden of the tax sticks to where the government places the tax) often proves to be incorrect. Instead, tax shifting occurs. Shifting tax burden describes the situation where the economic reaction to a tax causes prices and output in the economy to change, thereby shifting part of the burden to others. For example, a reduction in PAYE tax and an increase in the minimum wage will indeed put more money in people’s pockets but it may also change their buying patterns and induce wage push inflation in the economy.

The Government must be very cautious in their approach towards tax policy particularly as it relates to PAYE and higher taxes for the mines.  One point of view, states that a tax increase would simply move the spending decision from the private- to the public-sector. However, this view of taxation is very narrow. This view does not recognize the fundamental axiom of taxation. Taxing an activity, any activity, will reduce the level of that activity. Basic economic theories of supply and demand show that when anything rises in price, as occurs with a tax increase, less is demanded.

 

The measures proposed in the 2018 budget are imbalanced as they continue to focus on collecting more tax revenue and higher domestic borrowing amidst a stagnant economy with no fiscal stimulus of the real economy. The monetary policy the Bank of Zambia (BOZ) is pursuing is not sustainable over the medium to long term even though they have politically managed to achieve single digit inflation but even with that, we still see higher interest rates in the market due to heavy domestic borrowing by government. To catalyze the private sector, government must reduce its domestic borrowing and through the Bank of Zambia reduce interest rates that will allow Zambian business to access finance. More importantly, government must promote infrastructure projects that will maximize involvement of Zambian companies and link Zambian export products to regional and international markets. There is need for balance and consistency in policy formulation and implementation to reduce the impact of “Unintended Consequences”.

 

Investment is a forward-looking endeavor. Businesses will invest only if they perceive that they will be rewarded with higher profits in the future. A healthy desire to invest will increase economic output. It is imperative that as the government considers taxing the mining and other foreign companies, ‘we do not throw the baby out with the bathwater!’ Balanced budgets require a Minister of Finance and a Parliament that is committed to holding the line on spending. Otherwise, we will find ourselves going back to the days of huge budget deficits, foreign debt and donors controlling our economic policies. The way to improve the economy is by retaining more control of the economy to Zambian private citizens and not to the Government.

 

Follow Trevor on Twitter using the handle @TrevorSim and Facebook page @trevormsimumba

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