When many take their thoughts off this weekend, the next thing that should come in mind is an iconic black briefcase which is synonymous with the biggest annual national event in this country, where it seems fashion meets serious fiscal business action, slated after the next 48 hours -the Budget Speech.

Thoughts right now move to the legendary Parliament building corridors with a lot of anticipations to see the Oscar Awards-esque figure of a black-suited Dr Thapelo Matsheka, strutting on a much photographed red carpet while clenching onto the symbolic black briefcase. The next step will be for Matsheka to take on the altar inside the Parliament chambers where he will give audience to political figures inside the building, which might also include President Mokgweetsi Masisi.

For legislators across the political divide, it will be business as usual inside, but for the business community it will be the most attentive affair, economists will be listening  in coming with a lot of burden of expertise on their shoulders. As for the nation; those at vendor markets, some at drinking spots, others holding slashers clearing out long summer grass along the roadsides, and folks who will be inside their cars as radio sound systems broadcast the Budget Speech.

Some will be sitting under shades with pulled out radio antennas at some village corner while others will have their eyes fixated on Matsheka through their television sets or some viewing livestream broadcast pop ups on their mobile phones trying to make sense out of the thick fiscal language which will come out of the minister’s debut fiscal speech.

The political figure with the briefcase and his audience

More than 95 percent interacted with Matsheka on his personal Facebook page this week, of those more than 50 commentators, were all positive on that he will deliver their promises through the Speech. In an announcement where he stated that he will tour all the five national radio stations before and after the Budget Speech is read, he received more than 300 positive reactions from followers with some “hoping for more enlightenment, considering your past as a lecture”, some reminding him that “public servants and Vocational Training Colleges and brigades are waiting patiently.”

Some were fixated at an apparent democratic or a political gesture of having a Minister addressing the public on the national budge. While one advised the Minister to “be careful of negative voices….this is your first as Minister.” Some, a minority of the interactors, “don’t want to hear politicians talk…we want to see tangible developments….you probably want to lie to us”, someone expects “talk talk but no action, an all-time song put on repeat always”.

Speaking from legislators’ Budget Speech retreat this week at Selibe Phikwe, Matsheka said he would not mind any economic or fiscal issues discussion with the media, but this publication could not engage him further since he was held up at a cabinet retreat.

But Matsheka’s suitcase could be containing a negative budget

During one of Matsheka’s first task in the treasury, the draft mid-term review of National Development Plan (NDP) 11, which covers government’s planned project expenditure for the years running from 2017 to 2023, the Minister painted a gloomy picture of this country’s purse, something which might also reflect on his briefcase this coming Monday.

This year is the halfway year bridging government plans towards the end of NDP 11, to 2023, but according to Matsheka last year, government continues to tackle simmering and growing budget deficits which needs to be tackled amid diamond revenue failing to square up with the ever increasing government revenue.

It was like a good dream when the government foresaw a minor six year budget surplus of just over P1 billion for NDP 11. But a contradicting projection shows that this country will have a budget deficit of over P18 billion over the six year period, which is now on its fourth year. A disturbing trend of budget deficits has been traced back to NDP 10 or the budget of 2013/14, where a shortfall of P7.2 billion was recorded, crossing over to the next financial year where it fell down but only at P -4.8 billion. 

Towards the current NDP, in the 2016 financial period, government had a budget surplus of P8.3 billion before a meagre surplus of P27 million during the beginning period of NDP 11, then a promising P2.7 billion in 2017/2018. After that, government budget has been appearing on a negative, P7.3 billion in 2018/19 and P7.79 billion in 2019/20.

It is not over until the fat lady sings with government budget deficits as they are expected to run over the whole of NDP 11. A notable deficit is expected to record P6.94 billion in 2020/21 financial year, but a revival by a surplus in the year before the end of NDP 11 is projected at P4 billion 2021/22.  

Public wages hike to also weigh in on Matsheka‘s briefcase

In a brief interview with BusinessPost this week, economist Othata Batsetswe said an expected budget deficit will come mostly as a result of planned salary increment which was made by President Masisi last year to run for two financial years. Government should now feel the pinch of public service salary hike, according to Batsetswe.

The economist explained that the last 10 percent salary increase on public service Grades A to B and a 6 percent increment for Grades C and D which would eat away P2 billion from the national bill will be felt even in this financial year. Government has further increased disciplined forces’ special allowance by 20 percent.

Government revenues failing to go up against the ever stubborn expenditure

Diamonds revenue continue to fall with the unreliable rough diamond sales always going down and the production being restricted by the slowing of demands.  The downward revision of P24.1 billion for extension of the lives of mines dubbed Cut 9 and 3 projects will also hold down Botswana’s dividends.

Latest released statistics from Statistics Botswana, shows Botswana choking at a trade deficit of more than P3 billion. And this current drift is contributed mostly by the dwindling diamond exports, a red flag for the diamond dependent economy. Latest released International Merchandise Trade Statistics which covers the last quarter of 2019 until now for a period running from October 2019, shows Botswana registered a trade deficit of P3, 425.1 million.

Matsheka’s gamble on fiscal consolidation and increase of revenue

Last year Matsheka revealed before Parliament that government plans to increase revenue by increasing taxes. This country‘s tax to GDP is at 22.3 percent and remains below the benchmark of emerging economies. Botswana’s tax to Gross Domestic Product ratio is still below the benchmark for emerging market economies such as South Africa, whose ratio currently sits at 26 per cent compared to Botswana’s 22.3percent for the 2017/18 financial year. Botswana Unified Revenue Service (BURS) in its recent Strategic Plan 2019 to 2024, requires the improvement in the tax to GDP ratio to reach by March 2024.

Increase on taxes in the coming Budget Speech

In the 2017 Budget Presentation, former Finance Minister Kenneth Matambo, hinted that government should increase its revenue base by hiking taxes. Matsheka echoed his predecessor’s words suggesting that government is not ruling out the possibility of increasing tax anytime soon. He is quoted by newspapers saying that Botswana has one of the lowest VAT rates in the world and that government is mulling at extending its tax base to informal or cash-based activities or considering new taxes, increasing tax rates or reducing exemptions.

Tax consultant Jonathan Hore told this publication that it is apparent from the above quotes that there is pressure on government to find ways of increasing tax revenues. He contrasted this country’s VAT with its SADC counterparts and said it is lower and should be from the current 12 percent to 14 percent or 15 percent.

“Economists have pointed out that the Botswana VAT rate is too low and this would be unsustainable in the long run. It is a well-known fact that Botswana has the lowest VAT rate in SADC (12 percent), whilst the average VAT rate in the region is 15.3 percent,” Hore said. The Tax consultant said considering that an increase in the VAT rate automatically increases the prices of goods and services, such a move will be technically correct but it will cut everyone’s purchasing power and significantly hurt the lowly paid and the poor.

“Inflation shot up in 2010 after the VAT rate was increased effective 1 April 2010 from 10 percent to 12 percent and this is expected to also happen should the authorities up the VAT rate. As an alternative, the authorities could consider introducing a Financial Transactions Tax (FTT) at a minimal amount on financial transactions such as bank deposits and withdrawals (both electronic, physical and at ATMs), swiping for purchases with a bank card, the purchase of shares (listed and unlisted), conversion of currencies, international money transfers through designated agents and money transactions facilitated by telecommunications giants, among others,” said the tax consultant.

He said the magnitude of these transactions is so huge and a minimal tax of say P3.50/transaction could raise around P1bn/annum, based on the author’s assumed transactions of 700 000/day. A 3 percent increase in VAT, according to Hore will only yield around P180m/annum, based on BURS records that it collected about P6bn in 2016/2017 year. He further said: “The beauty about FTTs is that they only target the ‘haves’ and they are not inflationary. Other countries which have introduced FTTs or some form/s of FTTs are South Africa, Egypt, UK, Colombia, Zimbabwe and USA.”

Hore also expects the Budget Speech to come with corporate tax hike. It will not be surprising to get a corporate tax hike from the current 22 percent to +/-25 percent, based on previous indications by authorities for the need to increase revenue. Botswana has the second lowest corporate tax rate in SADC as the average corporate tax rate in the region is 28.03 percent.

PAYE is also lower, with South Africa PAYE rate said to be higher at 45 percent. While Botswana’s PAYE is at 25 percent the average PAYE rate in SADC at the highest bracket is 32.6 percent. Hore expects both PAYE and VAT to be increased on Monday, but that will result reduced purchasing power for the public, as increased PAYE takes away part of disposable income and so does a VAT increase. The tax consultant said this may further contract the economy due to reduced disposable income.
Hore also expects government to also introduce presumptive taxes for the first time and this will mean taxing even the informal sector.

But tax experts believe there will rather be reduction of tax exemptions than increase of tax rates by government. This is because some see increment of taxes to be an economic impediment while minimizing exemptions would be more efficient.
Economist Batsetswe is of a strong view that government should rather maximize its collection of taxes than to jump at the decision of increasing tax rates. He believes when government increases taxes they will have far reaching consequences on the working population and the poor. He also said minimizing exemptions and increase of taxes may also scare away investors.  

Advice

Batsetswe expects Matsheka to mention reinforcement of moratorium on new parastatals; rationalization of parastatals and some being privatized. He also advised that government should refrain on building new offices or buildings and give the task to the private sector or a PPP arrangement takes over, something which should start with the Monday Speech. As it was said in last year budget planning paper and the State of the Nation Address, Batsetswe also agrees the public service should be rationalized and a freeze of new jobs is needed as Botswana wage bill is high.