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Capricorn Asset Management Budget Forecast 2017/18

If you, like us, are curious about what Minister of Finance Calle Schlettwein will have to say in today's presentation of the National Budget for the 2017/18 period, and what the tax implications for citizens and residents of Namibia will be Claudia Boamah, Economic Analyst at Capricorn Asset Management has a few ideas, here is her prediction for what we could see this afternoon:

OVERVIEW
 
According to the October 2016 Medium Term economic Framework (MTEF) the main agenda of the 2017/18 Budget can be summarized as pro-growth fiscal consolidation. This objective might seem like a paradox because in times of recession, it is rather fiscal stimulus and not tightening that is required to revive the economy. Consequently, greater emphasis will likely be placed on priority spending and improved revenue collection. Prevailing high interest rates are already exerting a contractionary force on economic growth (2.5% 2016 est.); therefore, disproportionate fiscal consolidation could extend the recession.
 
As a Namibian national policy, its objective would have implications towards the realization of the Harambee Prosperity Plan (HPP). The Solidarity Wealth Tax will surely be a prominent feature in this year’s budget as it addresses poverty eradication which is one of the objectives under the social progression pillar of HPP. The establishment of the independent Namibia Revenue Agency will not only enhance effective governance, another pillar of the HPP, but will address an issue closer to the fiscal policy which is efficient tax revenue collection. Commitment to other Harambee goals such as economic advancement and infrastructural development should reflect in expenditure allocation.
 
REVENUE
 
Revenue was estimated last at N$51.5bn, 12.4% (N$6.4bn) lower than the 2016/17 budget had projected. This disappointment was due to the effects of the drought, unfavourable commodity prices (uranium price lost 50% in value in January 2016), reduced government expenditure (construction slump), contractionary monetary policy and less Angolan commercial tourism on GDP growth. The lower growth in turn had implications for the highest contributors to revenue namely income tax, VAT and company tax which had to be revised down by N$4.3bn, N$23bn and 12.5% respectively. International tax revenue, yet another major contributor to revenue also fell severely short of estimates to N$14.1bn.
 
The medium term estimate for revenue in 2017/18 is N$54.6bn. In order to achieve this, the usual upward adjustments will be made with respect to sin taxes and fuel levies. The following proposals that were mentioned in the MTEF will also feature in this year’s budget:
 
* Wealth tax – Solidarity Tax and Capital Gains Tax
 
* Narrowed scope on exemptions and non-taxable items
 
* Introduction of the presumptive tax
 
VAT might be another avenue for revenue generation; however, it has implications for low-income earning households that might be counterproductive to the national aim of poverty reduction. Between widening the tax base, increasing certain taxes and instituting better tax collection mechanisms the 2017/18 revenue collected might put a dent in the deficit.
 
EXPENDITURE
 
There’s no question that policy makers have more control over expenditure reduction than they do over revenue generation in the interest of reducing the budget deficit. However, budget cuts will have to be strategically executed otherwise much needed economic growth will be delayed and that will in turn impede revenue generation and further increase the deficit. The 2016/17 expenditure estimate is 61.5bn
 
NAD while the forecast for 2017/18 is 59.9bn NAD. The MTEF suggests a cut amounting to N$10bn this financial year which would bring expenditure to 31% of GDP from a current estimate of 38.8% in 2016/17.
 
The expectation for the 2017/18 budget is the reinforcement the MTEF’s strategy of targeting consumptive and non-productive expenditure for cuts. The MTEF identified a 5.5bn NAD cut; N$4.5bn represents operational and development expenditure that have been suspended, while N$1bn will be reallocated to the following priority areas:
 
* N$ 350mil – Neckartal Dam completion
 
* N$ 150mil – Drought relief
 
* N$ 150mil – Welfare: Vulnerable Children
 
* N$ 100mil – Mass housing
 
* N$ 200mil – UNAM & NUST (even split)
 
* N$ 50mil – VISA Stickers project
 
DEFICIT AND FINANCING
 
The revised MTEF 2016/17 budget deficit stood at 6.3% which is an improvement from the previous financial period but it falls short of the budget estimated 4.3%. As such the borrowing requirement necessitated a debt level that amounted to 42.4% of GDP. In 2017/18 the deficit is expected to fall to 3% of GDP. Domestic issuance is the main source of financing the deficit; in line with this the local asset requirement has been increased from 35% to 50%. During this financial year, it is not expected that the debt-to-GDP ratio will fall below 40%.
 
CONCLUSION
 
It is safe to expect a modest increase in revenue; the SA budget has given cause for optimism regarding Namibia’s SACU revenue allocation; the performance of uranium and diamond exports might have a counteractive effect on the international tax.
 
Expenditure will have to be strictly implemented and monitored. The operational budget should be given special attention and should not be allowed to exceed the threshold.
 
The achievement of a sustainable debt to GDP ratio is attainable in the medium term; it all depends on fiscal operations being tailored to fiscal policy and not vice versa.