Towards expansionary fiscal policy in 2019/20 budget
Tanzania’s budget season is a long one. After the preparatory works, come the normally heated parliamentary debates of sectoral budget estimates and requests and then the national budget tabled by the minister responsible for finance and planning.
There are normally predictions, expectations and forecasts of what the national budget will offer on the revenue and expenditure sides. Among the expectations are those in the fiscal policy space.
Fiscal policy
Simply said, fiscal policy is the means by which governments adjust their spending levels and tax rates to monitor and influence nations’ economies.
This is done using various fiscal policy instruments in the names and shapes of taxes and subsidies.
Taxes and other sources of revenues aim at raising revenues to finance public goods and services such as economic and social infrastructure.
Subsidies are used by governments to shoulder and pay for final consumers burden.
Expansionary fiscal policy
Expansionary as opposed to contractionary fiscal policy, is characterised by good fiscal policy instruments from the tax payers perspectives.
These include few tax types, low tax rates and high subsidies. Fewer tax types and lower tax rates are good for producers and consumers.
They attract and retain investments and related production thereby stimulating incomes and aggregate demand.
This in turn gives buoyancy to the economy. Multiplicity of taxes and high tax rates constitute contractionary fiscal policy instruments. They constrain economic growth and development and related benefits.
Tone from the top
On the December 10, 2018 President John Magufuli had a working meeting with the Tanzania Revenue Authority (TRA), ministers and regional commissioners.
Among the key issues addressed in the meeting are those revolving in the axis of taxation.
His tone on tax issues points to expansionary fiscal policy and fiscal policy instruments for the 2019/20 budget.
Prime Minister Kassim Majaliwa had a similar tone in a separate occasion. From political economy of taxation school of thought these are signals for unfolding expansionary fiscal policy.
There have also been actions from TRA that point to the direction of expansionary fiscal policy.
Election year factor
Political economy of fiscal policy would predict expansionary fiscal policy and fiscal policy instruments in 2019/20 and 2020/21 fiscal years due to elections factor. In 2019 there is local government elections while in 2020 there will be general election. Whether right or wrong, it is a fact that in Tanzania and other beyond politics dominate a number of areas including the budgetary process and therefore fiscal policy.
In competitive political environment, governments would like to win voters’ hearts.
There are several ways of doing this including having several voter-friendly policies. These include expansionary fiscal policy and its related instruments.
Election years are not times to ‘disturb’ voters in any way including in the tax space. It is a time to ‘please’ voters in many ways including through low tax rates, fewer tax typologies and many and high subsidies. All these constitute expansionary fiscal policy.
Tax rates and numbers
Over years, there have been complaints about relatively high tax rates that reduce competitiveness. At 18 per cent for example, Value Added Tax (VAT) has been considered very high. The private sector once proposed 16 per cent VAT.
On top of high tax rates, the many number of taxes to be paid and at times not in a one stop shop are issues of concern.
Multiplicity of taxes and many paying points takes substantial actual business time from tax payers. Tax rates and multiplicity of the same came out very clearly in the President’s meeting with TRA.
It signals reforms towards expansionary fiscal policy anytime soon. The lower the tax rate the higher the possibility of voluntary compliance other factors remaining constant.
Tax assessment
Some tax payers have issues regarding tax assessment by TRA. There have been claims of unfair and artificially high and unrealistic tax liability assessment and estimation by the taxman. Given the tone from the top one expects this to be kissed goodbye soonest thereby embracing expansionary fiscal policy.
Final remarks
Expansionary fiscal policy and its instruments is good for the economy. It attracts and retains investors and producers; it leads to high disposable incomes and therefore high aggregate demand that further stimulates the economy.
Expansionary fiscal policy may lead to reduced revenue in the short term but has the potential to widen the tax base in the medium to long term. These gains may more than compensate the revenues lost in the short term.
