ReNIP Critiqued 2021 Budget

ReNIP Critiqued 2021 Budget

The budget on Friday 13 November 2020 theme “Economic Recovery for Job Creation and Human Capital Development” was a budget for the epidemic and the normal Budget rolled into one. The Budget was created setting out medium term tax and spending plans till 2023. The emergency Budget aimed at dealing with immediate potential consequences of the coronavirus by creating a deferred tax repayment in the budget to help big businesses and allow the poor people to finance the country till 2024.

The latter made the former a rather odd affair for the Country for the poor citizens to finance the Ministry of Finance plan for the country for deficit spending. All the economic forecasts on which the Budget was based were put together before any significant effect of the coronavirus was accounted for, and were therefore out of date during publication by the Government to has achieved an 89 percent based on the Bank of Sierra Leone base rate of 73.2 percent. The actual percentage by the bank of Sierra Leone was 3.2 percent based on the leading ration for the short-term disruption caused by coronavirus    Any significant longer-term effect though, and a smaller economy will mean the tax and spending plans set out on 13 November 2020 will lead to an even bigger deficit than currently planned in the first few years in this government planning by increasing the loan interest by 13 percent of government borrowing. The Government and the National Revenue Authority (NRA) has granted tax break or deferred tax to bigger businesses despite the more needed cash of almost Le 1.8 trillion to bring the cost in line with revenue expenditure.

These are the headlines from the budget base on ReNIP assessment?

  • The coronavirus package appears to be what was promised: targeted, and temporary for the economy. At Le 81 billion it is also sub-substantial for what needs to be achieved in the economy when private companies have contributed over Le 352 Billion. It looks fairly well designed but failed to meet the basic needs of the population. It remains to be seen whether it will be enough to support public services, support the vulnerable and insulate the economy from long-term effects.
  • The Macroeconomic and Budgetary Performance (MBP) economic forecasts are a little more positive than the Bank’s, but they are still very weak even before factoring in possible longer-term effects from the coronavirus. Projected growth rates averaging barely over one per cent a year for the next five years are feeble and indicative of an economy that is not in a robust position for coping with shocks like the coronavirus. The MBP continues to assume an inflation of 13.7 percent but the actual inflation is at 115 percent from 2018 to date.
  • Overall spending will rise by $176 million or 9% in real terms between 2019-20 and 2023-24, largely paid for by extra borrowing. This will mean the size of the state, measured by looking at public spending as a fraction of national income, stabilising at nearly 4% of national income, creating a national deficit of 96%. That is above its pre-crisis level and bigger than at any point between the mid-1980s and the start of the financial crisis. The project debt will be $750 million at the end of 2020 bases on the projection from the Bank of Sierra Leone and Ministry of Finance.
  • The investment spending plans are very big. The intention is to get to the manifesto “ceiling” of 1.5% of national income in short order. This will take investment spending to its highest level in modern times. The challenge will be to ensure this money is well spent. That is a big challenge. The Government has borrowed between April 2018 and October 2020 in the tune of US$865 million equivalent of Le865,000,000,000 (Le8.65 trillion).
  • The current revenue collection plans are nothing like as generous as they appear. Average annual increases of 3.3% sound substantial for projected growth. This is not achievable as the Government is expected a retraction of the economy of 3.8 percentage.  Considering the amount from International borrowing, funding, and factor[BH1]  in planned increases for health, schools, defence and overseas aid, and there is relatively little here for other departments. If this spending envelope is stuck to there are plenty of public services, the NRA has only collected Le5.7 Billion (US$570,000) with a deferred tax of Le100 billion (US$100 million). The proposed revenue collection is not possible based on the data from the Ministry of Finance.
  • Current spending plans also look suspiciously front-loaded. Spending increases pencilled in for the next two years are much bigger than what follows. This could suggest top ups in later budgets and hence a need for more and more borrowing. The Government is borrowing more than investing in the development in the Nation. We need to attract the development of the nation via a new Governmental growth. 
  • Current Economic Recovery spending per person for most public services will remain well below 2001-08 levels in 2024-25. The capital per person returning to 2002 – 08 levels. Outside of health though spending per person will still be 5% lower, and around 19% lower once account for the spending that is simply replacing International funding. We need to provide for our nation to be more effective in what we are doing.
  • Borrowing will be peaking at $250 million, nearly $80 million above its 2018-19 level. With promising increase spending the current budget balance target is looser than the maximum 12% deficit targeted. As election is on the horizon, more will be borrowed and far looser than previous government commitment. Nevertheless, this appears entirely consistent with pre-election promises.
  • Underlying tax management rigorous changes to rise revenue relative to national income. The strategy to undertake transfer pricing audits, lacks the creditability of both the NRA and the Ministry of Finance. Growth is predicated to be weaker in 2021-2022 and this will continue until 2024 for growth to turns to it pre 2012 level, then debt could easily start moving decisively upwards.

Public finances Assessment

The government spending and borrowing are both rising over the next few years. These are consistence in the way which appears consistent with the movement of the SLPP manifesto, but which is different to the paths they were on under previous SLPP government, as borrowing and spending are not economically financial benefits to the Nation. In the ever-increasing borrowing costs mean there are sustainable risks of further inflation.

The first risk is that with more debt stockpiles, more than twice what it was pre 2018, with shorter maturities and a financing requirement much higher as a share of GDP than it was prior to the 2008 financial crisis, we are more vulnerable to changes in interest rates, inflation and undergrowth.

Secondly, debt is not falling  but increasing at a rate of 89% of NRA revenue collection, whiles deferring the tax collection to stimulate growth which seems to be at normal (if deeply disappointing) levels. It would grow sharply in the face of a downturn as big businesses start an exodus.

Most importantly, the current country framework and set of tax policies do not look likely to deliver the kinds of spending growth that were implied in this budget speech. Outside of increase in security wages (increase below inflation) and a few other protected areas like education, it looks like little will be available to increase spending. Due to the raising day to day real spending on public services, taxes will need to rises. while austerity is clearly at an end in the sense that spending is rising, spending levels in many areas are set to remain well below 2006 levels for a long time to come.

The Minister of Finance has promised a comprehensive review of the fiscal framework. That is to be welcomed. It doesn’t matter how hard you review it, though, the iron laws of fiscal arithmetic will assert themselves. The only way that a change in the fiscal rules can help justify more spending without tax rises is if the Minister is happy borrow more as debt continue to increase quickly.

Tax assessment

This budget was a spending budget fuel by heavy borrowing, to the tune of just over $190 million a year for the next three years. This has largely driven by the reduction in income tax from the mining sector and deferred tax created to other businesses. It is fair to say that on taxes, as on investment spending and on planned borrowing, this budget did largely deliver on the, additional infrastructure project promises.

The Minister of Finance is looking to create new tax framework to help with the tax management and reduction in tax evasion. These strategies will not yield any benefit as the fundaments are not in place to facilitate effective tax management systems.

One area where a strategy is desperately required is on “net zero Payroll”.  This  strategy has been announced in previous budgets to combat the leakage of over payment to either “ghost employees” or “catfish employees”  was due later this year so perhaps a lack of direction this time round is forgivable, but the decisions made in this Budget don’t provide confidence in the government that they are willing to solve this problem. The failure once again even to maintain the real value of fuel duties when oil prices are falling is not encouraging but public-private partnership initiatives was encouraged. 

The government has failed to provide tangle tax break the agricultural industry, fishery industry, tourism industry, manufacturing sector

The increase of wages and salaries for the security forces of 25% year on year is 100% increase by 2023 though it is a shame that this distortionary and unnecessary increase for the security but the other civil servant will not receive any pay increase up to 2023 but only 2021.  The government promised 25% increase for all civil servants workers, but only accounted for 6% increase.

Spending analysis

The cost of running the country for 2021 is analysis below:

Sector 2020 2021 Percentage increase Spending percentage
Le million Le million
Wages                  3,300,000.00                 3,500,000.00 6% 34%
Debt interest                  1,100,000.00                 1,300,000.00 18% 13%
Education                  1,540,000.00                 1,540,000.00 0% 15%
Health                     794,200.00                     794,200.00 0% 8%
Social protection                          2,000.00                       81,100.00 3955% 1%
Agriculture                     422,600.00                     422,600.00 0% 4%
Fisheries                        14,600.00                       14,600.00 0% 0%
Tourism                        12,600.00                       12,600.00 0% 0%
Manufacturing                        16,200.00                       16,200.00 0% 0%
MUNUFA FUND (Koindu Market)                                       –                         50,000.00 100% 0%
Electricity supply                        45,500.00                       45,500.00 0% 0%
Water supply                        15,700.00                       15,700.00 0% 0%
Road authority                     270,000.00                     270,000.00 0% 3%
Repairs and maintenance                        12,700.00                       12,700.00 0% 0%
Good governance                        10,400.00                       10,400.00 0% 0%
Others                  1,653,500.00                 2,174,400.00 32% 21%
Total                  9,210,000.00               10,260,000.00 100%

The total spending is Le10.26 trillion but failed to account for the Le2.174 trillion for the year 2021. We will further try to open a dialogue with the Ministry of Finance to explain further what the other represent as the budget has got a lot of gaps. 

GAPS in the budget

The government has failed to provide any data or financial information on the following areas:

  • Defence
  • Local government spending
  • Pension and welfare
  • Sport
  • Human capital development

Conclusions

As we can see this Ministry of Finance has announce a 25% increase in all government worker for 2021, but only the security forces will get 100% increase by 2023. The budget is full of gaps but only time will tell to the full effect of this budget as inflation is on the rise. The spending proposed by the Ministry of Finance is heavy spending that will result in a big increase in borrowing. Investment spending around tax management framework is promised but how quickly will this become effective.

There are plenty of risks and omissions in the budget. The biggest risks in the short-term increase in wages with no increase in taxes but taxes been deferred for the bigger companies, whiles the poor is bankrolling the country finance. In the longer term higher borrowing and debt carry their own risks. The lack of any coherent strategy on tax is a long standing problems in Sierra Leone. The lack of strategy on net zero payroll will hopefully be sorted out later in the year.


 [BH1]

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