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Fiscal Policy and Growth in Namibia

Fiscal Policy and Growth in Namibia. Organisation of the Presentation. 1. Theories on Fiscal Policy and Growth - Define growth and competitiveness - Fiscal policy and neoclassical theory - Keynesian and endogenous growth theory 2. Namibian Fiscal Policy

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Fiscal Policy and Growth in Namibia

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  1. Fiscal Policy and Growth in Namibia

  2. Organisation of the Presentation 1. Theories on Fiscal Policy and Growth - Define growth and competitiveness - Fiscal policy and neoclassical theory - Keynesian and endogenous growth theory 2. Namibian Fiscal Policy - Consolidation of the budget, expenditures, revenues 3. Conclusion

  3. 1. Theories on Fiscal Policy and Growth • Neoclassical Theory: Supply Side Theory Support production by non-intervention market always finds its equilibrium again • Keynesian Theory: Demand Side Theory Support consumption when the economy in long- term disequilibrium • Endogenous Growth Theory: Synthesis Intervention, but as support for production only

  4. Define Growth and Competitiveness • Growth: Technical know how, progress in technical facilities (Innovations delivered by FDI) and accumulation of productive resources such as human capital • Competitiveness: Ability of domestic industries to produce at lower costs and deliver goods and services on higher quality than other industries in the global market

  5. Fiscal Policy and Neoclassical Theory • Growth can be raised by consolidation of the budget (reduction of expenditure), because this raises financial market confidence and lowers interest rates = Investments increase • Revenue collection should be neglected • Tax concessions are important to attract investments, taxes should be abolished

  6. Fiscal Policy and Keynesian Theory • Growth can be increased by countercyclical demand policy (increased expenditures) • Revenue collection is key for demand policy • A reduction of the deficit can lead to recessions • Direct taxes (progressive) are superior to indirect taxes (regressive) in triggering domestic demand

  7. Fiscal Policy and Endogenous Growth Theory • Certain expenditures lead to growth • Revenues can also be increased by tax increases • The indirect Value Added Tax (VAT) is superior to direct taxes because it is non-distortionary

  8. 2. Namibian Fiscal Policy and Growth

  9. The Consolidation of the Budget • Namibian Fiscal Policy is conservative= The balancing of the budget is apriority • 2001: MTEF introduced with fiscal target (budget deficit of 3% of GDP, public debt 25% of GDP, now extended to 30%) • 2005-2008 SaaraKuugongelwa-Amadhilamanaged to obtain a surplus by increasing revenues and decreasing expenditures

  10. Budget balance as percentage GDP 2003/2004 – 2006/2007

  11. Foreign direct investment in- and outflows Namibia 1990-2009

  12. GDP growth at domestic prices at constant local currency

  13. Suggestions for Namibian Budget Policy • SaaraKuugongelwa-Amadhila followed an endogenous growth theory approach = lowered expenditures and increased revenues to balance budget • However, FDI and growth were not triggered • Suggestion: Investments can be obtained by infrastructure, education, internal market. = More expenditures in these areas increase competitiveness • In the 2011/12-2013/14 MTEF more expenditures to lower unemployment in Namibia

  14. Expenditures in Namibia • Even though the Minister of Finance reduced the expenditures before the financial crises, she increased them during and after the crises • With the 2011/2014 MTEF 104,000 jobs should be created byhigher expenditures • However, the composition of the vote funds could be enhanced: Defence is the second highest receiver after education, more funds could go to the social expenditure and industry sector

  15. Expenditures by vote 2008/2009-2011/2012 in N$ billions

  16. Revenues in Namibia • SACU: collects customs for Namibia, Botswana, Swaziland, Lesotho and South Africa and channels the funds on basis of a formula to the countries again • 2008/2009 40% of Namibian tax revenues by SACU as customs, in 2011/2012 27.3%. • Need new revenues sources= increased the share of VAT and personal income taxes over the years, only low increase in corporate taxes and no increase in property taxes

  17. SACU revenues 2008-2014

  18. The Composition of the Tax System • In Namibia 22% of the tax revenues are collected by VAT, 24% by personal income tax and 15% by corporate taxes, property tax is minimal • Supply side economics would suggest, that the VAT rate (15%) could be increased even further, but all other taxes should be lower • From a Keynesian point of view having indirect taxes collect half of the revenues is too high • Direct taxes (personal income, corporate, property) are progressive and indirect (VAT) are regressive= Higher demand and growth if VAT lower and other higher • Zero VAT for staple foods is a good step, luxury would also help

  19. Direct and indirect tax revenues

  20. Company Taxes under Tax Competition • Corporate income tax is 35% • Their share on revenues increased only little over the years • The biggest share has the non-mining sector, mining and diamond-mining have least share • Tax concessions: Manufacturing get a deduction of 50% in first years, EPZ companies are exempt • Tax concessions are in line with supply side economic theory • Alternative is: Raising mining taxes, cause industry depends on Namibian resources, funds can be channelled to manufacturing industry = competitiveness

  21. Company tax composition 2011/12

  22. 3. Conclusion • Namibian supply side fiscal policy neither let to growth nor investments • Recommendations for the future are: • Increase expenditures for education, infrastructure, social spending and industry • Decrease spending on defence • Increase the share of direct taxes, such as property taxes and corporate taxes for the mining industry • Decrease indirect taxes (VAT)

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