In a swift move that appears to be amongst the few options available to increase revenue, the Botswana government is considering a hike in taxes both corporate and personal.
The imminent hike will also include previously untaxed operations, as the diamond dependent economy shows signs of cracking induced by the growing budget deficits.
The revelation was made during 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.
It also comes at a time when the International Monetary Fund has also advised Botswana to consider widening its tax base.
During the recent mission to Gaborone, the IMF staff recommended fiscal reforms which include greater revenue mobilisation through broadening the tax base and advancing tax reform.
On Thursday, the Treasury led by new Finance Minister – Dr Thapelo Matsheka admitted that Botswana’s fiscal position and performance during National Development Plan 11 was worse than projected at the time of preparing in 2017.
Dr Matsheka said that the growing budget deficits might have to be tackled through some adjustments as the revenue supported by diamonds fails to keep up with the government’s increased expenditure.
Whereas the Treasury had initially projected a small cumulative budget surplus of P1.1 billion over the six-year period, the revised projections show that the country will record a significant cumulative budget deficit of P18.8 billion over the plan period.
Dr Matsheka said this is not acceptable prudent management of public finances.
The country’s woes became noticeable in 2013/2014 after recording a budget deficit of P7.2 billion, followed by another shortage of P4.8 billion.
Things appeared to improve in the financial year 2016/2017, delivering a record P8.3 billion surplus, followed by another one in 2016/2017 registering P27 million, and P2.7 billion in 2017/2018.
However, the budget tumbled in 2018/2019 with government official figures putting the budget deficit for the year at P7.2 billion, representing 3.5 percent of the gross domestic product (GDP). To make matters worse, the Finance and Economic Development officials say the expected deficit for 2019/2020 to be P 7.79 billion in 2020/21 before slightly retreating to a budget shortfall of P6.94 billion for the 2020/2021 financial year. The country expects to turn the corner with a budget surplus of P4 billion in 2021/22.
Though the government said it will fund these massive deficits through both domestic and external government debt as well as drawdown of foreign reserves, the tone changed on Thursday. The Finance ministry officials said they will go easy on tapping from the reserves since they act as buffers, and depleting them will leave the country vulnerable.
Bank of Botswana’s most financial statistics brief shows that foreign reserves were at P73.4 billion in August, a decrease of 5 percent from the previous year’s corresponding period. The year began with foreign reserves at P73 billion and touched their highest level so far this year at P76.5 billion in April, and plunged to P71 billion by June, with the decrease corresponding with beginning of the country’s financial year when the country’s budget allocation takes effect.
The central bank said the decrease mainly reflects the drawdown on foreign exchange reserves to fund government expenditure and imports. The use of the once sacred sovereign fund is was becoming a constant feature following the government’s 2016 decision to fund the Economic Stimulus Package (ESP) by drawing about P3 billion from the reserves.
The now newly found hesitation to use the reserves has left the government to use the oldest policy tool to raise its revenues, by increasing tax rates, with the officials justifying the proposed move as long overdue given Botswana’s lowest tax rates. The maximum tax rate for corporates and individuals is 25 percent, and the government has indicated it might hike the value added tax (VAT) which at 12 percent say its also low compared to other countries.
Moreover, the new administration that was ushered in this month after the October general elections won by President Mokgweetsi Masisi, says it will broaden the tax base to possibly include new taxes on property, informal businesses, cut the size of the civil services, and reduce exemptions.
Ironically, last year the former finance minister Kenneth Matambo balked at suggestions that the country should introduce wealth tax. He said that the ministry considers the current taxation of wealth through taxing of income to be sufficient to generate revenue for government without overburdening taxpayers.