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 - Consolidation of the budget, expenditures, revenues 3. Conclusion

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

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

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

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

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

2. Namibian Fiscal Policy and Growth

The Consolidation of the Budget Namibian Fiscal Policy is conservative= The balancing of the budget is a priority 2001: MTEF introduced with fiscal target (budget deficit of 3% of GDP, public debt 25% of GDP, now extended to 30%) Saara Kuugongelwa-Amadhila managed to obtain a surplus by increasing revenues and decreasing expenditures

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

Foreign direct investment in- and outflows Namibia

GDP growth at domestic prices at constant local currency

Suggestions for Namibian Budget Policy Saara Kuugongelwa-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/ /14 MTEF more expenditures to lower unemployment in Namibia

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 by higher 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

Expenditures by vote 2008/ /2012 in N$ billions

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/ % of Namibian tax revenues by SACU as customs, in 2011/ %. 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

SACU revenues

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

Direct and indirect tax revenues

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

Company tax composition 2011/12

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)