A budget that yearns to free up disposable income

The K1.7 trillion 2019/20 National Budget that Minister of Finance, Economic Planning and Development Joseph Mwanamvekha presented on Monday afternoon is a very ambitious financial plan that desires to put money in the pockets of average Malawians.

By crafting this budget, one thing is clear: Mwanamvekha and team are mindful of how the sky-rocketing cost of living is throwing millions of average income earners into the abyss of abject poverty.

The national average cost of living, as measured by the faith-based Centre for Social Concern (CfSC) is towering at K165 660 (as of June 2019).This is aloof to most average income earners.

Workers such as these are likely to have an increased disposable income

Of course days of rapid inflation seems to be over, at least for now. But that is just a necessary condition not sufficient to cushion consumers from their waning purchasing power.

Generally, living a basic life in Malawi is not cheap, let alone an easy ride.

With rentals shooting up the roof due to excess demand for housing units, coupled with ever increasing cost of utilities and other basic products such as maize, sugar and soap, life is simply unbearable.

But as the cost of living in all the major cities remain escalated; on one hand, wages and salaries for many Malawians have remained stunted and inelastic over the years.

The same desolate song is sung by both small and large businessmen who have usually complained of subdued operating business environment, year in year out. Profits are not forthcoming, in the process.

But going back to Mwanamvekha’s 2019/2020 National Budget, for sure his maiden budget is an attempt by government to wean-off most average Malawians from the jaws of callous poverty levels.

Relieving over-burdened tax payers

One key highlight of the 2019/2020 National Budget is the adjustment of the pay as you earn (Paye) tax free bracket by 28.5 percent from K35 000 to K45 000.This is a mere gambit by Mwanamvekha to help cushion workers from the rising cost of living while shoring up their disposable personal income.   

In the same vein, Mwanamvekha has also gone to town, stretching further the minimum wage to K1 346 per day or K35 000 per month, up from K962 per day or K25 012 per month.

 “This Madam Speaker, is to partly protect the lowly paid workers and to improve their welfare. Government will be reviewing the minimum wage from time to time to take into account developments in the purchasing power of the kwacha,” he told the august House.

Economic watchdogs such as the Malawi Economics Justice Network (Mejn) and the Economics Association of Malawi (Ecama) were in the forefront in July 2019 during pre-budget consultations in Lilongwe to entice Mwanamvekha to consider flexing the Paye tax free band.

Quizzed on Tuesday on whether the institution is now happy with the new tax measures, Mejn executive director Grace Kumchulesi said: “This is good progress. Overall we are going in the right direction and we are happy that government has taken on board our contributions.” 

But at K45 000, Business Review understands that the bracket is still way below the proposed tax free bracket of at least K80 000 that Mejn suggested to Mwanamvekha ‘at least to get closer to the food poverty line.’

In fact, Kumchulesi also suggested then that government should add another tax bracket between K50 000 to K3 000 000, a request which Mwanamvekha has apparently turned down in the budget.

Consumers liberated, employers in ‘captivity’

Tellingly, by removing value added tax (VAT) on selected items such as solar and gas equipment, laundry soap in bars, among others, consumers will be emancipated from the bondage of paying more on these goods and this would also help bolster their purchasing power.

Interestingly, Mwanamvekha has been stubborn in the new financial plan. Instead of succumbing to pressure by civil society organisations (CSOs) to remove VAT on goods such as bread and utilities as earlier proposed, Mwanamvekha has instead introduced a surcharge on imported goods that have local substitutes. The products whose comprehensive list has been published in the gazette include  vegetables, sugar, cooking oil and cement, among other.

This means VAT on these essential products is still intact, contrary to expectations by Mejn and Ecama.

By imposing a surcharge on such products, government’s ultimate goal is to shield infant local industries from stiff competition with imported goods while saving the much-needed foreign exchange as well as promoting industrialisation.

From another angle, the upward adjustment of the minimum wage to K35 000 is certainly an eyesore to most employers who are left with no option but to align their packages for low-ranking employees to this new measure. This will inevitably push up wage bills of most employers.

Gowokani Chijere-Chirwa, a PhD in economics scholar at the University of York in the United Kingdom summarised it this way: “Imagine you get K100 000 per month from your employer and you also have a maid at your house.

This means that your maid will get K35 000.Mind you, you will also have the first K45 000 out which means K55 000 will also be subjected to taxation. Then you have to settle your bills and rentals on the same.”

Sceptics of new tax measures

Some experts view the new tax measures as simply a mere wish-list on the part of government while others argue that the measures are feasible. They are simply divided over the matter. For example, a Blantyre-based tax expert, Emmanuel Kaluluma thinks the adjustment of a tax free band to K45 000 is simply “no work done.”

He justified: “It’s just a wish. You will agree with me that if you take your friends out to chill and you have K45 000 in your pocket, this money will not be enough to cater for you these days because the cost of living has gone up but at the same time most Malawians are still earning very little.”

According to Kaluluma, the zero-rated K45 000 tax measure is also going to be enjoyed by everyone regardless of whether one is a low or high income earner.

He also questions the rationality of removing a 3 percent withholding tax on tobacco sales for the first 1 200 kilogrammes when tea, sugarcane, coffee growers are still paying various forms of taxes.

Argues Kaluluma: “Why restricting this K45 000 tax free bracket only to salary earners. If I am Nandolo farmer, if I take my produce to Admarc, they won’t apply this K45 000. But mind you poverty level is the same regardless of whether you are a farmer, a businessman or a formal employee.”

But economist Collen Kalua seems to disagree with the thinking of people such as Kaluluma and Chijere-Chirwa on the budget framework.

He argued on Tuesday that the suggested wages and salaries increment among civil servants by an average of 12 percent, coupled with the removal of VAT on some critical goods, ‘though minimal,’ will definitely put some more disposable income in the pockets of many average Malawians. n

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