Observations: Budget deficit

Barbrah Musamba Chama Mumba

By Barbrah Musamba Chama Mumba

On Sunday 11 August 2013 finance minister Alexander Chikwanda said that there was a budget deficit arising from the poor performance of the global economy. He further stated that budget deficits are a normal thing thus downplaying the situation the country finds itself in.

The planned deficit was 4.3% of GDP of which 1.5% is supposed to be domestic funded. It is thought that the deficit has already exceeded the 4.3% and could be running to 5.0%. The finance minister did not disclose any figures of the current deficit.

It would be appropriate to define what a budget deficit is to the lay man or those who are unfamiliar with economic terminologies and I will also give insights how deficits occur and what are the effects to the economy.

After defining and explaining the budget deficit some excerpts from the PF manifesto on finance and economic.

Investor words defines budget deficit as the amount by which a government, company, or individual’s spending exceeds its income over a period of time also called deficit spending.

In this case we are looking at the budget deficit by a government. Most governments can run moderate deficits for years. That’s because they are usually likely to repay their creditors.

Government leaders retain popular support by spending money on services and infrastructure development so that they get re-elected.

Moderate budget deficits do not hurt the economy, in fact the help boost the economy through government spending which is a component of the total nation’s output known as the Gross Domestic Product (GDP).

Budget deficits are financed both by external and internal borrowing. It should be noted that each year the deficit adds to a country’s sovereign debt. The subsequent growth of the debt has two consequences.

Due to interest to be paid each year, it increases the spending on repayment which will not provide any benefit. When the interest gets high it creates a drag on economic growth as the funds could have been used to stimulate growth.

Secondly, high debt levels can make it difficult for the government to raise funds. The cost of borrowing becomes high as creditors will ask for high interest rates due to higher risks. This increases the deficit each year.

Coming back to the budget deficit in our country, Mr Chikwanda does not explain fully why the deficit has gone beyond the planned deficit.

It is no hidden secret that the current government has gone on a shopping spree without an adequate financial plan to appease the electorate and to fortify their stay in government.

The government has a bloated cabinet, deputy ministers and it has created by elections by enticing opposition MPs with deputy ministerial positions.

Furthermore, districts and an additional province have been created with a consequence of needing more financial resources.

Salary increments for both civil servants and politicians in government are a further strain on the budget. Unbudgeted infrastructure development has also had a strain on the budget.

Copper prices still remain favorable and currently are at about US$7,200 a reduction of 2.09% in the last year.The recent removal of subsidies on fuel and the setting of a minimum wage have had a direct consequence on industry as the cost of production and doing business has gone up.

This does not only result in higher prices of goods and services but also the profits of commercial entities, thereby creating less corporate tax. The removal of subsidies on fuel, maize and fertilizers should have reduced the budget deficit.

In 2011, the Patriotic Front (PF) through its manifesto promised to tackle the MMD financial mismanagement with vigour.

An excerpt of the foreword of the manifesto by President Michael Sata read as follows, “The economy of Zambia has continued to slide into the abyss whilst the country’s resources have continued to be mismanaged and misapplied by the MMD government. The MMD government has shown many a time that it is not accountable to the people of Zambia.”
Further, the manifesto on finance and national development reads

Point number 17 says
Unlike the MMD, the principal objective and thrust of PF economic policy is on pro-poor growth. MMD’s management of the economy in recent years, while it has benefited some types of foreign investor and some classes of privileged Zambian, has left the majority of citizens in a state of helplessness and poverty, as is evidenced for example by the Jesuit Centre for Theological Reflection’s (JCTR) Food Basket research.

Even positive achievements at the macroeconomic level – such as a relatively strong exchange rate or a national maize surplus – mean nothing to the majority of people who lack the income to buy a balanced diet for their family, or to purchase one of the second hand imported vehicles that have become so conspicuous on our roads.

(a) Development Planning
Planning and financing are critical components of national development. Under the MMD government there has been an increased level of haphazard development and expenditure accentuating externally driven development initiatives.

For example there has been an observable dislocation between the Five Year Plan (National Development Plan), Three Year Planning (Medium Term Economic Framework) and One Year Planning (The Budget).

This has led to poor and uncoordinated implementation. In order to achieve integrated social and economic development planning, coordination and implementation of programmes the PF government shall:

• Streamline the development planning and finance portfolios;
• Develop home grown social and economic development programmes;
• Develop a transitional development plan to precede long term development plans;
• Ensure that all set bench-marks in sector ministries are achieved within the prescribed time frame.

(b) Monetary Policy
For any country to achieve sustainable economic growth it must have consistent monetary policies to control inflation, interest rates and the exchange rate.

The monetary policies of the MMD government have been characterized by high domestic interest rates and only modest improvements in the rate of inflation due to cheaper imports resulting from consumer-friendly, producer-hostile exchange rates (which have anyway been unstable and thus inimical to consumer price cuts).

This has slowed down economic growth and led to failure to achieve set economic performance targets. The pronouncements of monthly inflation statistics have not translated into improved living standards for the vast majority of the Zambian people. Instead there has been rising unemployment, increased basic commodity prices, rampant poverty, inaccessibility of credit and uncontrolled capital flight.

To facilitate its objectives the PF government shall:

• Review and amend the Banking and Financial Services Act in order to streamline the relationship of the Central Bank and the banking industry;
• Promote through the Central Bank favorable interest rates to facilitate borrowing and investment by the private sector and individuals;
• Control inflation in a manner which will realistically reduce prices of commodities in order to make them affordable to the vast majority of the Zambian people.

(c) Fiscal Policy

Items (i) and (ii) are omitted.
(iii) Foreign Aid
The issue of dependence upon cooperating partners for budget support, and for off-budget support in social security sectors needs to be addressed.

In order to address this issue the PF government shall:
• Strive to achieve budgetary self-sufficiency and invite open as well as candid assessment of its achievements in this regard on an annual basis.
(iv)Public Expenditure

Under the MMD government public expenditure has not been firmly related to annual budgetary estimates as approved by the National Assembly.

As a result the government has been incurring unauthorized expenditure outside the budget estimates using the National Assembly to rubber stamp supplementary budgets.

Budget deficits have been the order of the day leading to a huge domestic and external debt. As a consequence of poor management of the budget the domestic debt such as unpaid retirement packages, payment to local suppliers, utility bills to Zesco and water and sewerage companies, remittances to Pension Funds and allowances for public service workers has grown to unmanageable levels to the disadvantage of both the creditors and the economy.

The capital budget has been haphazardly implemented leading to failure to complete capital projects on time and escalation of costs. Additionally the social and economic infrastructure sectors such as education, health, roads and bridges have been underfunded.

In order to redress the above situation the PF government shall:
• Run an activity based budget in order to instill financial discipline in government expenditure;
• Dismantle the domestic debt as a matter of priority;
• Increase budgetary allocation to the education and health sectors;
• Increase budgetary allocation to the economic infrastructure sector;
• Prioritize budgetary allocation to established micro-credit financing institutions.

Finally, the PF government promised transparency and prudent financial management, the government should live up to its promise.