Fiscal sustainability key for 2016 national budget

via Fiscal sustainability key for 2016 national budget – Zimbabwe Independent October 23, 2015

It is that time of the year when the hype of the national budget is underway. The 2016 national budget comes at a time when government has just successfully convinced the Bretton Woods institutions on a debt restructuring strategy.

Rodney Ndamba

This development, to some extent, excited greater expectations and implications for the 2016 national budget. The budget is expected to demonstrate the practicality and translation of the debt restructuring strategy into a fiscal regime and economic direction. Failing to provide for the debt strategy will be a critical setback for this achievement which may have ripple effects on the economy. It is therefore important to acknowledge progress made in Lima, Peru, is vital for setting the economic direction for Zimbabwe and the 2016 budget will be crucial in pointing the right direction.

Many a time as a country, we have come from the right direction, but ended up going the wrong way. To avoid this, we should aim to achieve fiscal sustainability in addition to other economic fundamentals that will drive sustainability and national competitiveness. This article provides pointers to issues that the budget formulation process may need to explore in light of the debt strategy.

Fiscal sustainability
Despite the achievement in Lima, it will be crucial for the budget to address fiscal sustainability. Fiscal sustainability or public finance sustainability refers to a government’s ability to sustain its current spending, tax and other policies in the long-term without threatening solvency or defaulting on some of its liabilities or promised expenditure. In essence, fiscal sustainability provides a scenario in which governments do not expose future generations to high taxes due to heavy borrowing.

Managing fiscal sustainability will not come without the hard decisions or fiscal rules, and it needs generational sacrifice. Fiscal rules refer to statutory or constitutional restrictions that set specific limits on fiscal indicators such as budgetary balance, debt, government spending, or taxation (Kennedy and Robbins, 2012). Therefore, fiscal rules will be critical when coming up with the budget to ensure that government honours commitments made in Lima. A review of Ghana post fiscal deficit by Insah and Ofori-Boateng (2015) provides learning experiences for Zimbabwe in managing fiscal sustainability.

Achieving fiscal sustainability requires sustainable public finance where government revenue trends should be tightly matched to expenditure in order to avoid defaulting on international debts. Consequently, defaulting on international debt has a negative impact on the country’s fiscal profile with far-reaching implications on the economy’s ability to attract foreign direct investment (FDI). Ideally, the budget needs to spell out debt ceilings to avoid digging new holes to fill old ones. Achieving this requires government to make tough decisions on non-productive expenditure such as expensive vehicles.

Stable economic growth
It is a fact that the achievements in Lima cannot be under-estimated. However, there are a number of variables that need to be constructed to support this achievement. The 2016 budget should build upon this achievement to inspire sustainable economic growth that is supported by a culture of productivity and results-based orientation in which expenditure should be matched with results or returns

Growth ambitions should be based on creating new formal businesses that create formal jobs which allow government to collect taxes with minimum costs. The informal sectors can then become part of the supply chain. Experiences have shown it is hard to collect taxes in informal settings. The budget should set the tone for business and economic growth.

To drive sustainable economic growth, government should also create a prudent fiscal position that obviates pressure on future increases (Schick, 2005). A stable tax regime provides investor confidence because it is less likely to shift dramatically as opposed to unstable situations where, for instance, a government raises taxes to meet unbudgeted expenditures. As such, it will be critical for the budget to create an enabling business environment for new investments that bring new jobs, hence broadening the tax base than increasing taxes on already struggling companies. The budget therefore needs to provide a stable tax regime that attracts investors while driving existing and new business towards value creation and productivity.

Responsible investment
While a lot of effort has been made in trying to attract FDI, the budget needs to reflect that bias.

Investing in infrastructure such as roads and railway networks, water, energy and efficient service delivery makes the country an attractive investment destination. Such responsible investment enhances the country’s investment profile while motivating locals towards productive and sustainable economic development. The budget therefore needs to reflect a sustainable national investment profile supported by responsible investment values.

In this regard, government must take a leading role by ensuring that public sector investment is done responsibly. It is sad to see a struggling parastatal prioritising buying top-of-the-range vehicles while struggling to deliver basic social services. Responsible investment requires the budget to consider fiscal rules on state-owned enterprises (SOEs) to ensure public sector sustainability.

Sustainability is now a defining factor for lending. Multinational lending institutions like the International Finance Corporation (IFC) already have their sustainability reporting framework, applied before lending to any institution or government. The test for the 2016 budget rests upon allocation of resources in a responsible manner that reflects the national ambition based on sustainable values.

While the Institute for Sustainability Africa (Insaf) and its partners, the Securities and Exchange Commission of Zimbabwe and the Zimbabwe Stock Exchange (ZSE) have been striving to promote responsible investment in the private sector, government has to ensure resources allocation to SOEs is done in a responsible manner that fosters good corporate governance, accountability and transparency.

During an event on the demutualisation of the ZSE, Finance minister Patrick Chinamasa echoed a sentiment to consider SOEs to list on the ZSE, which was a noble idea. Such a proposal should be reflected in next budget as they project a national ambition of building responsible and accountable SOEs which can compete with the private sector. SOEs in South Africa compete with the private sector and this can be a basis of reforming SOEs in Zimbabwe.

Sustainable private sector
A lot has been said about private sector’s impact on national competitiveness as reflected in the World Bank economic competitiveness rankings that saw Zimbabwe being ranked lowly. It is crucial that government sets aside resources for monitoring and driving private sector competitiveness besides providing rescue packages.

It is obvious that major struggles among private sector players in Zimbabwe are inherent issues of poor management, poor corporate governance practices and outdated business models that are uncompetitive. Competitive economies in Africa are mainly driven by sustainable business practices that attract investors. In Africa, countries that attract the bigger share of FDI — like South Africa, Kenya, Nigeria and Egypt — have built their competitiveness on corporate sustainability practices and values in their private sectors and capital markets.

Therefore, the budget should outline a national plan and vision for developing and driving policies for the private sector that embed corporate sustainability and sustainable business practices. The implementation of the National Code on Corporate Governance (Zimcode) should be one of the issues the national budget provides resources for.

It is important to point out that government made a commitment in Zimcode, therefore, developing a competitive business environment in 2016 requires government to find ways to enforce it through amendments to the Companies Act. As such, the budget needs to reflect such ambitions to build a competitive and sustainable private sector that is driven by international best practices and values.

In conclusion, the 2016 National Budget needs to take great lessons of avoiding a national economy that is built on one sector. Many countries, including Zimbabwe, are bearing the pain of depressed mineral prices, having placed too much hope on the mining sector. It is crucial that the budget reflects building a multiple sector approach to fiscal revenue that provides different sectors’ contribution to the fiscus. It will be crucial to build strong sectors like agriculture, manufacturing, tourism and finance services in addition to mining.

The budget should be a case study for avoiding a fiscal cliff amid global economic slowdown in major economies within the Brics (Brazil, Russia, India, China and South Africa). Should the budget be crafted and supported with fiscal discipline, sustainability and fiscal rules, chances are high that Zimbabwe will be able to turn its fortunes.

Achieving fiscal sustainability also requires government to consider generational accounting in which annual national budgets are updated versions of long-term budgets that could range between 10-20 years from now.

Ndamba is the founder of the Institute for Sustainability Africa (Insaf), an independent think-tank and research institute on sustainability and sustainable development. He can be reached on: