The Sunday Mail
Nyasha Patience Mandeya
Government spending on goods and services is intended to create future benefits to the economy, such as infrastructure investment or research spending and is classified as government investment (government gross capital formation). These two types of government spending, on final consumption and on gross capital formation, together constitute one of the major components of GDP.
Sustained optimal government spending will result in creation of jobs, improved physical infrastructure, increased educational investment and economic enhancement. Using public spending to stimulate economic activity has been a key option for successive governments since the 1930s when British economist, John Maynard Keynes, argued that public spending should be increased when private spending and investment were inadequate.
There are two types of spending: namely current spending, which is expenditure on wages and raw materials, and is short-term and has to be renewed each year; and capital spending, which is use of resources on physical assets like roads, bridges, hospital buildings and equipment. Capital spending is long-term as it does not have to be renewed each year. However, it has to be optimal, as higher government expenditure hinders economic performance.
Spending on infrastructure, healthcare, and education also provides an external benefit to the rest of the economy which can have long run effects. Public spending can be targeted to achieve a wide range of specific economic objectives, such as reducing unemployment, achieving more equity, road building, action against poverty, and re-building city centres and small towns. However, there may be a considerable time-lag between spending and the benefits that arise.
For example, a decision to increase spending on education will take many months and maybe years to implement, and many years or decades to see the full benefits. Indeed, the full benefits may never be measured and recorded because of information failure. In trying to promote growth or reduce unemployment government spending can be inflationary, especially if the government has to borrow from the financial markets or if the spending is rising too quickly, as might occur if public sector pay increases without an efficiency gains.
Government spending, however, is ineffective in inherently inflationary environments, hence the more pragmatic approach to be employed with the ushering in of the bond notes era. By hindsight, new classical economists implore government expenditure to improve supply-side performance, especially labour productivity.
Likewise, new classical economists, such as Robert Lucas, highlight what they see as the general failure of government to influence consumer behaviour. This is relevant to the Zimbabwean scenario where a deflationary trend beset the economy as Government expenditure has been largely directed towards recurrent expenditure. Strained resources have resulted in Government borrowing to fund spending, thereby compounding the national debt and creating excessive debt burden for future generations.
Currently the government continues to run a perennial deficit which is financed through domestic borrowings. Revenue collections have been comparatively lower than expenditure on account of subdued economic activity leading to dwindling corporate tax and value added tax flows.
In 2015, Government expenditure stood at US$3,837 billion against revenue estimates of US$3,543 billion, thus a budget deficit of US$294 million financed largely through domestic borrowing. This has seen total domestic borrowing (net) reaching US$258 million, about nine percent of total expenditure at the end of September 2015.
With only US$190 million spent on capital projects over the same period as presented in the figure 1 below. This is not sustainable as it crowds out private sector borrowing, which impedes growth. In 2015, Government was in fire-fighting mode, with wages getting top priority. Thus in 2015, US$3,159 billion (82 percent) of the budget was spent on employment costs.
Growth-enhancing capital expenditure accounted for only US$237 million (six percent) of the budget, with the remaining 12 percent spent on other recurrent costs and loan repayments. In 2016, Government expenditure has been projected at 4,2 percent higher than 2015, with a budget deficit of US$150 million. The situation has broadly remained unchanged with the budget remaining an “employment budget” and unsupportive of long-term growth.
Employment costs were projected to increase in nominal terms by 1 percent to US$3,19 billion in 2016. As a share of total spending, employment costs are projected to account for 80 percent of total budget and 22,5 percent of GDP, against sustainability thresholds of 30 percent and seven percent respectively, in line with regional countries.
In principle there arises a potential trade-off between unemployment and inflation, as first analysed by AW Phillips in the 1950s. If the aim of public spending is to create jobs, there is the strong possibility that prices will be driven-up, and any growth in jobs will only be temporary as the economy quickly readjusts to the previous level of unemployment.
Consequently this results in crowding-out, which is defined as the process of “squeezing” out the privately owned manufacturing sector by the expansion of the public sector.
It is argued that crowding out occurs because of the inherent scarcity of financial and real resources. The more the (inefficient) public sector uses scarce resources, the less resources are available for the more efficient and productive private sector hence resulting in poor economic growth.
The major sources of government revenue stem from tax collections. Notably, Zimra revenue collections are dwindling every month because companies are closing. Furthermore retrenchments which escalated following the Supreme Court Ruling of July 17, 2015 also adversely affected pay as you earn collections.
Recurrent expenditure which is dominated by employment costs, pensions and transfers accounted for 94 percent of government expenditure, leaving a paltry six percent for capital expenditure and social spending. Central bank Governor Dr John Mangundya alluded that “United States dollar cash shortages were a symptom of narrow fiscal space and a trade deficit”.
A 2015 civil service audit established that Government had 188 070 workers, excluding the uniformed forces and personnel under the Health Services Board. Some 130 000 are in education, against an approved staff threshold of 100 000.
In the first half of 2015, Treasury spent US$1,54 billion on labour against revenue of US$1,718 billion. The central bank also issued US$1,126 billion worth of Treasury Bills between 2012 and February of 2016 to finance some of its obligations. It is worrisome that treasury bill maturities are being honoured at a time when the government`s revenue streams fall short of the recurrent expenditure.
This means there is not enough notes and coins to back bank balances a situation which should not occur in a market that does not print the currency. The ushering in of the bond currency is expected to stimulate economic activity, by and large with the Government been expected to redirect expenditures towards capital projects whose ripple effects are set to ignite economic growth.
However, a prudent fiscal policy is a key ingredient in ensuring an optimal budget whose key priorities include capital expenditure within a disciplined expenditure rules framework which inhibits inflationary expenditure that are normally associated with huge government expenditure.
So much controversy has been associated with the bond issue; hence the government should be wary of inflationary expenditures that are characteristic of an election environment. Once again the ruling party is in the spot light as it is expected to craft economic strategies that deliver growth, employment, stability as well as being able whether the storm in the event of speculative attacks on the muted bond currency introduction.
Cde Nyasha Patience Mandeya is the Zanu-PF Director of Economic Affairs. She wrote this article for The Sunday Mail.
