Is govt expenditure inflexible to be reviewed downwards?

Does the government need to focus on government expenditure or revenue? An obvious answer is both. It is that time of the year when the excitement of the national budget is underway.

George Musvovi,Economist

The 2018 national budget will be presented as the government has just completed nationwide consultations in Zimbabwe to derive social and economic welfare functions. Due to its inflexible downward nature, the article will focus on government expenditure.

The government expenditure in Zimbabwe over the past two decades has revealed the growth trends that most models of government expenditure would predict.

Sticking to formal models or hypotheses of government expenditure, public sector economists highlight why government expenditure will remain high. The Wagner Hypothesis argued that expanding government expenditure will always accompany social progress and rising incomes. The model recognises three functions of the state, all of which have a tendency of demanding an increasingly large amount of funds from the fiscus. These are providing administration and protection, ensuring stability, providing for the economic and social welfare of society as a whole.

Notably, as of 2017 top three allocations include Primary and Secondary Education with US$803,7 million, Home Affairs with US$364 million and Defence with US$340 million. The 1990s were generally characterised by a reduced proportion of the public sector in overall economic activity. The possible explanation of the decline is the inception of Economic Structural Adjustment Programme (Esap) that demanded the rationalisation of the civil service.

Public expenditure would increase because of urbanisation that leads to the breakdown of communal relationships.

The breakdown of communal relationships would require the government to take over the functions previously carried out by families and local communities. This creates a centralised administration with large administrative units that can only be supported with higher government expenditure.

Technological progress will also lead to growth of monopolies in the private sector. The government will eventually be forced to intervene and replace them with public corporations or parastatals. This creates the need for government to expand in order to provide the social benefits for services that are not open to economic evaluation by the market system, and such services include education, threat detection, and health care among others.

Furthermore the displacement model is based on the idea that if there is an emergency such as previous HIV outbreaks, government expenditure is accepted and so too are the higher rates of taxation needed to pay for it.

People become used to higher tax rates and their notions of the tolerable tax burden are displaced upwards. After the disturbance there is increased scope for government expenditure to increase and it does not fall back to its original level. This is because of the ratchet effect — an engineering word which refers to a wheel-shaped, toothed object that allows movement in one direction and resists movement in the reverse direction.

Accordingly, this explains why it takes long to establish stability in the economy once instability has ensued. The ratchet effect implies that certain economic variables are quite flexible upwards and relatively inflexible in the downward direction. Government expenditure is one variable that typically displays such behaviour. People observe the social needs during the crisis and accept that there is a case for increased social spending. This can be exemplified through the taxation of pandemics like the Aids levy and 5% tax on airtime of healthcare financing in Zimbabwe.

According to this model, government expenditure does not follow a smooth trend, but instead is characterised by upward jumps at discrete intervals. The government is therefore able to maintain high expenditure even though the period of crisis or emergency has passed.

The Niskanen model or the agenda-setting model gives some insight into the bureaucratic behaviour. It focuses on the relationship between the legislature and the agencies, also referred to as the bureaucracy. The model describes the budgetary interaction in which the legislature has demand for the output of the agency and the agency also has demand for funds from the legislature. In this relationship the legislature has the power to approve expenditures that are proposed by the bureaucracy or civil service.

Obviously, bureaucracy has certain information that the legislature does not have and a single goal of the bureaucracy is a perpetually rising budget from which it derives power, pay and prestige (3Ps). These 3Ps are correlated with the size of the Bureau (resources available to the bureaucrat).

Niskanen concludes that the forces motivating the agency always produce a government expenditure which is too large. In Zimbabwe, the national budget statement is presented in such a way that some proposed measures take immediate effect. The budget statement is then debated over several months, and in most cases passes with minor amendments with technocrats at the Ministry of Finance discretionally slashing the bids down.

The dumping of reforms which the Ministry of Finance and economic development proposal on cutting the wage bill without any alternatives explain government expenditure inflexibility. A careful review of the successive budget revenue estimates and end of year actual revenue points to systematic overestimation of revenue. Ambitious revenue targets tend to fuel more spending requests and indirectly appear to drive overall deficit and consequent borrowing. Total government expenditures are largely determined by the size of the resource envelop, as the government needs to limit the size of fiscal deficits.

The role of government or the extent of government involvement in economic activities generally depends on the economic system operating in the particular country. Cumulative expenditure for January to October 2016 amounts to US$3,84 billion against a target of US$3,32 billion, representing US$520 million overspend. Primary and secondary education ministry gets highest vote of US$800,3 million followed by Home Affairs ministry allocated US$364 million. Defence ministry allocated US$340,5 million while health and agriculture sectors receive US$208 million and US$244 million respectively.

The high share of employment costs to total expenditures remains a grave concern, crowding out other non-wage capital and social spending, key for stimulating growth and reducing poverty. The government acknowledges the need to reign in on its high wage costs and create room for other growth-enhancing expenditures using the proportion of general government expenditure to GDP. There was marked government expenditure growth up to 1988. We are almost compelled to believe that ideologies like social orientation has some influence on patterns of government expenditure.

The government should be applauded for introducing the Special Economic Zones (SEZs) concept in order to attract foreign direct investment. However, the country needs to do more to be in a position to compete with the rest of the world.

However, without proper infrastructure and good institutions, SEZs cannot prosper. There should be transparency in the licensing of SEZs so that the country attracts the right investments. Operationalisation of the one-stop investment shop, proposed more than a decade ago, is long overdue.

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.

In conclusion, the 2018 national budget needs to take great lessons on why government expenditure is always high, while also avoiding a national economy that is built on one sector, unnecessary ambitions on spending and poor corporate governance. Reasons why government expenditure is inflexible downward need to be understood.

Consequently, this will help the nation focus on addressing the stumbling blocks. This will increase chances that Zimbabwe will be able to revise and respect its government expenditure patterns and turn its revenue fortunes.

Musvovi is a development economist with the Institute of Sustainability Africa. These New Perspectives articles are co-ordinated by Lovemore Kadenge, president of the Zimbabwe Economics Society. E-mail kadenge.zes@gmail.com or cell 263 772 382 852.

No comments yet.

Leave a Reply

AMH logo

© 2017 The Zimind. All Rights reserved.