Understanding Zimbabwe’s budget deficits, government debt and economic effects

The policy that ‘we eat what we kill’ was made popular in Zimbabwe during the Global Political Agreement period when Tendai Biti was the Minister of Finance. This is a principle advocated for by balanced-budget proponents. On the contrary governments also run budget deficits I have dedicated this article to explain the concept of budget deficits. A budget deficit the amount by which public spending exceeds revenue over a particular period of time. The Zimbabwean government is currently running budget deficits. The harmful effects of running budget deficits include; crowding out of the private sector, high real rates of interest, low national savings, low economic growth rates, large current account deficits and inflation, among others.

John Maynard Keynes holds that in times of severe economic shriveling in the private economy, it is tolerable for the government to go into debt and increase spending to compensate for the fall in consumer and other private sector expenditures. This is applicable to economies that have functional industries unlike Zimbabwe which relies on imports. It should also be noted that Zimbabwe has been burdened by a huge external debt and is unable to borrow from international multilateral organizations like the International Monetary Fund and World Bank. The borrowing of Zimbabwe government from the domestic market to finance government deficits has resulted in the current liquidity crises and the introduction of the loathed bond notes. The Keynesians theory indicates that, an in­crease in government spending leads to an increase in aggregate demand, which leads to the employment of the redundant re­sources which subsequently leads to an in­crease in output (Bernheim 1989). This implies that during periods of recession, the government should run a deficit to stimulate aggregate demand whereas during periods of economic boom government should pursue a surplus bud­getary policy. In the following section l will explain the politico-institutional approaches to budget deficits namely the public choice school and political business cycle theory.

The public choice school

Proponents of the public choice school base their arguments around two thoughts: fiscal illusion and asymmetric stabilization policies. The concept of fiscal illusion is that the voters do not understand the intertemporal budget constraint of the government (Buchanan and Wagner 1977). When offered a deficit-financed expenditure program, they overestimate the benefits of current expenditures and underestimate the future tax burden. Buchanan and Wagner (1977) further state that opportunistic politicians who want to be re-elected take advantage of this confusion by raising government spending more than taxes in order to please the "fiscally illuded" voters. Politicians are always willing to run deficits in recessions, but never willing to run surpluses when recessions are over. The assumption is that ‘fiscally illuded’ voters do not punish this behavior. An argument somewhat related to the fiscal illusion approach is put forward in the political business cycle literature as explained below: 

Political Business Cycle Theory

Political business cycle (PBC) theory assumes that governments can use monetary and fiscal policies such as budget deficits to fix the desired level of unemployment and inflation in a manner that would facilitate their re-election to power. Nordhaus (1975) posits that the idea underlying the political business cycle is that governments seek to maximize votes in the next election by implementing policies which would lead to favourable economic outcomes just before the election. After the election, governments pursue less favourable economic policies. Nordhaus (ibid) assumed that voters were backward looking and short sighted and voted for the incumbent political party if its policies before the election emphasized low unemployment.

Generational Effects

Budget deficits and the ensuing debts and the future payments on that debt force future generations to pay for those things that the present government is unwilling to pay for now (Levit 2011). This means that the burden of the national debt is largely shifted towards future generations. As a result of the national debt and associated interest payments, future generations will likely face a reduction in economic output and lower levels of real income. Normally, economic theory indicates that the reduction of output in the future constitutes the burden of the national debt, which is borne largely by future generations.

Concluding Remarks

Wasteful spending such as excessive gov­ernment expenditure on official travels and conferences does not contribute to economic growth and development. It should also be noted that over 90% of Zimbabwe’s government revenue goes towards the salaries bill, which is recurrent expenditure and leaves very little resources for capital expenditure. Most defence spending and most forms of spending on public amenities are of this nature. These do not normally add to the government’s ability to service the debt. A high percentage of the budget should go towards investment such as agriculture, mining etc. which gives a country ability to service debt. Financing state enterprises that are loss making also result in wasted expenditure.

Countries should restrict borrowing for investment expenditure and avoid borrowing for wasted or recurrent expenditure. If borrowing is undertaken for investment the debt will be able to service itself from the returns on investment. Government borrowing should not be used to maintain a large civil service sector and social grants. Government domestic debt also pushes interest rates up as demand for capital rises. Government domestic borrowing reduces the supply of loanable funds available for private sector investment. Increasing interest rates can reduce investment by the private sector as cost of capital rises. The retiring of government securities such as treasury bills through printing money can also result in increased inflation. Budget deficits which lead to falling economic growth is likely to result in contracting revenues in future whilst the government will be burdened by increasing debt servicing costs.

References

Bernheim, B. D. 1989. A neoclassical perspective on budget deficits. The Journal of Economic Perspectives, 3 (2): 55-72.

Buchanan, J. M. and Wagner, R. E. 1977. Democracy in deficit. JSTOR.

Levit, M. R. 2011. Reducing the Budget Deficit: The President's Fiscal Commission and Other Initiatives. In:  Proceedings of.   DTIC Document,

Nordhaus, W. D. 1975. The political business cycle. The review of economic studies, 42 (2): 169-190.