Understanding the anchoring power of fiscal policy: How will the 2016/17 budget help navigate economic headwinds?

INTRODUCTION National budgets have been in existence from time immemorial and have been known to be effective tools in anchoring and supporting countries faced with economic headwinds. Namibia currently faces several economic headwinds such as low commodity prices, a volatile exchange rate and a high inflation rate and, given the submissive nature of its monetary policy to the Common Monetary Area (CMA), the national budget remains the preferred policy of choice to help navigate these headwinds. Expectations of how Namibia's budget will impact on the economy are already sky high. The national budget is defined as a document through which a government wishes to present its proposed revenues and spending to the nation for a financial year. Usually, this document is also known as a “bill” which is often passed by the legislature and, in the case of Namibia, the “parliament”. It has to be approved by President Hage Geingob and is presented by the minister of finance, Calle Schlettwein, to the nation. The budget, also known as the annual financial statement of the country, contains estimates for anticipated government revenues and expenditures for the ensuing financial year. UNDERSTANDING THE NATIONAL BUDGET It is the duty of every Namibian to understand the national budget. For instance, government is expected to spend close to N$70 billion in the 2016-17 financial year. For many that sounds like a lot of money, and it is. That amounts to about N$35 000 for each woman, man and child living in Namibia. It is also about 33.8% of the entire Namibian economy. But government is not just a bill collector and spender. At its best, each of the dollars our government spends can advance the common good and enhance the quality of life of Namibians through public investment in infrastructure and systems that only government is positioned to make – investments in things like courts, clean water, transportation, security and education. Without government, our communities and families would not be the same. Since we all contribute to government, whether by voting or other civic involvement, or whether by simply going to work and paying our taxes, it is in our best interest to see that our tax dollars are raised and spent in ways that reflect our priorities. To do that, we need to know where that money is going, and how budgetary decisions are made. COMPONENTS OF THE BUDGET REVENUE (WHERE DOES THE DOLLAR COME FROM?) Governments acquire the resources to finance their expenditure through a number of methods and the most important by far is taxation. Governments, however, also have recourse to raise funds through the sale of their goods and services. Namibia relies heavily on the revenues it receives from its membership of the Southern African Customs Union (SACU). Government revenue was projected to be N$58.4 billion in the 2015-16 financial year, which is an estimated 8.4% increase over that of 2014-15. For 2016-17, revenue is expected to grow very slowly due to the anticipated decline in the SACU revenue and weak corporate tax revenue. EXPENDITURE (WHERE DOES THE DOLLAR GO?) The size of the budget is measured by the size of its expenditure. This could either be expenditure incurred for the routine and normal day-to-day running of government departments or for the provision of various services to citizens. The total size of the budget for the 2015-16 financial year was N$67.1 billion. This is expected to expand to more than N$75 billion in 2016-17 in line with the increased wage bills and social spending earmarked to fight poverty. BUDGET DEFICIT (WHAT ABOUT THE DOLLAR SHORTFALL?) It is common for governments to run persistent fiscal deficits and Namibia is not an exception. A budget deficit arises when tax revenues are insufficient to fund government spending, forcing the state to borrow money, usually in the form of government bonds. You may ask, but why do countries run fiscal deficits? Reasons could be attributed to structural or fiscal problems facing a country. Namibia will witness an expansion in the 2016-17 budget deficit of up to 5.5%, compared to 5.3% of GDP in 2015-16. Although, this is still below the fiscal target, the speed at which it’s rising, is causing some serious sustainability concerns. ANCHORING POWER National budgets derive their importance from their ability to anchor the country during times of economic hardships. In Namibia the national budget has come to the rescue of the economy on several occasions. Key amongst them includes the period immediately after independence, between 1992 and 1995, when the country was hit by a severe drought that threatened a large number of the Namibian population. The second time was in 1998 during the Asian financial crisis that plunged the global economy into recession. The more recent one was in 2008-09 when the US housing market collapsed sending the world’s greatest economy tumbling. On all these occasions the national budget was successful in anchoring the economy and helped navigating it through the economic hardships of the day. Despite all the overwhelming evidence supporting the fact that national budgets are more effective in anchoring the economy during times of economic hardships, there still remains a serious lack of understanding of its real nature and role amongst our citizens. Understanding government budgets can help enhance its effectiveness as the process becomes clearer and transparent. Poor understanding leads to low civic participation and this poses significant challenges to the governments. WHAT SHOULD BUDGET 2016-17 FOCUS ON? Government prepares the budget for fulfilling certain objectives. These objectives are the direct outcome of government’s economic, social and political aspirations. Through the budgetary policy, government aims to reallocate resources in accordance with the economic (profit maximisation) and social (public welfare) priorities of the country. Economic inequality is an inherent part of every economic system. Government aims to reduce such inequalities of income and wealth through its budgetary policy. Government aims to influence distribution of income by imposing taxes on the rich (solidarity wealth taxes) and spending more on the welfare of the poor. This will reduce the income of the rich and raise the living standards of the poor, thus reducing inequalities in the distribution of income. Government aims to control the different phases of business fluctuations through its budgetary policy. In order for government to meet these objectives, the following areas are what the 2016-17 budget should focus on. In this instance, proper budget design and correct prioritisation is key. BOOSTING GROWTH With exports declining for months in a row, and with the situation not expected to improve in the near future and private domestic investors not keen to invest in a big way, we will have to rely on Foreign Direct Investment (FDI) and public investment to boost growth. Of course, the implementation of the “Growth at Home” initiative will excite a lot of people, but this is not a viable route for boosting growth. FDI can certainly help, but public investment will have to play a major role. To this effect, the sector that should be top priority is infrastructure. As the backbone and foundation of economic development, this sector has a multiplier effect that can benefit and propel the country into industrialisation. With the dream of becoming the regional hub in the Southern African Development Community (SADC), spending on growth-enhancing infrastructure and the energy sector should not be an option if Namibia is to become a regional logistics hub but a priority. The infrastructure sector received N$5.8 billion or 9.2% of total planned expenditure and it is expected that government will increase the allocation during the 2016-17 budget. The minister of finance must keep two things in mind when proposing major increases in infrastructure. Firstly, the allocations must be used efficiently and effectively. Our incremental capital-output ratio is already very high and we cannot afford a business-as-usual approach. Secondly, while allocating public money, the minister of finance must be clear in his mind about what public money is supposed to be spent on. In principle, public money should be spent on: (a) the provision of public goods or goods with positive externalities, that is, goods and services, which the private sector will not provide (for example, national defence, control of pollution and elimination of open defecation); and (b) the provision of private goods and services to certain people on equity grounds. In the same vein, allocation to economic sectors – which received N$9.9 billion or 15.7% of total planned expenditure last year, should increase during the 2016-17 budget. Namibia, alongside the rest of the world, is heading for a challenging period and it needs resources in this sector now more than ever before. Resources in this sector should be directed towards growth and development. By stabilising the macro-economic environment, government can enhance prosperity. Recently, government has put food security at the top of its agenda and hence more resources will be required to implement projects that would drive such agenda and boost food security and self-sufficiency. NURTURING A BROADLY EQUITABLE DISTRIBUTION OF ECONOMIC CAPABILITIES AMONG OUR PEOPLE We need to empower people through education, skills development and better health, and create gainful employment or self-employment opportunities for them. This demands substantial increases in the budgetary allocations for education, skills development and health, and efficient and effective utilisation of these allocations. Endeavours to meet this challenge will put many demands on public money and public money must be allocated to meet these demands. But do we have that kind of money? The social sector should continue to enjoy priority over the next three years. In 2015-17 it was allocated the largest share of the budget in the 2015-16 fiscal year, receiving N$26.7 billion or 42.3% of total planned expenditure. The high allocation to the social sector was well in line with government’s programme aimed at poverty reduction and improvement of social welfare through, amongst others, the increase of the old-age pension to N$1 000 (from N$600) and the provision of free secondary education to increase access to education. HONOURING THE COMMITMENT TO FISCAL CONSOLIDATION The minister of finance should not worry about honouring the commitment to fiscal consolidation. Why? Because sticking to a fiscal deficit target and at the same time allowing central public enterprises to raise money through extra-budgetary resources is no way of honouring the commitment to fiscal consolidation. To improve transparency, the minister of finance could include the public enterprises' extra-budgetary resources in the revised estimate of fiscal deficit for 2015-16 and in the budget estimate of fiscal deficit for 2016-17. A deficit is not necessarily a bad thing. What really matters is that the money is used efficiently and effectively and is spent on public goods and services. (Written and compiled by: Standard Bank Namibia’s manager of economic and market research, Mally Likukela.)