TABLING the 2024/25 Budget Framework before Members of Parliament in Dodoma last month, Finance Minister Dr. Mwigulu Nchemba said the budget will increase by 11.2% from Tshs 44.4 trillion in the ending fiscal year 2023/24 to Tshs 49.346 trillion.
Further, the government expects to collect Tshs 29.58 trillion, of which Tshs 3.4 trillion non-tax revenue will be collected by ministries, institutions and self-reliant departments and Tshs 1.34 trillion from local government authorities.
With the expected collection, the government targets 70 percent of domestic revenues to finance its budget. This will be an increase of 10 percent from the previous financial year.
So, even without defining what the budget deficit is, the above three paragraphs provide the glimpse.
When government expenses exceed revenues, we say there is a budget deficit. But the question is:
Does the government’s economic rhetorics of purposing inclusive growth, alleviating poverty and increasing productivity make sense even with the expanding deficit?
May be, may be not!
The government is 30 percent short of what is required to finance the budget from domestic sources. Yet, it goes on to project a 2.9 percent government deficit as percentage of Gross Domestic Product(GDP) in next financial year. Confused? Do not!
The 2.9 percent projection is in relation to GDP which in the margin of Tshs.148 trillion. GDP as in all monetary or market value of all goods and services produced in an economy. But the budget deficit is in relation to the budget projections of Ths 49.346 trillion.
Of course, they are related because the budget feeds through GDP, but the deficits here are technically different.
The 2.9 percent may sound small but it is huge because GDP means production plus destruction. Yet, economic growth can only mean increase in the standard of living where inclusiveness, productivity and poverty alleviation find their nest.
Since budget relates closely to GDP which ought to bring about economic growth, the budget deficit deserves a more technical scrutiny.
BUDGET DEFICIT
Deficit deniers have always been adamant that budget deficit is not only good but necessary. That when societies are in search for rapid progress, deficits present a rare path towards achieving the same. In resource constrained grounds, they argue.
We have deficit deniers in Tanzania. In many of our think tanks, advisory roles and political institutions. Whenever this debate props up, they never desist to bring to the fore the dominant business concept always taught in American business schools. LEVERAGE.
But isn’t it basic economics even in business management that there is a point at which business gets over-leveraged? The point at which debt over burdens the business.
In macroeconomics, the inflection point becomes a moving target. You know things are not as good as they look when for every Tsh 100 collected, not below Tshs 26 is spent on servicing debt.
Going by the budget framework, we seem to be of the view that things are not as bad as they look. This belief makes me agree with Angus Deaton.
Angus, Deaton, the Nobel prize winner argues: “The time has come for economists to get back to serving society. The discipline has become unmoored from its proper basis, which is the study of human welfare.”
And Deaton is vindicated by economic planners who think that by increasing the budget with that deficit hole is the way to building inclusiveness.
I think the search for an inclusive, prosperous society in this budget framework is all together chimerical.
As I write this article, government expenditure(recurrent) is 16 percent of GDP expected to hit 18 percent in 2028. With this budget projecting Tshs 33.5 trillion on recurrent and Tshs 15 trillion on development projects, why would one think that the government expenditure-GDP relationship is any beneficial to the people?
It is not only the problem of meagre allocation to development which in many cases has ended being sunk costs, but the reimbursement uncertainty is the face of our budget implementation. It has been the case for donkey years.
In these circumstances, any attempt to increase the budget deficit comes with increased public debt, increased interest rates and inflation-the escalating cost of living.
COST OF LIVING
Governments finance their budgets either through taxes or borrowing. Poor countries like ours go panhandling from donors. We are unable to meet the basics such as recurrent expenditures from our taxes.
Politicians love alternative facts, but the truth is that the size of the budget is a policy choice. Whenever we increase our budget, our implementation strategy – which has never sufficiently worked – is to tax and borrow.
The ideal thing would be to have a balanced budget by putting limits on government spending proportionate to our collections. This we haven’t done.
We have been a society of two communities as John Caldwell Calhoun would say; of tax payers and tax-consumers, who of course, cannot be said to pay taxes at all.
Consequently, government has been spending way above what it collects, hence a recipe for cyclic deficits.
Because deficits create desperate moments, desperate solutions is all that matters.
First, is the call for widening the tax base. However, the problem in the battle to net in many citizens, is the informal nature of doing business. Many times, government has ended up increasing cost of living as it tries to net in many.
Secondly, in many attempts by government to squeeze more from the already paying, entrepreneurs shift the cost of doing business to consumers.
Thirdly, domestic borrowing. As government tries to attract more money, interest rates go up since the government is always the best risk in the economy. For example today, the government is paying 15.95 percent interest for a 20 year treasury bond. Equivalent to almost 20 percent on taxable basis. Meaning the cumulative interest rate between an entrepreneur and her small enterprise is in the margin of 40 percent.
Since it is the selling price of goods and services that covers the financing cost, the rising interest rates lead to higher prices of goods and services.
CONCLUSION
As things stand, it is nugatory and absurd to keep increasing the budget that leads to budget deficits.
Considering the internal absorption capacity relative to the size of our economy i.e GDP of Tsh 148 trillion in nominal terms, our budget should not be above Tshs 35 trillion.
Of course we can only come to that level if we are ready to understand; that economics, done properly, is the study of distribution of real resources from value crated through production, not numbers on spreadsheets.
