Guest Contributor | Nov 14, 2022 | 0
Erratic deficits slowly evolved over 25 years maturing to a stable, predictable pattern that can be applied as a proper macro tool
A chart prepared by the analysts at Capricorn Asset Management provides a workable comparison of budget deficits since 1991. It has to be noted that this chart identifies a fiscal year by the end of each period so the bulk of the year will actually be for the previous year. So what is shown as 1992, refers mostly to calendar year 1991, and so on for the rest of the chart.
Fiscal year 2020, highlighted in the dark red column, is the current fiscal year in other words, what would conventionally be indicated as 2019/20.
The years up to 2018 are based on actuals while 2019 will remain an estimate until about August this year when we get the final National Accounts. The value as indicated is taken from last year’s budget as are the values for 2020 to 2022, all based on the previous Medium Term Expenditure Framework.
The years up to 2002 must be viewed with caution as it was only in 2003 that the Ministry of Finance adopted the Medium Term Expenditure Framework of the International Monetary Fund, as applied to middle-income countries.
What one can glean from the chart’s first ten years, is that projections for both Gross Domestic Product and Expenditure were rather erratic. These type of gyrating stats usually indicate flawed or incomplete data. This can be seen in the wide fluctuations between 1.3% and 5%. It is also obvious that none of the deficits was very serious, even the calamitous 1996 when the Honourable Mbumba, much against his wishes, had to budget for a deficit exceeding 6% of GDP.
This is indicated in the chart as the value for 1997. The 5% actual value shows that a not-insignificant adjustment was made from the time the budget was presented up to the time of the final national accounts, a delay which in those years could have been as long as 20 months. This fact alone makes much of the earlier statistics (before 2003) obsolete for practical application, or as strategic tool for subsequent budgets.
Also noteworthy is that whatever accumulated debt we had up to 2005, it was quickly neutralised in the surplus years of 2006 to 2008. In 2009, total government debt and guarantees came to only 16% of GDP.
The chart reveals three distinct patterns. The first, a three-year period started in 2009 when the economy was first estimated to have contracted by 0.9% but later adjusted to a weak growth of only 0.2%. The modest 1.7% deficit was a result of the weak economic performance.
At the beginning of 2010 we received our first so-called counter cyclical budget, leveraging the equity in the negligible government debt at that time. This was quickly followed by a large deficit jump to 4.8%, this time to cater for TIPEEG, culminating in the first record budget deficit of 8.1% in 2011/12. This was also the period when the debt ceiling was hastily lifted from 25% to 30%, a level I believe that has never officially been adjusted despite us having breached that ceiling in 2015.
The second obvious pattern is the almost exact repeat in the years 2012 to 2015 at the end of which we notched up a second record deficit, matching the earlier 8.1%.
The third distinct pattern emerges for the next three years, from 2016 to 2018, clearly showing the declining trend in government expenditure as a percentage of GDP.
Noteworthy is the fairly stable pattern reflected in the last three years. Not looking at the actual nominal debt for a moment, one sees that the deficit stabilised in a band between 4% and 5%. This reflects a certain level of maturity in the entire budgetting process but I also believe it has set the benchmark, perhaps even for the next five years.
If I am correct, the 3.8% and 1.7% deficits for the last two years of the previous Medium Term Expenditure Framework, are nonsense. They will not be achieved but this is not a big issue in my mind.
What is more important is that historical figures, (and reality) prescribe a current budget deficit between 4% and 5% and that the finance ministry can save itself much chagrin if it accepts this reality, and budget accordingly.
At some point, the fiscus will eventually catch up in response to the myriad of new investments that have poured into the economy since 2011, and when that happens, our preoccupation with government debt will slowly fade away.
For the time being, it is more important to address the enormous wastage in government spending, and the lingering corruption that undermines the finance ministry’s best efforts to right our ship.