- The dilemma of running a balanced public budget is inevitable where there is a divergence of economics and politics.
- Economics calls for sacrifices and trade-offs, while politics is committed to a quest for re-election.
- A lack of consensus among the political elite leads to a loss of legitimacy.
- Inadequate allocations in key areas may result in a vicious cycle.
Just over 35 years ago, that bastion of capitalism, the United States of America, battled with the dilemma of how to run a balanced public budget. The ever-increasing budget deficits were a source of anxiety across the political and social spectrum.
This problem – common throughout the world – is an inevitable consequence of the divergence in economics and politics.
Economics, concerned with the long-term welfare of the nation at large, routinely calls for sacrifices and trade-offs in financial decision-making. Politics, on the other hand, routinely committed to the quest for re-election and the preservation of political power, operates from a much shorter definition of the future.
In this dilemma, the primary anxiety for economists is what happens when bad economic policy finds its way to the political discourse and binds current and future generations to the consequences. The primary anxiety of politicians during budgeting times is how to avoid good economics forcing the implementation of tough political decisions.
The United States solution of 1985 was to initiate an awkward political alliance aimed at intervening whenever the prospect of economic trade-offs called for unpopular political concessions.
Three senators designed and championed a bill aimed at intervening in times of impasse in a manner that would provide political insulation to the politicians themselves. The Gramm-Rudman-Hollings Act was born with the primary purpose of forcing American politicians to commit to a budget-deficit reduction programme.
Under the programme, a series of annual deficit reductions would theoretically lead to an eventual existence of a balanced budget. In cases where the targets for annual deficit targets were missed – simply through the politicians wishing and committing to spending more than could actually be generated in the form of revenue – then the Act would impose cuts across the board with the exception of key social programmes.
Ideally, the prospect of across-the-board cuts should have forced everyone to stick to the agreed deficit-reduction programme rather than face an imposed set of cuts. The reality however, turned out to be very different.
A primary flaw of the Act was the latitude it gave politicians to continuously move the goalposts. Its most explicit flaw was the $10 billion margin of error which simply meant that whatever numbers had been agreed to, if politicians came back later and said 'we think that number was overestimated or underestimated by $10 billion' that was to be accepted with no recourse. For an Act that sought to set deficit-reduction targets of $36 billion per year, a $10 billion margin of error condemned the Act to a mockery from the start.
Nevertheless, the Act's intentions were and remain an important part of public policy formulation and the management of public finances. Countries that spend their way to obscurity create an intergenerational public finance crisis that future generations need to somehow find a way to fix. Those future generations, however, may find themselves dealing with new issues and also financing the cost of bad decisions from years past.
What cuts can be implemented?
Next week Tito Mboweni will table an emergency budget that will seek to chart a pathway for the management of public finances for the next few years. The primary question that should underpin any national budget – Do we have enough money to spend on what we wish to spend on? – has long lost relevance in South Africa simply because the answer is an emphatic NO.
Where we find ourselves then, is on the question of what cuts can be implemented that are a combination of effective economics and palatable politics. Effective economics will direct us to considering the direct and indirect impact of all trade-offs prior to making a call on what and where to cut. Palatable politics will demand that we acknowledge that the decisions remain a political matter and all we can hope for is that the political stakeholders find a middle ground somewhere.
The absence of a consensus among the political elite means that the process will lack legitimacy. In South Africa, the consequence of a rejection of a public service wage agreement, for example, is strike action in the civil service that compromises the ability of the state to function even further. The traditional budgeting process – made up of the lengthy consultation process involving the Ministerial Committee on Budgeting (MinComBud) – generally results in ambitious budget requests being tempered by the reality of what's actually available to be shared among different departments.
For next week's budget, however, the fact is that there is much less to share as the national economic lockdown and the international trade gridlock have cut off large chunks of potential tax revenue. South Africa's gravitation towards a process envisaged by the Gramm-Rudman-Hollings Act is a direct result of the times we find ourselves in that call for cost-cutting across the board.
The one common feature all political principals have is the belief that their budgets are sacrosanct, and nothing can be sacrificed. Far too many of them, however, do not practice the habit of learning to justify each element of their spending requests and, more importantly, explaining why it cannot be sacrificed during times of crisis.
The tabling of prior allocations as the baseline for the budget deliberations will simply lead to an artificial, usual review of budget line items rather than a thorough analysis and interrogation of quantum, necessity, relevance and impact on the bigger national priorities. Moving towards a zero-budgeting framework, demands a thorough look at all aspects of spending requests and a justification in light of the dire state of public finances.
The lessons from the Gramm-Rudman-Hollings Act are plenty for Mboweni. Less than two years from the date it was enacted, the Act found itself sidelined by the great economic interruption of that age – the 1987 stock market crash which required politicians to formulate solutions aimed at dealing with the fallout of the crisis.
Naturally, commitment to deficit ceilings didn't feature highly in that list. As Mboweni prepares to table his next budget, he has the benefit of doing so after the advent of a crisis and access to some insights on how it has crippled the economy.
The key point to remember, though, is that in preparing an austerity budget there are elements that require greater allocations as they shoulder a greater burden of the aftershock of an economic disruption of this nature. Such elements – social assistance, healthcare and education - not only warrant an insulation from the cuts, but must command a greater share of the redistributed resources.
Failure to spare them from the austerity guillotine will mean that we are condemning ourselves to austerity budgets for generations to come.
Khaya Sithole is an accountant, academic and activist who writes and Tweets on finance, economics and politics. Views expressed are his own.