16 June 2014

East Africa: Little Wriggle Room for Ministers

Ten or 15 years ago, who would have thought that East Africa would be battling terrorism on a daily basis?

It was widely assumed that the 1998 bombings in Nairobi and Dar es Salaam were one off events. Yet the situation today has dispelled all such thoughts.

Terrorism is an added cost to regional governments, on top of paying for other public goods like roads, hospitals and schools.

There is no compromise when it comes to protecting the lives and property of your citizens and the money to do so has to be squeezed from somewhere.

In recent years balancing the national budget has become much harder with a sluggish global economy, rising population rates, sporadic violent instability in neighbouring countries and deep cuts in Development Partner assistance.

Most regional governments have been battling with budget deficits. This occurs when government spending is much greater than tax revenues. This tends to lead to big amounts of public sector debt. If the deficits are unsustainable, this can eventually cause interest rates to remain high and inevitably business people begin complaining about the high cost of borrowing.

Regional finance ministers have little wriggling room. The obvious way to reduce a budget deficit is to increase tax rates and cut government spending.

However, the difficulty is that this fiscal tightening can cause lower economic growth. This in turn might mean that governments get less tax revenue.

One of the best ways to reduce the budget deficit as a % of GDP, is to promote economic growth. If the economy grows, then the government will increase tax revenue, without raising taxes.

With economic growth, people pay more VAT, companies pay more corporation tax (tax on profits), and workers pay more income tax. High economic growth, is the least painful way to reduce the budget deficit because you don't need to raise tax rates or cut spending.

The concept of value for money is extremely important in such circumstances. When citizens are squeezed, they expect their governments to use the tax revenue on things that promote economic growth.

Things like better roads, railways, reliable electricity, a good health system and competitive education opportunities. This means tightening all avenues that allow for wastage and outright theft. Corruption is a terrible expense when you cannot balance your budget.

When citizens see that their taxes are used for sensible things then compliance becomes less of a problem. When citizens see their governments not walking the talk of fiscal accountability, cynicism sets in and self-initiative suffers. So does the country's international competitiveness. Finally we should discourage bureaucracy for bureaucracy sake, because it's a heavy cost on everyone.

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