Reasons for the persistent deficits

Possibly there are some people who expected as I did to read recommendations of the Public Affairs Committee 5th All-inclusive Conference in the media. Perhaps they were issued through some newspaper edition which I missed.

In this article I want to think about a recommendation a delegate made to the effect that the government should balance the budget. My immediate reaction was to remember what Dr Hastings Kamuzu Banda said when some of his expatriate advisors presented him with advice, he did not like. “You are giving me this advice because you are not the one to face the people” or words close to these.

Balancing a government budget makes sense, only that it is not as easy as balancing the wheels of a car or the weights of a scale. Balanced budgets are less ubiquitous than deficits even in developed and wealthy countries. This is explained by what is called the Public Choice School of Economics.

Members of the Public Choice School of Economics, insists that politics must be studied with the tools of economics. They assert that politics in an economic activity. This sounds plausible when we listen to politicians criticising those in power for shortage of food, rising prices of goods or members of Parliament (MPs) complaining about lack of projects in their constituencies.

Todd G. Buchholz in his book New Ideas from Dead Economists says: “The Public Choice School of Economics thinks it can explain many economic and political problems why we suffer from persistent budget deficits, why special interest groups proliferate, why bureaucrate continue to expand despite presidential promises to trim them…”

In business we learn that chief executives maximise profits. Do bureaucrats also maximise profits? No, because the civil service is not a profit making system. But there also bureaucrats do engage in maximisation; they budget for bigger salaries, perks and other privileges.

When travelling abroad they fly business class instead of the cheaper ones. They book themselves in luxury hotels instead of the cheaper ones. When awarding government contracts they may accept bribes indirectly by awarding the contract to a company that promises them employment when they retire from the public service. In this manner despite a call to trim the budget the budget the bureaucrats do not respond in full.

Politicians themselves are not innocent of the tendency to resist budget cuts. An MP may attack the government for engaging in wastefulness but when government decides to cut or postpone expenditure on projects in his own constituency, you will see that person strongly objecting to this. They support austerity measures when it is the other fellows who have to bear them, not themselves.

Is balancing the budget advisable under all circumstances? Suppose you personally have decided to live entirely within your salary and never to be indebted to anyone or anything. One day your beloved is diagnosed of a disease which can be successfully treated only in a foreign hospital, you do not have enough savings to take your beloved one abroad but there is an opportunity to borrow the extra money. Which would you rather do; go into debt and save life of your beloved one or avoid the debt and let that illness take its course?

Budgets prove difficult to prune to the bone because of contingencies that cannot be shrugged off.

What most economists advocate is balancing the budget not annually but over a business cycle in the Keynesian manner. When the economy is booming the government should raise taxes and spend less than tax revenue.

In this way it will reduce inflation. During recession, the government should lower taxes, but increase expenditure beyond tax revenue thereby incurring a deficit. When David Cameron first became Prime Minister of Britain he promised to balance the budget over a period of five years. It is this type of budget balancing that is practicable.

Governments these days are involved in economic and social activities that cannot be achieved except with expanding budgets. Balancing a budget is the ideal thing to do but we must appreciate realities.

 

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