This has significant implications for the eventual deficit we will have to tackle for this year and the efforts required to close the gap. It also means that the budget for next year must reflect much lower government revenue from the energy sector (relatively) and further cuts in expenditure will be required to address this variance. Fiscal consolidation will be needed going forward, requiring both spending cuts and revenue measures. But these have to be chosen carefully, balancing trade-offs between occasionally conflicting policy objectives. Fiscal consolidation must minimize negative short-term reduction in domestic demand.
The truth is that in normal conditions there are a number of options that are available to governments to tackle a deficit, but this depends on the nature and size of the deficit. In normal conditions when a deficit is considered to be of short duration, closing the deficit can be financed through borrowing. As long as there is fiscal space and the country’s debt overhang is not burdensome, maintaining the same level of economic activity is beneficial to the economy. In circumstances when countries have high debt levels, adding more debt can come at a steep price as well as loss of limited fiscal space.
In the present circumstances the deficit is far more endemic, although admittedly our debt levels are relatively moderate with very low external debt levels and debt service. In addition, the Government has already cut expenditures based on budgeted figures by seven percent. Certainly using growth as a solution is a more medium to long term approach and has to be undertaken alongside more short term measures.
The reduction in energy sector tax revenue will require a rationalisation of tax exemptions given to businesses. Limiting tax-induced distortions that are detrimental to growth by broadening tax bases is important. The government has started to expand the tax base by increasing the vatable items and the reintroduction of house taxes are on the cards. The relatively low personal income tax rate needs to be re-assessed particularly for high income earners. This has to be considered in tandem with an inflation policy because high income and net disposable income are different. More taxes yes, but what about a leaner or more efficient government service? How many people does the government employ? Are we getting value for money? What about government institutions with overlapping mandates? What about people getting disability grants under false pretences? What about placing a limit on wages and NIS or pensions? Perhaps adding an extra category or two to cater for higher income earners should be considered. However, revenue growth will not be high enough to offset the expenditure levels of 2016.
The best recommendation to the reform of expenditure is to reduce outlays to improve allocative efficiency (ie better overall use of resources) or productive efficiency (ie lower resource cost per unit of service delivery). At the same time, the more vulnerable members of society need to be protected from cuts, through targeted offsets if necessary. Fiscal consolidation is needed, we all need to be engaged to achieve this, and failure to do so will be counterproductive.