Wanted: public information on IMF fiscal rule
Martin Henry, Contributor
"A broad public-information campaign" is to be undertaken to educate the public - you and me - about something called 'fiscal rule', which is something the International Monetary Fund (IMF) is demanding of the Government to be in place by March 31 as a loan condition.
Since nutten nah gwaan yet by way of public education by the authorities about this radical shift in how Government spends, wi hav fi try help wiself to understand fiscal rule and what it means for us. Today's column attempts to do some of that. Where it may be misinforming, the authorities have an opportunity created to step in and give you and me the proper facts of the matter. The Government has committed itself to "initiate a broad public-information campaign on the objectives and features of a new fiscal rule before its legal implementation", according to the latest memorandum of economic and financial policies submitted to the IMF.
When you cut through the IMF jargon, which was plentifully rolled over by this newspaper in its IMF Tracker story last Wednesday, 'No sign of public information campaign on fiscal rule', the fiscal rule being demanded by the IMF and, which is now being practised by several countries, places a legislative cap on government spending so as to impose "fiscal discipline" upon public expenditure. It forces Government to not spend what it can't afford, and to live within its means.
Public opinion is strong on the view, helped by media miseducation, that we are in the debt crisis that we are in, where debt is some 150 per cent of GDP, because the politician dem rob up di money or simply misspent it. The truth is that the real cause of the debt crisis, not to discount corruption and waste, is really from the good behaviour of our leaders.
They delivered public benefits, education, health services, water supply, roads, subsidies to tourism and agriculture, do-little overemployment in the public service, you name it, at a speed and in volumes which could not be paid for from current tax revenues.
So money was borrowed against future tax revenues to pay for these public benefits to show that Government is doing something and delivering. The trouble is, with the chronic economic woes of the country for most of its 51 years of independence, a weak tax system and a large tax-evading informal economy, tax revenues never caught up with loan obligations. We reached the stage where money had to be borrowed, not for new development projects, but for debt servicing. That is borrowing just to pay down the interest on what had been borrowed already.
But successive administrations were not about to 'stop the progress'. The international lending agencies are not without fault in creating this mess either. In the 1970s, IMF was for 'Is Manley Fault'. But the Fund and the others are not without their own fault. They poured billions of loan dollars into countries that stood no chance of repaying those loans from their known economic base.
Last October while in South Africa, one of its big banks, the Africa Bank, was slapped with a hefty fine for loan defaults, borrowers' defaults. Under South African law, the courts ruled that the bank ought to have known that the defaulting clients were not in any position to pay back the loans they were enticed to take. We need a fiscal rule for the lending agencies!
A number of laws are to be amended to implement the fiscal rule and put a tighter rein on public spending. But Parliament last year has shown what it can do with a little IMF push!
The role of Parliament as the Standing Finance Committee, including all members and the constitutional budget watchdog, is to be strengthened under fiscal rule. "Measures will include transparency and accountability through parliamentary hearings and public statements by officials. The minister of finance will be required to explain deviations from the fiscal rule in a mid-term budget review in Parliament and outline corrective steps to get back on track with the annual fiscal rule target."
The fiscal rule will incorporate an automatic correction mechanism that will be triggered by any significant deviation from targets, the IMF report for December says. I want to know more about how this correction mechanism will work.
Exceptions to the rule
There will be an escape clause from the strictures of fiscal rule for "adverse shocks". But Government will have to name out upfront potential adverse shocks that could affect spending and set out measurable conditions for invoking the escape clause which will require the approval of Parliament. Independent validation of the event or shock will be required before the escape clause can be initiated by the Ministry of Finance and Planning.
An IMF working paper, Fiscal Rules in Response to the Crisis - Toward the Next-Generation Rules. A New Dataset (July 2012), helps a bit with our education on fiscal rules. "A fiscal rule," the paper says, "imposes a long-lasting constraint on fiscal policy through numerical limits on budgetary aggregates. This implies that boundaries are set for fiscal policy which cannot be frequently changed and some operational guidance is provided by specifying a numerical target that limits a particular budgetary aggregate. Rules aim at correcting distorted incentives and containing pressures to overspend, in particular in good times, so as to ensure fiscal responsibility and debt sustainability."
The paper identifies two main problems for governments overspending and creating deficits (or holes in the budget) requiring debt plugs. Those problems are governments' shortsightedness and the "common pool problem". Special-interest groups, or 'constituencies', do not internalise the overall budgetary impact of their competing demands, and the presence of many competing interest groups results in the 'voracity effect'. That is, different groups compete and push for overspending windfalls in good years, which leaves no room for countercyclical response in bad years.
Our own Government has a lot to do and to tell in two short months on the fiscal rule which the IMF is demanding and which we need for the fiscal discipline that has been long absent, leaving the debt to grow.
Martin Henry is a university administrator and public-affairs analyst. Email feedback to email@example.com.