New Fiscal Rules Will Produce Discipline And A Confidence Shock In Zimbabwe

Authored by Steve H. Hanke of the Johns Hopkins University. Follow him on Twitter @Steve_Hanke.

Zimbabwe’s new President Emmerson
Mnangagwa, like his predecessor Robert Mugabe, claims that economic sanctions
have crippled Zimbabwe’s national development. What nonsense. Robert Mugabe and
the current governing party ZANU-PF have made Zimbabwe into an economic basket
case. Indeed, the ruling Party has put its stamp of approval on one disastrous
economic policy after another for 37 years. Among other things, a total lack of
fiscal discipline resulted in the world’s second-highest
hyperinflation. It ended abruptly on November 14, 2008, when the annual
inflation rate peaked at 89,700,000,000,000,000,000,000%.

To illustrate Zimbabwe’s lack of
fiscal discipline, consider that the budget for 2017 called for total government
expenditures of $4,100 mil. On December 8, 2017, the new Mnangagwa government
estimated that total expenditures for 2017 will actually reach $6,045 mil.
That’s a whopping 47.4% overshoot. Talk about indiscipline. The 2018 budget,
which was announced on December 7th, projects $5,743 mil to be spent
in 2018. That’s 40.1% higher than the 2017 budget, but 5% lower than the
estimate of actual 2017 expenditures.

******

To successfully implement reforms,
the Mnangagwa government will have to generate confidence and credibility. As
Keynes argued in The General Theory:

The state of confidence, as they term it, is
a matter to which practical men always pay the closest and most anxious
attention. But economists have not analyzed it carefully and have been content,
as a rule, to discuss it in general terms. In particular it has not been made
clear that its relevance to economic problems comes in through its importance
influence on the schedule of the marginal efficiency of capital. There are now
two separate factors affecting the rate of investment, namely, the schedule of
the marginal efficiency of capital and the state of confidence. The state of confidence
is relevant because it is one of the major factors determining the former,
which is the same as the investment demand schedule.

There is, however,
not much to be said about the state of confidence a priori. Our conclusions
must mainly depend upon the actual observation of markets and business
psychology.

Most economists have completely
ignored this passage in the General Theory, because confidence is difficult to
define and insert in any formal abstract model. Economists find it difficult to
quantify and measure. Keynes admitted as much. Perhaps this explains the
failure of economists to consider confidence seriously. Yet, it is clearly
unsatisfactory to confine analysis only to definable and quantifiable
magnitudes and to ignore an important determinant of behavior simply because it
cannot be encapsulated in any neat definition or be measured by government
statisticians.

Unlike Keynes, I suspect that there
is much to be said a priori about the state of confidence. For example, it
seems likely that confidence is determined by the general credibility of
government policy.

******

To deliver a positive confidence
shock to the Zimbabwean economy, the new Mnangagwa government must change
Zimbabwe’s fiscal order. In short, it must replace disorder, with order. Three
new elements must be introduced:

Fiscal order and transparency must be
established. Zimbabwe lacks the fiscal institutions to guarantee that
budget deficits and government spending can be controlled. To put its fiscal
house in order, Zimbabwe’s government should begin to publish a national set of
accounts which includes a balance sheet of its assets and liabilities and an
accrual-based annual operating statement of income and expenses. These
financial statements should meet International Accounting Standards and should
be subject to an independent audit.

Just what is an
accrual-based operating statement? At present, accounts in Zimbabwe are kept on
a crude cash basis. Revenues and expenditures are recorded when cash is
received or paid out. With accrual accounting, spending and revenues are
recorded when they are incurred, regardless of when the money actually changes
hands. Accrual accounting gives a much more accurate picture of the realities
and avoids many financial tricks that politicians can play with cash
accounting. For example, under cash accounting, politicians can promise
pensions for future retirees, but since no money is paid until people retire,
there are no budgeted costs under cash accounting until the pensions are paid.
With accrual accounting, the promises to pay future pensions would appear in
the government’s accounts when the promises for future obligations are made.
Consequently, under accrual accounting, the government cannot distort the
magnitude of its spending obligations.

Do any countries
use accrual accounting for their public accounts? Yes. For instance, New
Zealand started to use it in 1989. As a result, New Zealand presents a far more
transparent and honest picture of government operations than do most other
governments. This has allowed New Zealand to make more informed decisions and
control the state much better.

To reduce
corruption in Zimbabwe, there is no better medicine than the transparency which
would accompany a New-Zealand type set of fiscal accounts.

Supermajority voting must be established for
important fiscal decisions. Many countries require supermajority voting for
important decisions. Such a voting rule protects the “minority” from the
potential tyranny of a simple “majority.” A supermajority voting rule is
particularly important for the protection of minorities in countries, like Zimbabwe,
where the democratic process is not circumscribed by a firm rule of law.

Fiscal decisions
are important. The arithmetic of the budget shows us that two new fiscal rules
would be sufficient to control the scope and scale of the government and
protect minority interests. Total outlays minus total receipts equals the
deficit, which in turn equals the increase in the total outstanding debt. Rules
that limit any two of these variables would limit the other variables. Which
two variables should be limited?

Before I answer
that question, I should remark that the goal of reducing Zimbabwe’s total
public debt to something less than 50% of GDP by 2025 is desirable and that it should
be vigorously pursued by the Zimbabwean government.

The easiest way to
answer the question about which two variables should be limited by
supermajority voting rules is to sketch an amendment to the Zimbabwean
constitution:

Section 1. The total Zimbabwean debt may increase
only by the approval of two-thirds of the members of the House of Assembly.

Section 2. Any bill to levy a new tax or increase
the rate or base of an existing tax shall become law only by approval of
two-thirds of the members of the House of Assembly.

Section 3. The above two sections of this
amendment shall be suspended in any fiscal year during which a declaration of
war is in effect.

Fiscal accountability must be established.
Since actual fiscal expenditures have little relationship to budgets in
Zimbabwe, strict rules of accountability must be imposed. If the actual
government expenditures exceed 10% of budgeted expenses in any fiscal year, the
Finance Minister and the Governor of the Reserve Bank of Zimbabwe should be
dismissed immediately. Furthermore, they should be barred from holding any
government or government-related position for life. The only exception to this
rule would be in fiscal years during which a declaration of war is in effect.

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The adoption of these three rules
would generate a significant confidence shock in Zimbabwe. And, with that, an
investment boom and prosperity would follow.

This piece was originally published on Forbes.

Source

Business

Zimbabwe

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New Fiscal Rules Will Produce Discipline And A Confidence Shock In Zimbabwe