The Government of Zimbabwe is currently engaged in efforts to raise funding to restore basic services .It is critical that these services be restored and maintained to prevent the country from falling into a totally failed state. One of the key measures of a failed state is the state’s ability to provide basic services such health care, maintain law and order and provision of other social services .The maintenance of such social services is hinged and linked to Public Finance, a subject which has not been clearly defined in the current Zimbabwean transitional phase . An analysis of the proper role of government provides a starting point for the analysis of public finance . Once Zimbabwean Public Finance is clearly define it may assist the key players on how to proceed in restoring normalcy to the Country
Public finance is a field of economics concerned with the payment for social or government activities, and with the administration and design of those activities. The field is easily simplified by divided into areas of what the government or collective organizations should do or are doing, and defining the means and ways on how to pay for the activities.
Governments normally pay for their expenditure by borrowing . In this instance borrowing is a method of distributing tax burdens through time lines rather than a replacement for taxes since the Government later repays the loans through funds raised from Taxes. A government budget deficit is the difference between government spending and government revenues. The accumulation of deficits over time is then referred to as total public debt. Whilst many Governments and Economists try to push for surplus or balanced budget ( we eat what we gather) ,Budget Deficit finance allows governments to smooth tax burdens over time, and gives governments an critical fiscal policy tool.
The use of budget deficit allows the Government to carry out its responsibilities even when the current revenues do not allow . It is important to understand that Government Finance is not structured or functions like a normal household or person. An individual person normally looks at how much income they make per year and then budget how to use that income. The Government Financing is rather the opposite of that in sequence of events. The Government first looks at its responsibilities and how much it will cost to finance those activities.
Once the expected expenditure has been compiled , the Government then looks at various ways to fund its responsibilities. This is how most governments end up spending more than what they are generating as revenue or expecting as income from various sources.
Any Public finance system is closely connected to issues of income distribution and social equity which brings national stability . Governments can reallocate income through transfer payments or by designing tax systems that treat high-income and low-income households differently.
Government financing can be achieved by income and corporate taxes, government borrowing, asset sales (privatizations), or printing and trading local currency commonly called seigniorage. All these options are available to the Government of Zimbabwe, except seignior age .Zimbabwe’s lack of its own currency immediately creates a massive funding gap since the Government lacks the power to print currency in the times of need such as the current period .
When a Government fails to pay for civil servants salaries and has to rely on donors that situation is not sustainable and will lead to instability as it becomes clear that the Government is not actually the Government .As part of Public Finance field the use of local currency is key and cornerstone of the system .When Governments are said to be financing operations through overdraft normally what they are doing is printing additional local currency to temporarily cover a funding gap with the hope to drain the excess liquidity later through various mechanisms including Open Market Operations (OMO) which are executed through the Central Bank. As such the integrity of the Central Bank is critical for any proper functioning of the Public Finance system.
Under Public Finance theories and practice the money that can be printed or injected in the financial system is predetermined by various pre-agreed formulas including using a certain percentage of expected Government revenue in the next 12 months. This allows the use of local currency printing (seigniorage) without eroding public confidence in the local currency
Since Public finance is both a name for government finance - the way governments secure and the way manage their revenues it also encompasses Public Financial Management, Expenditure Policy, and Revenue Policy and Administration of public resources. The whole system only remains credible once it is transparent and follows pre-determined rules of engagement. Any ad hoc and hap hazard changing of some of the rules will undermine the system and normally results in the Government failing to raise adequate resources due to lack of confidence and system leakages normally fuelled by corruption .
It is important to correctly have a credible and robust Public Finance system as it has a direct link to the economic multiplier effect . That is in simple terms, comparative statics calculates how much one or more endogenous variables change in the long run, given a permanent change in one or more exogenous variables . Simplified this measures how much a single dollar spent by the Government can have other spin offs and benefits in the Economy. So when the Government does not spend as much as it should it has a negative impact on the Country’s economy. In Zimbabwe’s case the failure by the Government to pay civil servants adequately has a direct impact on reducing aggregate demand in the economy as the civil servants can not afford to pay for basics. This in turn creates a stagnant economic environment due to weak demand and investment levels remain low
As a simplified illustration is if an increase in Zimbabwe Government spending by Z$1000, with no change in related taxes, causes Zimbabwean GDP to increase by Z$1500, then the spending multiplier is 1.5. Various other types of fiscal multipliers related to Public Finance expenditure can also be measured, like multipliers that describe the effects of changing income and corporate taxes. This is the basics of how Economic Stimulus packages are designed and implemented . But since Zimbabwe does not have a local currency to supplement international resources the country can not use such packages or tools .
The above assessment measures how Government activity or lack of it can impact the Economy. So when the Zimbabwe Government suspends the Zimbabwe dollar and ends up unable to pay the civil servants in the process this will have a long term negative impact on the economic recovery. The Government needs the use of seigniorage as part of the Public Finance system for it to effectively carry out its responsibilities.
Gilbert Muponda is an Entrepreneur based in Canada.
He is Founder of GMRI Capital He can be reached at;
Email: gilbert@gilbertmuponda.com . Skype ID: gilbert.Muponda
Twitter ; http://twitter.com/gmricapital
Phone: 1-416-841-5542
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