Fiscal prudence

By Dr. Brian Francis

By Dr. Brian Francis

As often as possible, we are told that governments are elected to serve the best interest of people and countries and that our politicians ought to be seen not as our masters but as servants of the people. But how exactly should this broad vision be executed? How has it been executed?

Anyone following political and economic developments throughout the world over the past few decades would be left with little choice but to conclude that generally our politicians tend to over-reach not only in terms of the things they promise to win control of governments following a general election but also in relation to the policies, programmes and plans they actually implement while in office. It is generally within this context that financial and economic troubles begin for most countries.

You see, the roles of governments vary from country to country depending on several factors including political and economic philosophies, the level of resource endowments, the size of the local population and market, the type of institutions in place to foster growth and development, and the strength of the private sector.

Irrespective of how one sees the functions of governments, it is clear that fiscal matters are usually among the top priorities. In short, governments can only fulfill their mandates (undertake extensive spending) if appropriate levels of taxes are collected. It is for this reason that fiscal prudence ought to be the guiding principles in everything that governments do. Why?

One conceptualisation of the term suggests that fiscal prudence refers to “whether a country’s fiscal policies are appropriate to support economic growth and achieve other social objectives without causing a fiscal crisis. The focus is on the fiscal stance within the control of the government – usually proxied by the primary fiscal balance (that is, the fiscal balance net of interest payments).”

In a nutshell, therefore, fiscal prudence dictates that governments ought to generate a surplus on their current account by simply ensuring that current expenditures never exceed current revenues. In rare cases, a small deficit can suffice.

As simple as this may appear, a quick glance at the fiscal accounts of several countries around the world (large as well as small economies, wealthy as well as poor countries) tells quite the opposite story.

Given the far-reaching negative effects that poor fiscal policies can have on economic growth and development and the accumulation of public debt, it is virtually inconceivable to conclude that a government that does not adhere to fiscal prudence is serious about looking after the needs of people and country and indeed putting those needs first.

Yet, most of the governments that continue to run huge deficits on their current accounts as a result of increasing the rate of growth of public expenditure will argue that such behaviour is consistent with looking after the needs of the society, especially those of the most vulnerable among us.

And that is typically how the broad vision of putting people and country first has been executed.

Hence, rather than serving the best interest of people and country though wise decision making, particularly on the fiscal side (precisely how the vision should be executed); many governments resort to massive increases in public services – a phenomenon that results in excessive growth in current expenditure in circumstances where there is little scope for raising current revenue.

The net effects of such actions are debt accumulation and the choking off of economic growth and development. And so the downward economic spiral continues!

(Dr. Brian Francis, the former Permanent Secretary in the local Ministry of Finance, is a Senior Lecturer in the Department of Economics at the Cave Hill Campus in Bridgetown, Barbados of the University of the West Indies)

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