Moving away from economic models, what is it that most developing economies suffer from? There is a general outcry over high taxes being levied which begs the question why? Well, taxes go up as the government looks for revenue to pay for its operations or finance its fiscal policy. This becomes an issue since there are governments that spend more than they collect in revenue. They, therefore, have to borrow to cover their expenses. Over time, this increase in borrowing needs to be paid back. This can be done in two ways if the application of the funds did not have an impact on the economy in terms of growth; more borrowing or increasing taxes.
For the next two weeks, we will look at budget deficits and trade deficits. We will start with a budget deficit. A budget deficit is a situation where a government spends more than it collects in taxes. A government budgeting cycle is inverse to that of a normal corporation or an individual in that the expenses come first followed by finding money to fund the expenses. In a normal situation, a person looks at what they have and then plans their expenses accordingly.
Whenever a government spends more than it will collect, the gap between revenues and expenses has to be bridged. This is normally done through debt.
From the above graph, the average budget deficit for Sub-Saharan Africa countries has been around 4% and worsened during the covid pandemic. At first glance, one might think this is all good. However, the problem is that using GDP as the denominator is prone to manipulation as an adjustment to the figure would make it look like you are living within your means.
Since GDP is not equivalent to revenue, the value to focus on should be the gap between actual revenue and expenditure. On average in Africa, revenue is only about 25% of GDP, further showing that GDP is not a proxy for revenue.
Let us take Kenya for example:
Whilst Kenya has had a budget deficit to GDP that averaged 8% in the first term of the current government, the real elephant in the room is that, on average, Kenya’s expenditure is 35% higher than the revenue it collects as shown below.
What does this mean? Well, it means that every year, Kenya has had to borrow an additional 40% of the budget value to meet its expenditure for the last 6 years. This totals to KES 4 trillion and effectively puts the country in a vicious debt trap as the government has to keep borrowing to survive.
While one might say the government will pay it back, the problem is that in as much as revenue has been increasing in absolute terms – and not necessarily in real terms – a majority of it goes to offset the budget deficit. Simply put, the government is mortgaging future revenues, which means mortgaging future development. The dangers of budget deficit include: Increase in national debt, higher debt interest payments, future tax rising and spending cuts, crowing out of the private sector and inflation.
How does the future of your country look like? Don’t be fooled by the deficit to GDP values. Look at your country’s revenue versus expenditure numbers.