Economic growth is the best way to reduce the budget deficit - Likukela
WINDHOEK - One of the best ways to reduce the national budget deficit as a percentage of GDP is to promote economic growth. This is according local economist, Mally Likukela, who notes that if the economy grows then the government will increase tax revenue without raising taxes.
“With economic growth, people pay more VAT (Value Added Tax), companies pay more corporation tax (tax on profits), and workers pay more income tax. High economic growth is the least painful way to reduce the budget deficit because you don’t need to raise tax rates or cut spending,” said Likukela in response to questions from New Era. He explained that as the country’s debt-to-GDP ratio increases, debt holders will begin to demand larger interest payments because they want compensation for an increased risk that they won’t be repaid in full or on time. Diminished demand for Namibian debt instruments would also further increase interest rates, which Likukela warned would slow the economy tremendously as a result of what is called ‘the crowding-out effect’.
“Erratic and uneven debt repayments can undermine a long-term development strategy of a country. Large debt service payments impose a number of constraints on a country’s growth prospect. It drains a country’s limited resources and curtails financial resources for domestic developmental needs,” he clarified.
“Large debt servicing obligations and debt burdens can depress investment, and hence economic growth through its illiquidity and disincentive effects. The illiquidity effect can result from the fact that there are only limited resources to be divided among consumption, investment and external transfers to service existing debt. The disincentive can arise because expectations of future tax burdens, which tend to discourage current private investment. This is so because new investors are reluctant to resume activity for the fear that they will soon share in defaults with creditors on old debt.”
However, Likukela emphasised that Namibia faces multiple challenges that keeps it stuck in a recession and therefore makes it difficult for the country to rebound from the recession. Amongst the reasons Likukela mentioned, the main factor he said constraining growth is the nature of monetary policy and the constraints of the Common Monetary Area (CMA), which he says hinders Namibia in using its monetary policy to complement the fiscal policy. Another underlying factor, he noted, is the structural deficit, which he said is a persistent characteristic of the Namibian economy, and this, he said, may still require spending cuts or tax rises.
“At this rate of debt accumulation, Namibia will soon be left with no option but to seek bailout from an international organisation, such as the IMF (International Monetary Fund). This means drawing on temporary funds to help with temporary liquidity shortages. In the midst of hovering ratings agencies, the bailout may reassure investors and give the country more time for dealing with the deficit,” said Likukela.
He added that although a bailout usually comes with strict instructions on reducing the deficit, this may be easier politically when it is enforced from the outside.
“Namibia is not yet a severely indebted country, so a bailout can still be sufficient to deal with the underlying level of debt. Also, bailout conditions can still be less strict. Getting rich nations to forgive your debts or hand you cash is a strategy that has been employed more than a few times. Many nations in Africa have been the beneficiaries of debt forgiveness and, unfortunately, even this strategy has its faults so government must tread carefully,” Likukela advised.
He continued that Namibia is by no means asset poor as large parts of the country’s wealth is locked up in various assets such as state-owned enterprises (SOEs).
“Governments can sell some of these assets to alleviate liquidity constraints and finance its expenditure. Asset sales include whole or partial privatisation of some SOEs and the sale of government property remains a viable option for Namibia. Although asset sales create a ‘once-off’ impact on the budget, the sales may also result in the loss of government revenue in future years, so government needs to choose wisely,” he cautioned.
Likukela further warned that Namibia is already on a dangerous budget path, hence the government’s emphasis on fiscal consolidation. He noted that current spending and debt (45 percent of GDP, which is above government ceiling of 35 percent of GDP) are dangerously high and said future spending and debt are on track to rise even higher in large part due to increasing social sector spending that is aimed at eradicating poverty and inequality as well as the weak local currency.
“High public debt, if left unchecked, could be detrimental to the sovereign credit profile; it could also crowd out private investments, and raise inflation. The implications would be severe and pronounced for all Namibians, but most especially for the poor, the elderly, and the middle class,” he warned.
Likukela raised a red flag, saying that even more concerning is the slower economic growth and weaker job markets that could potentially result from high debts and costs of servicing.
“If the cost of debt servicing rises, a greater portion of the government’s budget will go toward interest payments, leaving fewer dollars for other, more economically stimulating types of spending, such as building roads or providing tax incentives for small businesses,” Likukela
2019-03-05 10:06:41 2 months ago