Ever so often, we turn to forget that, the goal of government economic policy is to provide economic growth, full employment and stable prices rather than being obsessed with deficit number (say 3%) as an end in itself. Most often, we also, misunderstand that, deficit may be good or bad depending on the state of the economy, so we cannot have a fixed rule or restrain government deficit number irrespective of whether we have a weak or strong economy. Sometimes a higher deficit may be unavoidable, good and constructive to ensure that the economy is performing at its potential output level; to close spending gap to achieve full employment; and to increase discretionary public spending to advance public purpose in order to stimulate private investment. Large deficit spending, on the other hand, can also be very dangerous and damaging when the economy’s output is expanding strongly, nearing full production and full capacity. Under such a situation, too much government spending will generate competition over resources, bottle-necks, and even excessive aggregate demand, all of which can generate inflation, hence Paul Samuelson’s fairy tales about balance budget myth to scare politicians from overspending.
However, looking at current macro economic realities, the target to reduce budget deficit to 3% will weaken the domestic private sector balance sheet. By accounting identity, any government deficit reduction plan will cut the non-government domestic private sector surpluses by that same percentage. Such a move would be a threat to domestic corporate profits and can become dysfunctional especially when millions remain jobless; the private sector debt will soar up and weaken the financial system; widespread fall in income will lead to high poverty rates, income inequality will widen the gap between the rich and the poor. This old-time deficit religion and myth in budget balance makes it impossible to spend on the necessary scale to get access to good health care and quality education, and improve deteriorating infrastructure. In fact, mass unemployment, widespread fall of income, increased or above normal insolvencies, massive private debt overhang, companies folding up and falling GNP, are all indications that deficit is too low or there is fiscal austerity.
Daily media commentaries call on the government to be fiscally responsible (deficit reduction), to balance its budgets, live within its means, and also warn government about rising domestic debt, but doing that is actually the height of fiscal irresponsibility since it is prohibitively costly when idle resources are wasted and the economy performs below capacity. It is similar to a parent who wants to save, so he stops buying food for his family, stops paying his children’s school fees and refuses to seek medical care for his sick children. This “fiscal responsibility concept” becomes economically irresponsible when Ghana is operating below full employment capacity, because fiscal responsibility results in most of the increasing economic misery and growing idleness, damaging and wasting skills, competencies, and knowledge of our unemployed graduates who want to work. This bad policy outcome of fiscal responsibility is the cause of decrease in real national wealth compared to what could have been created(huge output gap); slowed economic recovery which results in economic inequality that many Ghanaians have endured for years. Again, following deficit reduction plan in isolation is dysfunctional especially when Ghana is experiencing a trade deficit, when private investment in production areas is weak; and when both labor and capital are deteriorating, thereby undermining and reducing the productive capacity of the economy. Therefore, any government that pursue this fiscal rule in the current economic climate described would further undermine growth and denying the private domestic sector the income support, which is essential to reduce its massive debt burden.
In conclusion, the fiscal responsible thing to do is for the government to significantly invest in building Real Assets and productive capacity of the economy, and advancing Public Purpose for the general well-being of the people. Government should balance the whole economy not the budget alone, targeting Real impacts, Real benefits, and Real results that fulfill the needs of Real people. This has nothing to do with a measure such as debt-to-GDP ratio at the expense of the actual well-being of the people. While pursuing these goals, government must effectively manage the cedi to ensure that inflation does not get out of control.The only real crisis is a crisis of a failing economy, mass unemployment, widespread falling in incomes, and growing economic inequality.
Author: Kwame Ofori Asomaning
