Whatever the government unveils in next year’s budget, policy makers should produce an economic blueprint that balances realism with ambition.
By Khalid W. Wazani
The government is due to unveil the details of its 2016 budget next month. The experience of the last three budgets proved that artificial and unrealistic assumptions result in unachievable budget outcomes; especially when it comes to budget deficit. This year’s budget, for example, was built on four main assumptions: oil prices of $100 per barrel; a real growth rate of 4 percent; a 2.8 percent inflation rate; and a 3.8 percent growth in exports.
Many experts and economists argued that these were unrealistic assumptions, starting with the fact that oil prices at the time were well below $60. Nevertheless, the government insisted that budgets have to be built on conservative scenarios and it isn’t advisable to revise the assumptions. I shouldn’t argue here that conservatism should be a rational exercise when a policy maker forms their forecasts, with a maximum of 10 percent margin of error upwards or downwards, but never 40 or 45 percent.
Going back to the 2016 budget, policy makers must focus on three issues. First, budget assumptions have to be built after proper consultation with experts and framed in the context of what’s happening in the world and regional economies. This means that a real growth rate can‘t be expected to exceed 3.5 percent; inflation will likely not pass 2 percent; oil prices aren’t expected to go beyond $60; and finally exports growth isn’t expected to be much better than the 2015 growth rate.
Secondly, building on those assumptions, electricity prices shouldn’t increase by the 15 percent which the government claimed it’s committed to under the IMF agreement. Rather, they should remain flat or even drop during 2016. This by itself would save an amount of more than JD350 million from last year’s deficit. In addition, the liquid gas subsidy should be fully omitted from the current expenditures, which should save another JD180 million. And given the stagnation on food staple prices worldwide, subsidies foe these products should be at least 10 percent less than last year. This is another saving of almost JD25 million. The overall result is a reduction of more than half a billion dinars.
Then there’s the third and final issue regarding next year’s budget and fiscal policy. In his 2012 book End This Depression Now!, Nobel Prize-winning economist Paul Krugman pointed out that government spending is people and corporate income, and people and corporate spending is government income. “Your spending is my income, and my spending is your income,” he wrote. I must also urge our government to find a way to spend some of these savings on moving the economy forward. This spending will go to the individuals and businesses that will in turn spend their income in the economy and pay more taxes.
If the government wants to move the economy forward it has to stop thinking as a tax department, but rather as a business enabler and an investment promoter. After all, the more businesses and individuals spend in any economy the more income the government will receive. It takes real policy makers to grasp this, though.