The most important aspect of any public sector budget is financing of the deficit. In Paragraph 50, the minister is vague on how the deficit of M1,028 million will be financed, suggesting instead that government is still to determine a strategy.
Since the choice of financing strategy can undermine the one-to-one parity of the loti to the rand, it is critical that Cabinet should have applied its mind to financing strategies before requesting Parliament to approve a budget with an incomplete financing strategy.
Annex I suggests that government will disburse net M526 million from international loans and finance the balance of M503 million by drawing down foreign currency reserves, selling bonds or borrowing from the private sector. Parliament is left to speculate how the funding shortfall will be financed.
This is not correct because Parliament must also approve the financing strategy itself. Moreover, loan disbursements always underperform the budget in line with the usual lacklustre implementation of capital projects.
This implies that government will use up more of its foreign currency reserves than this budget purports to show, and thus threaten the exchange rate peg more than this budget proposes.
Parliament must seek details of these planned loan disbursements to study very carefully before approving the financing strategy.
It is also worth finding out how government will be able to raise finance from the private sector in an environment of insecurity and poor business confidence.
Looking to the future, government will run deficits amounting to about M4,500 million in the next three fiscal years.
This is unprecedented and there is no information whatsoever how this massive funding shortfall will be financed, noting that the private sector will not always be willing to fund profligate spending plans.
The government claims that it will bring its spending under control, however as it will be shown below, government has no control over SACU flows and is losing control over the wage bill.
SACU fiscal cliff Looking at budget speeches going back to FY2000 (see www.finance. gov.ls when it works, for previous budget speeches), ministers of finance decry that SACU revenue will vanish, but without providing credible corrective policies. This is repeated in this budget as well.
Why is SACU is so important? Nearly all the collection of domestic taxesover only the wage bill with the rest of the spending (interest payments, goods and services, capital spending, social benefits, repayment of loans) financed by SACU revenue. Clearly, if SACU revenue was to be eliminated or fall to a fraction of the current amount, Lesotho would not be able to finance these other important items of spending resulting in a foreseen but not addressed fiscal crisis.
Critical SACU risks SACU revenue could disappear for two unconnected reasons:
Although SACU arrangements are over a century old, there is a forceful campaign in South Africa to eliminate payments to the smaller members and it is not clear when this could take place.
There has been speculation by analysts that South Africa could unilaterally change the structure of SACU and either reduce payments (base case) or withdraw completely (worst case scenario).
Lesotho has ratified the SADC Customs Union whose entry into force (EIF) in the future will eliminate the financial arrangements under SACU and with it the financial flows to Lesotho and other members of SACU. Thus, even if South Africa delays to abrogate the SACU agreement, the SADC Customs Union EIF will have the same revenue eliminating effect.
Can SACU be fully replaced? No. In her speech, the minister proposes two solutions, namely mobilisation of additional revenues (Paragraph 14, first and second bullets) and development of the private sector.
These are easier said than done. For one thing; predecessors have said the same, but so far without any new additional revenues — in a rudimentary and over-taxed economy, there is no room for more taxation.
Further, populist governments do not want to raise fees, penalties and charges as the minister proposes — but instead tend to delay reviews (toll road fees as an example) or reduce them (hospital user fees, school fees). Populism refers to those policies that are likely to be popular as opposed to those that are correct.
They tend to satisfy short-term and electoral and consumptive needs of majorities and politicians, but may turn out to be irresponsible in the long run.
Scrapping the grazing fee in 1993 was popular, but the resultant deterioration of the rangeland has proven far more damaging. An unpopular grazing fee would have been more beneficial years later.
Patronage is defined in dictionaries as the control of or power to make appointments to government jobs or the power to grant other political favours; the distribution of jobs and favours on a political basis, as to those who have supported one’s party or political campaign.
Thus, it is difficult to expect government to raise these fees, except if driven by a fiscal crisis. In short, the prospect of raising additional tax and non-tax revenue is nil and this speaks to the credibility of the commitment to macro-fiscal stability.
The minister also rightly places her confidence in a bourgeoning private sector to create additional jobs and expand the tax base (Paragraph 11, 7th to 9th bullets). However, in practice this is unlikely.
This government has had 19 years of governing (1993-2012), saying in each budget speech that the private sector will create jobs. With a long history of broken policy promises, it is difficult to accept that this time around it can happen.
Wage bill risk unaddressed The runaway wage bill is by far the most critical risk that Lesotho faces. Unaddressed, it will amplify the negative impact of the fall or disappearance of SACU revenue.
The minister recognises this and returns to it nine times during her speech (Paragraphs 13, 42, 43 and 80). However, she offers no policy solution at this point and in fact her proposal to increase salaries across the board by six percent only worsens rather than corrects the problem.
It is not surprising that the speech offers no policy solutions as the issue is very complex mainly because of political populism and patronage. This is also referred to in latest Government Finance Statistics classifications as compensation of employees (see Annex I).
Previous governments have kicked the can down the road and not wanted to be the first to tackle this issue. I do not expect that this government will act differently, particularly as there are more favours to repay this time around.
What’s wrong with wage bill? Increasing and uncontrolled share of expenditure and declining productivity of labour
Under global reporting standards, spending can be classified into four major blocks, namely (i) wages and salaries (W&S), (ii) goods and services (G&S), (iii) subsidies, and (iv) interest payments. W&S as a share of national output (GDP) has risen from around 14 percent in 2002/03 to nearly 22 percent today and will grow further according to this budget to nearly 25 percent of GDP.
How has this huge increase been financed? Comparing the shares of W&S and G&S in national output, the substantial rise in W&S has been at the expense of or been funded by reductions shares of goods and services and the development budget. Should we worry about this?
Of course — labour productivity or the performance of civil servants is dependent on both their personal competence and the tools given to them to work with. Reduce the volume of tools; performance collapses.
Over a long period, government has steadily ransacked the tools budget to fund wages and this underfunding is the main reason explaining the long-term decline in civil service productivity.
Worse, long-term idleness means that with each passing year, the civil service learns less and less from on-the-job training that comes with vigorous work.
There are other complicating factors. Knowledge in the Lesotho civil service is passed between generations with the next generation learning from the immediate past generation in the work place. But given gradual loss of knowledge, each generation passes less and less knowledge to the next.
In addition, senior managers (ministers and principal secretaries) are usually not proficient in the technical discipline of the ministry and must depend on the same civil servants who are gradually losing competence.
To illustrate, the public service is increasingly employing consultants to get work done; the best knowledge of Lesotho public financial management is found amongst retirees.
Wage bill reform difficult Populism, patronage and the fragile politics of coalition governments make it extremely difficult to implement wage bill reform. Leaders fear to implement wage freezes and cuts and the lack of required skills to undertake wage bill management has not only undermined reforms, but actually made the problem worse with each passing year.
Today’s wage bill of 23.5 percent of GDP (Annex II), possibly the highest in the world and certainly in Africa, has risen from 14 percent of GDP in FY2002/03, which government already recognised as dangerously too high.
It is pleasing to note that the minister intends to engage the World Bank Group to mobilise the knowledge necessary to undertake reform. However, the ministry will find that the World Bank is sceptical because it (along with other partners) has been involved in Lesotho’s civil service reform on and off since 1996, with no meaningful progress to speak of.
The reluctance by government to reform the wage bill is also exacerbated by a collapse of controls relating to hiring and paying of civil servants. The following are some of the irregularities relating to wage bill mismanagement:
Some ministries (particularly the Ministry of Local Government in recent history) hire staff quietly and pay them illegally through the goods and services budget and later present the unauthorised hires as fait accompli employees of government. This type of surreptitious hiring could worsen under the multi-party coalition government as each party positions itself for elections.
Continued next week . . .
Dr Majoro was the Development Planning minister in the previous government.
Minister of Finance Mamphono Khaketla.