Top 10 policy interventions that can help ease budget deficit

By , K24 Digital
On Tue, 18 Jul, 2023 07:00 | 3 mins read
Treasury CS Prof. Njuguna Ndung’u, flanked by Treasury PS Chris Kiptoo and PS Planning James Muhati during the budget presentation at the National Assembly on June 15, 2023. PHOTO/National Treasury and Econominc Planning
Treasury CS Prof. Njuguna Ndung’u, flanked by Treasury PS Chris Kiptoo and PS Planning James Muhati during the budget presentation at the National Assembly on June 15, 2023. PHOTO/National Treasury and Econominc Planning(@KeTreasury)/Twitter

A budget deficit occurs when spending exceeds income. If the deficit is not paid, then it creates debt. Higher debt levels can make it more difficult to raise funds, with creditors becoming concerned about the borrower’s ability to repay the debt. When this happens, the creditors demand higher interest rates to provide a greater return on this higher risk. Below are 10 ways Kenya can narrow its fiscal deficit which currently stands at Sh1 trillion equivalent to 8.1 per cent of the gross domestic product.

Cut government spending

The government can cut its public spending to reduce the fiscal deficit. For example, in February this year, for example, the National Treasury cut development spending by Sh106.3 billion in the last financial year, with a substantial chop being spent on among others infrastructure and water sanitation.

Tax increases

Higher taxes increase revenue for the government and help to reduce the budget deficit. Like spending cuts, they could however cause lower spending, and lead to a fall in economic growth. But it depends on the timing of tax increases. In a recession, tax increases could cause a significant drop in spending. During high growth, tax increases won’t harm spending as much. It also depends on the type of tax you increase.

Economic growth

One of the best ways to reduce the budget deficit as a percentage of the Gross Domestic Product (GDP) is to promote economic growth. If the economy grows, then the government will increase tax revenue, without raising taxes. With economic growth, people pay more VAT, 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.

Pension Reform

Ageing populations are placing increasing pressure on public pension systems. To diminish the cost of these systems, governments can shrink the pool of beneficiaries either by raising the retirement age or by reducing benefits, so as to save money. Most countries are modifying their social security systems in response to demographic projections.

Health Care Reform

The same demographics forcing changes in social security are pressing for health care reform as well since the elderly need more medical care than the young. Furthermore, healthcare costs have been rising drastically. These two factors have governments looking for ways to bring down costs and to regulate the procedures doctors perform.

Creditor Confidence

Some governments, notably Italy and Canada now pay high-interest charges on their government debt because of creditor uncertainty about fiscal policies. This hearkens back to the need for governments to control inflation. These two governments have tried to improve creditor confidence by demonstrating spending restraint and low-inflation policies.

Legal measures

The United States is an example of a nation that attempted to contain deficit spending by legal means such as balanced-budget legislation and a contested constitutional amendment to eliminate deficit spending. These initiatives are controversial since they limit legislative policy options, making it difficult to change spending priorities even when the need is compelling. But experts say that legal restraints might introduce excessive rigidity in government fiscal policy.

Bailouts

In some circumstances, countries can be eligible for a bailout from an international organisation, such as the International Monetary Fund (IMF) and World Bank. This means they can draw on temporary funds to help with temporary liquidity shortages. The bailout can reassure investors and give the country more time to deal with it’s fiscal deficit. However, bailouts usually comes with strict instructions on reducing the deficit. Bailout conditions can also be highly controversial.

Default

Sometimes countries get to the stage where they can’t manage their budget deficit. Also, the fiscal consolidation has caused an economic depression. Therefore, they may be better off defaulting, but the problem with defaulting is that it destroys the savings of investors, and a country will be declared risky in the global and local markets making it difficult to borrow again from capital markets.

Changes in income tax rates

Budget deficits can also be reduced by increasing income tax rates for individuals, raising the corporate income tax rate and taxation of greenhouse gas emissions for example can be considered unique ways to deal with a fiscal deficit.

Related Topics