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Government interventions to redistribute income and to improve living standards are part of a policy package, the components of which will be interdependent but not necessarily consistently integrated. Efforts to alleviate poverty in rural areas, to redistribute income, to promote agricultural development or to create jobs will be constrained by other macroeconomic and sectoral policies, and will, in turn, affect the outcomes of those policies. Furthermore, the outcomes of policies will be modified by exogenous shocks, which may themselves require action by the government to reduce their impact.

This paper is concerned primarily with fiscal policy. Other papers have concluded that the fiscal stance undermined many of the government’s development initiatives. The central economic problem facing Zimbabwe is the size of the fiscal deficit and mounting public-sector debt. Monetary policy bears the burden of adjustment, and is concerned essentially with financing the deficit in a non-inflationary way. Domestic dissaving necessitates external adjustment, achieved in the 1980s by direct controls on foreign exchange allocations and in the 1990s by large devaluations of the Zimbabwe dollar and by monetary compression. The public-sector deficit remains the primary cause of economic imbalance, undermining attempts at adjustment both without the support of the international financial institutions in the 1980s and with more foreign aid under the Economic Structural Adjustment Programme (ESAP) in the 1990s.

The questions to be answered in this paper are:

1. Why did the government consistently spend in excess of its means while, at the same time, acknowledging the need for and promising fiscal discipline?
2. Which policy variables were most responsible for the deterioration in the fiscal position?
3. How did these policy variables affect the relative size of the budget deficit, given external factors which exacerbated the internal imbalance?
4. How did the deficit affect observed outcomes? What has been the effect of the large, permanent fiscal deficit on the economy in general and on the poor more specifically?
5. What would have been the result for the real economy of greater fiscal discipline?

In the following section (Section 2) the government’s macroeconomic policy intentions are recorded. Section 3 considers the context of post-independence macroeconomic policies, in order to understand how it was that severe debt problems were allowed to develop so rapidly. Thereafter the structure and financing of public-sector expenditure is discussed, in order to assess which policy variables had most influence on the size of fiscal deficits (Section 4). Section 5 describes briefly the observed macroeconomic outcomes. The general equilibrium effects of external and fiscal-policy variables are then analysed using a real-effects computable general equilibrium model (Sections 6 and 7). Section 8 concludes, discussing the issue of public-sector deficits, economic objectives and macroeconomic stability.

Contents

1. Introduction
2. Zimbabwe’s economic policy plans
3. The context of policy-making after independence

3.1 Expectations of a dividend from the cessation of civil war
3.2 External shocks
3.3 Expectations of aid

4. Trends in central government revenue and expenditure

4.1 Trends in government expenditure
4.3 Financing the deficit

5. Economic outcomes

5.1 Trends in the growth and composition of output
5.2 Sectoral trends in employment and wages
5.3 Trends in private consumption and investment

6. The budget deficit and the economy

6.1 Introduction
6.2 The model
6.3 Changes in macroeconomic and policy variables and the relative size of the deficit
6.4 Macroeconomic effects of changes in fiscal policy variables
6.5 Conclusions

7. Public expenditure, policy objectives and economic performance
Appendix A: The Model
References

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