By Xavier Debrun et al

Rules to contain lavish government deficits are most effective if countries design them to be simple, flexible, and enforceable in the face of changing economic circumstances.

A new analysis of the fiscal rules in over 90 countries, based on their experiences, finds that the rules put in the place over the last three decades often were too complex, overly rigid, and difficult to enforce.

Fiscal rules set the course for a government’s responsible fiscal policy. For example, a government can decide to limit its annual borrowing to 3 percent of the economy’s total income, as is the case in many European countries. Rules can help prioritize among the many demands on the budget, chart a predictable path for government policy, and keep public debt in safe territory.

The analysis shows that better-designed rules can help avoid excessive deficits, which hinder sustainable public finances. This reassures financial markets and investors, and, as a result, countries that comply with their fiscal rules can borrow more cheaply. Countries with excessive deficits and lax rules have higher borrowing costs because investors see them as more of a risk.

By demonstrating a government’s commitment to well-managed public finances, fiscal rules can create room in the budget to finance policies that promote growth, enhance the economy’s resilience to adverse shocks, and reduce excessive income inequality.

Past as prologue: lessons for rule design

Some key features have proved to enhance the rules’ effectiveness in the past:

• Broad coverage, meaning that the rule should cover most, if not all of the budget, reducing possible loopholes.
• A design that encourages countries to save money in good economic times, for instance by preventing large expenditure increases, which can absorb all revenue windfalls.
• Limits on fiscal aggregates that are based on sound economic principles. For instance, governments should not set the debt ceiling too high to foster fiscal responsibility. But the debt ceiling should not be too low either, to enable desirable policies, such as filling public infrastructure gaps or offsetting the economic impact of large shocks.
• Precise exceptions to let the budget accommodate unexpected events, like natural disasters.

Also, successful fiscal rules need political buy-in, as well as supporting institutions that enhance fiscal transparency and accountability—such as fiscal councils, which governments establish to act as public watch dogs to evaluate fiscal policy. Most European countries have, for instance, set up fiscal councils in recent years.

In the past decade, substantial reforms have led to a second-generation of rules. These are: first, more flexible, for example with new and better-defined exceptions; and second, easier to enforce, for example, by adding correction mechanisms that foresee what the government should do when they break the rule. Jamaica and Grenada have introduced correction mechanisms in 2014 and 2015.

However, we find that these innovations have made the rules more complicated to operate with no discernible impact on compliance yet.

Three principles for future reforms

To address these shortcomings, our analysis provides three principles to guide the design of new rules and the reform of old ones:

• Make sure that the package of rules is consistent, parsimonious, and guarantees debt sustainability . Fiscal rules should include both a debt rule to set the course of medium-term fiscal policy, and a small number of operational rules that guide annual budget decisions, such as an expenditure rule or a budget balance rule. Reforms should ensure that these rules are not redundant and do not send conflicting signals.
• Create incentives for better compliance with rules.We find that governments comply with their rules about half of the time. To encourage governments to follow the rules, compliance should bring more tangible benefits, and there should be stronger costs for noncompliers. Although financial sanctions are often not credible, recent efforts to raise reputation and political costs seem more promising, notably through the role of fiscal councils that monitor and expose to the public possible mismanagement of public funds.
• Allow for adequate flexibility without sacrificing simplicity too much . Rules that permit some deviations from targets in response to economic shocks, such as the budget balance rule, are often complicated and hard to implement. Expenditure rules may provide a better balance between flexibility and simplicity

The Writer works with the IMF

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By Muzamiru Kibeedi

The demand for a law to be made by government to impose a ceiling on the rent that the landlords can charge for commercial properties has been around for some time. In the last five years, it has been spearheaded by KACITA, the umbrella organization of traders in Kampala.

Part of KACITA’s demands appear to have been answered when cabinet on April 9, 2018 approved a provision in the proposed Landlord and Tenant Act, 2018 which bars a landlord from increasing rent beyond 10% per year or such other percentage as may be prescribed by the Minister responsible for Housing. Said differently, the bill, in its current form, removes fixation of rent from the open market forces and subjects it to the whims of politics and politicians as symbolized by the ‘Minister responsible for Housing’.

Experiences in rent control

Giving the Minister power to control rent is not new in Uganda. When the Military Regime of Idi Amin expelled Asians from Uganda in 1972 he gave the power to his Minister to determine the rent chargeable in respect of the Departed Asians Properties. And as expected it was below the open market rates. So, the demand for the houses shot up and could not be met by available houses on the market.

A black market for rental houses emerged. The persons with the ‘right connections’ with state power would get houses allocated to them from the Custodian Board at the controlled rent and sublet them out at commercial open market rates.

Rent control also led the properties of the departed Asians to go to waste since the rent collections made by the Departed Asians Properties Custodian Board (DAPCB) from the tenants of the properties of the departed Asians was not sufficient to meet the cost of repairs and proper maintenance of the houses. Clearly the results of rent control were negative.

Elsewhere, a study done in New York in 1997 indicated that rent controls may lead to homelessness through an increase of rents in the uncontrolled sector and decreasing vacancy rate in the controlled sector. In Bombay, India, the rent control brought the town to its knees as people lost interest in investing in the housing sector where the returns were low.

 Constitutional angle

Our Constitution guarantees all of us equal treatment. So, rent control appears to deviate from that standard. Most houses that are put on the rent market are built using moneys borrowed from banks. Rental income is a key determinant of the value of the property and its suitability to act as security for the loan given to developers to build the house.

So, why control the rent the developer will use to repay the loan at the rate of 10% while the banks that lent the developer demand interest on the loan which is much higher than 10%. Isn’t that unequal treatment of sectors which are closely intertwined?

Developers use construction materials purchased from the open market. They engage contractors and human resource to construct their houses at the open market rates. Is it fair to control only the developers’ earning from the development (rent) while letting the other players operate by open market principles?

Above all, the proposed law does not indicate that the tenants who will occupy the premises whose rent is controlled will likewise have a legal obligation to sell their goods and services at likewise controlled

prices. What is good for the goose should also be good for the gander. But clearly, the rent control measures are unfair and do not meet the constitutional standard of equal treatment of all people.

CONCLUSION

The real estate sector is very central to the health of our economy. Commercial banks and other financial institutions heavily rely on it to secure the loans they lend to their customers for development. It is one of the least risky areas a private individual can invest and make a reasonable return on the investment. And historically, it has been one of the most dependable options for those seeking for financial security especially during their old age. As such, disrupting it at the altar of political expediency is a choice the next generation will never excuse us.

The Writer is a senior lawyer.

Email: kibeedi2015@gmail.com-0752693041

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