# **2.2.2 Fiscal Rules**

To prevent excessive spending and ensure fiscal sustainability in anticipation of the future diamond depletion, the government has, over time, set various fiscal rules, both formal and informal. First, the “Principle of Sustainable Budgeting” was introduced in 1994 with the intention of ensuring all mineral revenue to be invested productively or saved, and not used for consumption. This led to the construction of the Sustainable Budget Index (SBI), defined as the ratio of non-education, non-health recurrent expenditure to non-mining revenue. Although it is not a legal requirement, an SBI of no greater than unity is targeted in order to ensure non-investment expenditure to be financed by non-mineral revenue and conserve the country’s wealth.

Another fiscal “rule”, introduced in 2006 as part of the Mid-term Review of National Development Plan 9 (MTR NDP9), sets the maximum government expenditure at 40 percent of GDP, to be consistent with the projected medium-term government revenue. The MTR NDP9 (para. 68) also targeted increasing the share of development spending in the budget to 30 percent by 2008/09. Furthermore, under Section 20 of the Stock, Bonds and Treasury Bills Act (Chapter 56:07, 2005), the government’s total domestic debt and guarantees cannot exceed 20 percent of GDP. Similarly, the stock of government foreign debt and guarantees is limited to 20 percent of GDP.

Adherence to the fiscal rules has enjoyed mixed success. Although the SBI fell below unity immediately after its introduction in 1994/95, the effect has not been long-lasting (Figure 4); the SBI exceeded unity in 2001/02, when exceptionally high SACU revenue during 1999/00-2000/01 came to an end.<sup>9</sup> In 2003/04, however, the measures to raise domestic revenue, coupled with across the board cuts in all expenditures, resulted in a dramatic fall in the SBI. Nonetheless, some views that it was the changes in the accounting practices that contributed to the SBI’s dramatic improvement. For example, since the 2007/08 Budget, operation and maintenance (O&M) spending is explicitly included in development expenditure (Bank of Botswana, 2006). Over time Botswana’s

**Figure 4.  Botswana: Sustainable Budget Index (SBI)**

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1.2<br>Introduction of SBI<br>1.1<br>1.0<br>0.9<br>0.8<br>0.7<br>0.6<br>0.5<br>Source: Author’s calculation based on data provided by the<br>authorities.<br><!-- End of picture text -->

development expenditure has become much less of capital expenditure, comprising a mix of capital and current spending, some with no discernable end in sight.<sup>10</sup> The more recent 40 percent expenditure rule has also helped discipline overall expenditure somewhat. Yet again, in 2008/09, barely three years after the introduction, total government expenditure exceeded 40 percent of GDP albeit marginally, caused by the sharp rise in development expenditure and the negative GDP growth affected by the slump in diamond sales (see below).

> 9 SACU revenue was exceptionally high during 1999/00-2000/01 because of the rapid depreciation of the South African Rand.

> 10 Consulting fees and HIV/AIDS treatment program are accounted as development expenditure, not as recurrent spending. However, such spending is not additional investment, and categorizing it as such can distort the objective of rebalancing the budget in favor of investment spending.  Also, see MTR NDP9 (p. 8, para. 28), which says, “there is no precise correspondence between development expenditure and investment by government.”

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