Fiscal Discipline and Fiscal Council, More Borrowing or Less Expenditure? - ILAPI

The striving for macroeconomic stability to fostering consistent economic growth and development has been the major anteriority of this current New Patriotic party (NPP) government.  Massive recall can be made from the various macroeconomic variables projection since its maiden budget in march 2017 “Asempa budget”, and subsequent 2018 “Adwuma budget” and 2019 “Mpotuo budget”.  Indeed, fiscal consolidation has been the practice and pronouncement of this government.  The consistent drive to reducing budget deficit but within a medium term range not exceeding 5% of GDP, debt to GDP ratio, end of year inflation rate, currency depreciation and interest rate. Glancing through previous year’s budget, the end of year inflation rate for 2016 was 15.4% while the NPP government targeted 11.2% end of year inflation for 2017, deficit of 8.7% of GDP in 2016 as against an overall fiscal deficit of 6.5% of GDP in 2017 and last but least, debt to GDP of 73% in 2016 compared to 70.9% of GDP in 2017.

Again, the government through its efforts and zeal, forecasted in 2018 budget to achieve an end of year inflation rate of 8.9% representing 20.5% reduction in 2017 target, fiscal deficit of 3.7% of GDP and debt to GDP as at sept 2018 was 57.2% but this was expected to increase by the end of the year 2018 because of bailout of seven local banks which were either resolved or consolidated. The 2019 budget projected an end of year inflation rate of 8% and budget deficit of 4.2% of GDP.

 Practically, projections become achievable when strategies, policies, programmes and monitoring mechanisms are instituted. This drive towards the accomplishment of stable macroeconomic variables has necessitated the formation of Fiscal Council in Ghana.  Ghana then per historic records becomes the only country in sub-Sharan Africa to establish a Fiscal council.

The vice-president remarked about the fiscal council and said, the fiscal council would develop and recommend policies for the maintenance of prudent and sustainable levels of public debt, ensuring that fiscal balance is maintained at a sustainable level and fiscal risks managed in a prudent manner. He added, the fiscal council will also monitor the performance of the government budget with regard to compliance with fiscal rules and targets.

This is an unclutter evidence to the world at large by the government of Ghana, exhibiting the willingness to be fiscally disciplined.

However, the question is, how is the independency of the fiscal council preserved to perform?  The current dispensation in Ghana where everything is politicized among the political parties, whether good or bad, make the works of the fiscal council threatened.

To some extent, the government and its institutions may override budget expenditure compliance especially during the period of pre-election, because winning political power in Ghana is more prioritized and must-win affairs than building strong institutions. What would be the preferential stand of government; to be fiscally disciplined consistently at every period or be allowed to overspend and blot expenditure in the bid of winning elections?  How prepared is the government to avoiding these excess expenditures emanating from election demands which triple to worsen macroeconomic variables at post-election vis-à-vis establishing fiscal council?

Again, on the issue of public debt management versus the directives of the fiscal council, the easy attempt by government to rebasing GDP to give capacity for borrowing might affect the independency of the fiscal council. Would the fiscal council advise on public debts management suffice in the face of government borrowing for some irrationalized projects?

The appropriate litmus paper to test the government on these questions is how the independency of fiscal council is preserved and respected by the government and its institutions.

Moreover, over the past decade Ghana had experienced consistently budget deficit for administering ten (10) regions, and this is anticipated to worsen in the future if the additionally created regions are formally adored. This means all things being equal, the government attempt of maintaining the fiscal deficit in the medium term range of at least 5% of GDP would be discomfited and be reassessed upward. Indeed, if the independency of the fiscal council is preserved and respected by a government wanting to be disciplined, then a more stringent measures and policies are expected from the council to deny the government of huge budget deficit since the tendency of over expenditure would be high.

 Lastly, prior to the setting up of fiscal council, one of the fiscal challenges encountered repeatedly is the low tax revenue as a proportion to GDP. A survey conducted by KPMG indicated a higher government expenditure but low tax revenue due to the complexity of Ghana tax laws (KPMG 2019, budget survey). It is rather amazing in Ghana tax payers are threatened to honor tax obligations without proper tax education. The faith of taxpayers is always at the mercy of tax officials to demystify the complexity of the tax laws and in the end take undue advantage over taxpayers.

For government to still achieve the best fiscal consolidation, domestic tax revenue mobilization must be improved. The fiscal council must assist in the improvement of domestic tax revenue collection especially areas governments in the past have neglected such as the rental tax, rent currently is the hottest commodity patronized every day in Ghana. The tax law only mandates persons or corporate organizations to withhold rental tax on rent but loosely for individuals in this same subject.

 

 

Author,

Isaac Annan K. Yalley

Monetary Economist at ILAPI and a financial Auditor by profession

He regularly analyze government policies in the media in Ghana.

Source: ILAPI