By Prof. William Baah-Boateng
Fiscal mismanagement culminating in chronic fiscal deficit is at the heart of macroeconomic challenges of a country.
Over the past three decades, Ghana has consistently recorded fiscal deficit (excess government spending over revenue), particularly in election years.
Since 1992 when a general election was held to usher in the 4th Republic in January 1993, Ghana has consistently overrun its budget except for 1994 and 1995 when the country managed to record positive fiscal imbalance.
Generally, fiscal deficit worsens in election years ranging between 3.2% of GDP in 2004 and 12.1% in 2012.
Source: Computed from the Fiscal Data of the Ministry of Finance.
Essentially, fiscal deficit is not bad in itself but how the deficit comes about, and the strategy adopted to finance it, are the key concerns.
The bane of Ghana’s fiscal management is the inability or failure of fiscal managers to spend within the revenue constraint. Evidently, between 2008 and 2023, the gap between total expenditure and revenue has consistently widened.
Of course, persistent revenue shortfall against profligate and unproductive expenditure ultimately results in chronic fiscal deficit.
Source: Computed from the Fiscal Data of the Ministry of Finance.
Flawed implementation of tax measures partly as a results of weak tax administration, high incidence of revenue leakages, abuse of tax exemption measures, imposition of numerous taxes amid a number of fees, levies and charges, as well as misunderstanding and erroneous measure of the tax base are key identifiable factors explaining revenue challenges in Ghana. Interestingly, in the face of revenue challenges, the Ghana Revenue Authority has consistently met and in most cases claimed to have exceeded its revenue targets, causing analysts to question the model that the Authority employs in setting its revenue targets.
At the same time, efforts, if any to effectively manage expenditure is hampered by procurement irregularities, leakages and corrupt execution of unproductive and unplanned projects most of which tend to be abandoned midstream.
Excessive expenditure gets exacerbated every election year of the four-year cycle when government in its quest to win favour from the electorate and improve its election fortunes, initiates and executes new projects and speeds up completion of existing ones.
Public sector workers find it convenient to ask for their pound of flesh in the form of demands for salary increase during election years, which government finds difficult to contest and resist.
In effect, expenditure gets bloated and, coupled with low revenue generation efforts, lands the country into fiscal deficit with its attendant macroeconomic consequences.
Essentially, fiscal deficit is financed through borrowing from the domestic credit market, external creditors or central bank financing, each of which has implications for the overall economy. While central bank financing could be inflationary, domestic and external borrowing have a worsening effect on the domestic and external debt position of the country.
Simply put, it increases the country’s domestic and foreign debts without easing its ability to service them.
Between 1976 and 1980, central bank financing within a fixed exchange rate framework resulted in chronically high inflation reaching 116% in 1977, and an overvalued domestic currency.
In a liberalised exchange rate regime, which Ghana is currently pursuing, printing of money to finance monetary financing of fiscal deficit does not only cause rising inflation but also exerts pressure on the exchange rate and thus depreciation of the cedi. In other words, it leads to an increase in the rate at which prices of goods in the domestic market rise, while the value of the local currency falls against the major international currencies such as the US dollar.
On the other hand, resorting to domestic borrowing crowds out or deprives the private sector of loanable funds because private businesses are unable to compete for lending and struggle to pay off what they have borrowed because of the increase in the interest rate.
This leads to accumulation of domestic debt while external borrowing, particularly from the international capital market, draws the country into external debt challenge.
The subsequent debt financing including amortisation and interest payments exerts further pressure on the country’s fiscal imbalance …. and the cycle continues.
Over the last one-and-half decades, Ghana’s debt servicing, in terms of interest payments, rose from 8.5% of total expenditure to 31.2% between 2008 and 2022.
Similarly, interest payments as a percentage of tax revenue also rose significantly from 15.8% to 60.5% over the same period. Thus as of 2022, total tax revenue was not sufficient to cover compensation which primarily comprises public sector wages, salaries and social security emoluments; and interest payments, such that the two expenditure items constituted 113% of tax revenue.
The country’s decision to seek an IMF bailout was not surprising as the government in 2023 had no other option, and this culminated in the infamous debt exchange programme as the country struggled to finance its debts.
Source: Computed from the Fiscal Data of the Ministry of Finance.
With a new administration taking charge of Ghana’s affairs, the country would have to brace itself for the task.
The government should not be oblivious of the challenges ahead. Indeed, at the heart of confronting the current economic challenges, particularly at the macroeconomic level, is prudent fiscal management.
Fiscal consolidation- that is, reducing fiscal deficit and the accumulation of debt – is critical for macroeconomic stability for sustainable growth and economic development.
The starting point is for fiscal managers to strive towards achieving primary fiscal surplus (i.e. excess government revenue over government non-interest expenditure) to contain the country’s fiscal challenge.
This requires expenditure control and efficient revenue mobilisation, starting with the resetting of the expenditure side of the fiscal equation, particularly the procurement system, which has been characterised by overpricing of public projects. Essentially, efficient procurement practices that promote value for money is one major way of blocking expenditure leakages in the public finance system.
Another area that calls for policy attention is the effective and efficient management and control of public sector compensation through adoption of technology and digitalisation to clean up and prevent irregularities such as “ghost” names and any repetition of the “double salary saga” on the government payroll.
National ID Card
The National Identification Card should be a major tool in weeding out graft and blocking leakages in the public sector payroll system.
The government should also take a serious look at monetising non-pecuniary benefits of public sector workers that exerts undue pressure on public expenditure.
The provision and maintenance of vehicles, accommodation and other related non-monetary benefits if monetised, as the case in Rwanda (where government does not provide official vehicles for public sector workers except the President Vice-President, Speaker of Parliament and Chief Justice), could ease the fiscal pressure.
Over the next year or two years, the new government will be confronted with the resumption of the servicing of its external debts, which would exert pressure on the fiscal stance and the exchange rate.
At the same time, pressure from citizens in terms of provision of public projects and amenities will be enormous.
This makes it imperative for the new government not to abandon uncompleted public projects started by its predecessors, by taking stock of existing projects and mapping out strategies to complete them.
Private sector participation
Additionally, private sector participation in the provision of public projects, such as road and railways, would provide fiscal space and ease the debt service pressure.
On the revenue side, reforming the tax administration and rationalizing taxes, levies, fees and charges, should be the priority on the list of urgent measures to improve the generation of revenues for the government.
Undoubtedly, the tax system, particularly VAT with its associated health, education and COVID-19 recovery levies and its computation have become too complex, giving room for tax evasion and avoidance by tax-payers.
This makes it imperative for the tax system and numerous tax handles to be realigned and rationalised for effective tax administration and improved revenue generation.
These measures should have inbuilt strategies to block revenue leakages.
Revenue targets
A review of the Tax Authority’s model of setting revenue targets annually would also be necessary to ensure realistic revenue targets to boost revenue generation.
With the coming into force of the Exemptions Act, 2022 (Act 1,083), it is expected that applications for tax exemption will address revenue leakages through the granting of tax exemptions.
Essentially, fiscal consolidation should be the guiding objective of the new government towards macroeconomic stability and inclusive economic growth and prosperity.
The fiscal arm of the economy invariably constitutes the heartbeat or the engine room of economic management and thus if economic managers get the fiscal right, all other sectors of the economy would fall in place.
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The writer is the Director and Senior Fellow of the African Centre for Advanced Studies (ACAS)
