November 22

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DAILY HERITAGE THURSDAY NOVEMBER 22, 2018 11
Politics
Do not mind anything that anyone tells you about
anyone else. Judge everyone and everything for
yourself —Henry James
2019 budget commendable
• Continued from page 3
We note that just as it happened in 2017
and 2018, total revenue and grants has once
again been over-projected, high above what
can possibly be collected, resulting in a
small but artificial difference between total
revenue and grants and total government
expenditure. In 2019, the government has
projected to increase total revenue and
grants by as much as GH₵12.1 billion,
compared with increases of GH₵7.5 billion
in 2017 and GH₵7.1 billion in 2018.
Thus, while government was able to increase
total revenue and grants by a total of
GH₵14.6 billion in both 2017 and 2018, it
has projected to increase total revenue and
grants by GH₵12.1 billion in 2019 alone.
Again, in 2018, nominal GDP growth was
16.3% and revenue growth was 17.9%.
However, in 2019, despite the projected fall
in nominal GDP growth to 15.3%, revenue
growth has been projected at 25.8%. Given
this obviously over-optimistic projection, it
is hard to see the revenue increase in 2019
being realized. After all, the government
has proposed to implement similar revenue
enhancing measures in 2019 as it did in the
past two years.
It is important to point out that fiscal
expansion has been a common characteristic
of the country’s fiscal policy whenever
the country leaves an IMF program, which
has normally led to high fiscal deficits and
macroeconomic instability. The IFS therefore
cautions government that it has to be
careful not to derail the fiscal gains made in
the past two years, since the consequences
could be unpalatable. In this regard, the IFS
recommends that in 2019 the government
should continue to pursue the expenditure
policy it pursued in 2017 and 2018, i.e.
aligning expenditures with actual revenue
collections, so as to avoid fiscal
overruns.We have more to say below on
what the policy direction should be post-
IMF program.
Domestic Revenue Mobilization
IFS made domestic revenue mobilization
one of the key points in its pre-budget
statement. It has to be said that revenue
performance has been generally disappointing
in the past few years, with actual collections
consistently falling short of targets.
Indeed, Ghana’s tax effort leaves a lot to be
desired. The tax/GDP ratio was 11.3% in
2016, 11.9% in 2017 and is projected to be
12.6% in 2018. These ratios are significantly
below the potential of the country as well
as the average ratio of about 25% for low
middle-income-country peers. IFS has written
and spoken extensively on the revenue
quagmire, citing a number of reasons, including:
the near-exclusion of the informal
sector from the tax net, high level of exemptions,
pervasive evasion, overly-generous
incentives offered to the extractives and
free-zones companies, under-taxation of
real properties, illicit financial flows, and
other fraud and corruption. The Institute
has stressed the need to address these
lapses in the context of a comprehensive
strategy involving reforms in policies, systems,
administration and enforcement.
The Institute is pleased to note that
measures are being taken in the 2019
budget in several of the areas it has been
drawing attention to. The Institute particularly
recognises and welcomes the following
proposed measures:
Major institutional reforms within GRA
to make it more effective and efficient and
plug sources of irregularities and revenue
leakages;
Intensified tax compliance, including by
checking import undervaluation, avoidance
of tax payment on warehoused goods, nonissuance
of VAT receipts and other irregularities;
Using legal actions to retrieve overdue
tax liabilities;
Accelerated automation of tax administration
systems;
Engaging more creative strategies and
new approaches to broaden the tax net to
rope in individuals and businesses that continue
to operate outside the net;
Using TIN to get more persons
and businesses on the tax radar;
Increased formalization
through the National Identification
Scheme database
as a tax
administration tool;
and
Government
partnering with,
and resourcing,
MMDAs to enhance
local-level
revenue mobilization,
including
in the area
of property registration
and valuation.
IFS is also
pleased to note the
Minister’s expressed
displeasure with the
growing incidence and
magnitude of tax exemptions,
which the Institute has
continually drawn attention to. As
the Minister acknowledged, the exemptions
are subject to gross abuse and irregularities.
The decision to draft a policy to be
passed into law to regularize the exemptions
is, therefore, a step in the right direction
and should be fast-tracked.
Another area that IFS has focused on
extensively is the under-taxation of the
mining sector as a result of the overly-generous
rebates offered to mining companies
in the original agreements signed with
them. The Institute has called for a review
of these agreements to bring taxes paid by
the companies in line with the current high
profits being generated in the industry and
with international standards and practices.
Here, the Minister only indicated the intention
to aggressively enforce existing legislations
and regulations to improve tax
compliance, as well as plans to capitalize the
exemptions granted them into additional
government equity in the concessions.
While these steps are welcome, they still fall
short of what IFS has been calling for, viz.
a complete overhaul of the existing agreements.
It is noted that in light of the aforementioned
and other initiatives to boost
taxes, the tax/GDP ratio for 2019 is projected
to be 13.1%, which is 0.5 percentage
points above the projected 2018 figure of
12.6%. The 2019 ratio is still nowhere near
Ghana’s potential or that of its peers. Even
more disappointing is the fact that over the
medium term, the tax/GDP ratio is projected
to rise marginally to only 13.3% in
2020 and then thereafter retrogress to
12.9% in 2021 and further to 11.9% in
2022.These figures suggest that Ghana is
still not getting it right when it comes to tax
collection and that more innovative measures
are needed to further scale-up the effort
in that regard. Without sustained effort
to this end, not only will long-term fiscal
sustainability be elusive, but also economic
growth will be seriously compromised while
the vision of “Ghana beyond aid” will remain
a dream.
Expenditure Control and Rationalization
IFS has continuously pointed to the importance
of ensuring that we spend whatever
revenue we collect prudently and
efficiently so as to maximize the benefits to
the Ghanaian people and promote national
development. The
Institute
has
• Ken Ofori-Atta,
Minister of Finance
articulated
extensively
the presence of rigidities—in the
form of earmarked funds, wages and debt
service—that virtually hold the budget
hostage and leave little or no fiscal space to
address critical development and social outlays.
With this limited fiscal space, the Institute
stressed in its pre-budget press
conference the overriding need to restrict
consumption spending, including relating to
travel, entertainment, subsidies, free allowances,
etc. The Institute further suggested
that public sector reforms that had
been long delayed should be carried out as
a matter of priority. The reforms should include
right-sizing of the sector to reduce
what is obviously an over-bloated pay roll,
plagued by, among others, large numbers of
ghost names and other irregularities. The
Institute also called for reexamination of
some of Government’s policy initiatives, especially
the consumption-based ones, such
as nursing trainee allowances, teacher
trainee allowances and some components
of the FSHS policy, with the aim of
streamlining them so as to reduce costs
while exploring other non-Government
funding options.
It was the Institute’s expectation that
the 2019 budget would entail a serious
strategy of expenditure rebalancing in favor
of productive capital spending to enhance
long-term growth. In the budget, CAPEX
is projected to be 2.5% of GDP. However,
while this is up on the figure of 1.8% for
2018, it is the same as the figure of 2.5%
for 2017 and less than 3.6% for 2016. It has
to be recognized here that the CAPEX line
in the budget does not include grants to
other Government units for capital projects.
Thus, total capital expenditure will be
higher (it comes to some 4.1% in 2019). Yet
still, we can also look at major expenditure
lines in the budget that fall under recurrent
expenditure to compare with CAPEX. For
example, wages/GDP for 2019 is 5.6% of
GDP, compared with 5.9% for 2018,5.6%
for 2017 and 5.6% for 2016. Goods & services
for 2019 is 1.8% compared with 1.5%
for 2018, 1.0% for 2017 and 1.5% for 2016.
Interest payment is 5.4% for 2019 compared
with 5.0% for 2018, 5.3% for 2017
and 5.4% for 2016. Clearly, these individual
recurrent expenditure items as well as their
total (12.5% in 2016, 11.9% in 2017, 12.4%
in 2018 and 12.8% in 2019) have generally
been trending upwards over the period,
while CAPEX appears to have stagnated.
This calls for further expenditure rationalization
and rebalancing to give increasing
weight to CAPEX to drive growth and
jobs. The medium-term budget shows
CAPEX increasing over the 2019
figure of 2.5% to 3.3% in 2020 and
then falling slightly to 3.1% in
2021 and further to 3.0% in
2022.While the medium-term
figures seem to be in the right
direction, they could even be
scaled up further with continued
rationalisation of expenditure.
Infrastructure Development
and Financing
As noted in our introduction,
infrastructure development is one
of the strategic pillars of the 2019
budget, which recognises efficient infrastructure
as a prerequisite to drive the
government’s industrialisation and agricultural
modernisation programmes. To begin
with, and as stated earlier, the central government
capital budget is to be scaled up in
2019 to GH¢8.5 billion, rising to GH¢13.0
billion after including capital spending by
other government units. The higher spending
will benefit roads, railways, ports (air
and sea), hospitals, ICT, and sanitation infrastructure
development, among others.
Other initiatives to develop infrastructure
are the Sinohydro infrastructure for
bauxite arrangement, which is planned to
take off in 2019; securitization of the
GETFund to the tune of US$1.5 billion to
provide education infrastructure; and creation
of a Sovereign Century Fund as a vehicle
to raise bilateral long-term
concessional financing for commercial infrastructure
projects, including Public-Private
Partnership (PPP) investments.
Another critical announcement in the
budget is the development of standardised
designs and costs for infrastructure projects
in education, health and roads to ensure
standardised public construction and value
for money.
While we support the prominence given
infrastructure in the 2019 budget, we believe
there is a need to anchor Ghana’s infrastructure
development in a long-term
national infrastructure plan, which will
identify, cost, and prioritize the country’s infrastructure
requirements on a long-term
basis to meet the demands of a modern,
middle-income economy. The infrastructure
plan itself should be based on a long-term
national development plan.
We also want to draw attention to a recurring
practice in the country whereby various
amounts which are borrowed to
finance infrastructure are not captured in
the budget. The increase in such extra-budgetary
borrowing activities has important
fiscal and debt sustainability implications
for the country. There is the need therefore
to control the growth of these activities and
to widen the coverage of the fiscal accounts
to incorporate these transactions. We believe
that it would be appropriate—and indeed
prudent—to align these borrowings
strictly with the budget cycle. The IFS intends
to examine this issue more closely to
come up with necessary reform proposals
to enhance fiscal transparency and longterm
debt sustainability.
Exiting the IMF Financial Program and
Legislating Fiscal Responsibility
Ghana has an unenviable history of fiscal
indiscipline manifested in recurring
deficit overruns that increase borrowing
and debt. The indiscipline tends to escalate
in election years due to spikes in expenditure
in those years. The response to the
usually ensuing macroeconomic instability
has been to seek an IMF financial bailout.
The bailout is normally accompanied by a
program that prescribes strict policy conditionalities
geared to restabilising the economy
and placing it on a path of sustainable
growth.
Over the past three years or so, Ghana
has been on an IMF program that has
served as an anchor for the economy, with a
brief interruption in 2016. The program
has generally ensured prudent conduct of
fiscal policy.
Government has indicated its intention
to exit the program at the end of 2018. Exiting
the program means that we are going
to free ourselves from the conditionalities
that anchor fiscal policy. We have been here
before. In fact, Ghana has sourced IMF financial
assistance 16 times in its history.
This is precisely because we have failed on
our own to exercise the needed fiscal discipline
that the IMF program usually imposes
on us.
Government has indicated that it plans
to legislate fiscal responsibility after the
IMF program.. Furthermore, the mediumterm
budget deficit profile provides indication
of Government’s commitment to
enduring fiscal discipline and macroeconomic
stability. It has to be emphasized that
it is only by entrenching macroeconomic
stability that we can place the economic on
a path of sustained strong growth, job creation
and prosperity for all Ghanaians.
Government has indicated its intention to
pass a Fiscal Responsibility Law (FRL), in
line with what it states to be its commitment
to “ensuring irreversibility of the
macroeconomic gains.”The FRL will allegedly
encompass a fiscal rule that will
place the budget deficit within a 3-5%
band. There is available empirical evidence
that suggests that a deficit within that range
is likely to ensure long-term fiscal and debt
sustainability. The West African Monetary
Zone, of which Ghana is a member, also
specifies a deficit ceiling of 3% for the
membership. The envisaged fiscal deficit
band of 3-5% would, therefore, appear to
have a justified basis from that standpoint.
The medium-term deficit profile—4.2% in
2019, 3.7% in 2020, 3.2% in 2021 and 3.1%
in 2022—also seems to be in line with the
planned rule.
In principle, IFS welcomes the passage
of the FRL. It is a subject that the Institute
has taken keen interest in since it was first
mooted by the Vice President in 2017. In
due course, the Institute will make its views
known on the FRL and its key components
— the fiscal rule and Fiscal Council —
based on its own analysis and international
best practices so as to contribute to the
process of entrenching fiscal discipline and
sustainability in the country.