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Opinions of Monday, 6 July 2009

Columnist: Appiah-Kubi, Kojo

The 2009 Budget: The Fiscal “Blues”

On the presentation of the 2009 Budget Statement and Economic Policy of the NDC government, many labels were given to the budget. In the view of the majority party, the NDC, in parliament the budget is a “Rescue Plan”, a “Budget for a Better Ghana”, and would, against the backdrop of the fiscal slippages of 2008 “…lead this economy into middle income status that registers in the lives, livelihoods and incomes of ordinary people by the year 2020”. In the opinion of the NDC government the budget, which derives its objective from the party’s vision, as underscored in its manifesto, “…will stimulate and develop the immense talents and resourcefulness of Gha¬na¬¬ians and make them the main drivers and beneficiaries of the national development agenda, with spe¬cial empha¬sis on the rural and urban poor”.

The largest minority party, the NPP, in parliament sees the budget as a ‘SAKAWA’ budget, because it repre¬sents a mere collection of NPP programmes and projects, hurriedly and poorly repac¬¬kaged with seve¬ral errors and policy inconsistencies due to misunderstood underlying assump¬¬tions. For this reason the budget in its present form cannot be assumed to provide sustainable solutions to the current challenges of the country.

In the view of the NPP the first serious shortfall of the budget is its underlying assumption to cover the whole year 2009. The country is coming from a weary general election, which did not allow sufficient time for a smooth transition of government from the NPP to NDC. On the other hand the transition could not be smooth because the new NDC government, driven by the “Win¬ner takes all”, and “we know it all and better” mentality and their eagerness to find fault with the previous regime, which they can prosecute in the media, failed to provide a collabora¬tive platform for proper consultation between the NPP and the NDC to take place. The new government could therefore not have adequate information within that short tran¬sition time to deal appropriately with the challenges facing the nation. Against this background, the appro¬priate thing to do, as a new government, would have been to prepare an interim budget and later come out, after a mid-year review, with a “full budget“ and revised macroeconomic targets. During this time the govern¬¬ment might have completed new negotiations with Ghana’s development partners, espe¬cially with the Breton Wood institutions, for assistance and also gotten a handle over most of the issues about the Ghanaian economy. It appears, however, that the budget in its present form has failed woefully to suggest appropriate solutions to adequately address the challenges facing the nation and achieve the policy objectives of the NDC itself. Unless the new government comes back with a revised budget for the year 2009 the opinion is that most of the macroeconomic, particularly, the fiscal projections of the budget would remain pretentious and unrealistic and therefore unachievable.

Fiscal Policy Framework: The fiscal policy of the budget is premised on a proposed total outlay of about GH¢9.8 billion against total revenue and grants of GH¢7.2 billion and a budget deficit equivalent to 9.4 percent of GDP for the year 2009. The projected expenditure represents an increase of only 2.57 per¬cent over the provisional outturn of 2008. Given that inflation is programmed to grow at a rate of 15.3 per¬cent this would indeed represent a decline in real terms, which can hardly hold true for a government which won power on numerous horrendous promises and swore to keep faith with the people. Should the govern¬ment, how¬ever, stick steadfastly to its expenditure projections, it is not likely for it to achieve its econo¬mic growth projection of 5.9 percent, since in the past econo¬mic growth in the Ghanaian economy had largely been driven by increases in government spend¬ing. Indeed the GDP growth projection appears to be under serious threat. Because the govern¬ment projects to cut back domestic investments by almost 70 percent in 2009, while under the NPP government this expenditure item had increased by over 96 percent in 2008. It intends, however, to fill the investment gap by raising the projected foreign finan¬ced investment expenditure by more than 61 percent. This indeed appears to be pretentious and unrealis¬tic, given that Ghana’s donors are themselves facing serious financial crisis buffeted by a recession and increa¬sing pressures at home to reverse the outflow of resources inwardly to prop up their own economies.

The budget is supposed to prosecute the social democratic - “People First Agenda” - of the NDC govern¬ment as expressed in the policy commitment of its manifesto to increase public spending in the social sec¬tor. It can therefore not be taken serious that this same budget cancels utility price subsidies to zero, when the NPP government after massive utility price increases in early 2008 still needed to spend almost GH¢20 million in utility price supports. In 2008 spending on government emoluments rose by over 40 per¬cent. Given that the year 2009 is likely to witness inflation increases of over 15 percent on average as pro¬jected by the budget and witness the introduction of the single spine salary structure, the 27 percent pro¬jected increases in salaries cannot be seen to be realistic. It is unrealistic in view of the visibly rising unemploy¬ment menace of particularly the youth, and the fact that NDC government wants to prosecute a social democratic agenda.

The Challenge: The biggest challenge of the government, however, is how to balance the need to keep faith with the people of Ghana to whom the NDC had made numerous promises during the electioneering cam¬paign with the need to demand sacrifices from the people at this time of global economic challenges. A proper execu¬tion of this balancing act is very important for the government to achieve its programmed reduction of the budget deficit from 11.5 percent (or 14.8 percent without divestiture receipts) to 9.4 per¬cent of GDP in 2009. By all indications the budget has not been able to execute this balancing act adequa¬tely because the socialist ideological inclinations of the NDC constrains the government from the use of mar¬ket oriented approaches rightfully needed at this time.

Timid revenue mobilization drive: Indeed the budget can be said to be timid on new ideas to aggres¬sively mobilise the needed revenue to finance government expenditure. It contains only few new direct measures to enhance tax revenue mobilization: an increase in the airport tax, the restoration of import duties on rice, wheat and cooking oil which were removed by the previous government at the height of the food crises in 2008 and an increase in tolls and rates, and fees charged by MDAs. Beyond these few new revenue enhancements the budget limits itself only to reiteration of emphasis on ongoing reforms in tax administration, rationalization of tax exemptions and subsidies and cash management. These measures alone, without new measures to directly and aggressively mobilise revenue, would not bring about the badly needed fiscal consolidation.

Constrained by its manifesto promises not to introduce new taxes and also to reduce the prices of petro¬leum products immediately the budget also presents fiscal figures that lack credibility. In 2008 when the eco¬¬nomy (GDP) expanded nominally by 23 percent government total revenue (without grants) and total tax revenue grew by about 31.54 percent and 29.8 percent respectively. This underscores the scientifi¬cally pro¬ven relatively high buoyancy of tax revenue instruments capable of generating high tax efforts greater than tax capacity. This implies that Ghana’s tax authorities have been doing well under the NPP govern¬ment. In 2009 the GDP is projected to grow nominally by about 24 percent and higher than in 2008. Yet the total government revenue (without grants) and tax revenue are expected to grow by on 23.6 percent and about 19 percent respectively. Underlying these apparently timid revenue projections could be that either the assumptions for the revenue programming were wrong or there is a mistake with the revenue esti¬mates. Else it beats one’s imagination why tax and total government revenue in 2009 should grow lower than in 2008 and at a time when a new government, which is voted on the political slogan of ‘change’, swears in its maiden budget “…to improve tax revenue collections by introducing reforms in tax administration, and enhancing tax incentives”.

Another issue that is likely to throw the revenue estimates for the 2009 financial policy of the NDC govern¬ment off gear concerns the petroleum tax. In 2008 petroleum taxes declined from about GH¢403.3 mil¬lion in 2008 to GH¢ 386.2 million due to successive discretionary reductions in prices of petroleum pro¬ducts. The budget statement for 2009 reduced petroleum product prices by about 5-8 percent, which is, in the estimate of the government, expected to cost conservatively between GH¢50 - GH¢75 million in lost revenue earnings. In the face of these losses, it is not clear how the budget can programme an increase in petroleum tax revenues from GH¢ 386.2 million in 2008 to GH¢436.2 million in 2009. There is also the issue with the cost-savings measure in the budget in connection with the restoration of food tariffs introduced by the Kuffuor administration to mitigate the social impact of the rising food prices in 2008. This measure was programmed to bring between about GH¢43-72 million in revenue receipts. Out of fear of its potential negative impact on food prices and general price levels, the bill introduced in par¬lia¬¬ment with the budget has been withdrawn leaving a big hole in the revenue side of the budget. This means that the programmed budget deficit of 9.4 percent of GDP must be corrected upwards.

According to the government it intends to introduce a Treasury Single Account (TSA) to make cash manage¬ment more effective. It believes that “… the TSA framework will improve Government’s fiscal position and allow Government to identify and properly utilize idle cash in Government accounts at the Bank of Ghana and other deposit money banks”. These so called “idle cash”, however, represents savings, and a sign of fiscal prudence, on the part of the MDAs, an incentive that can be stifled by this new measure, since past government borrowings from these MDAs have scarcely been paid back.

Expenditure Controls: On the expenditure side the measures to reduce the fiscal deficit through some expen¬diture con¬trols of administration and service budgets can be described as half heated or cosmetic. In that the budget fails to address adequately the needed reforms of key expenditure line items such as the spiral¬ling wage bill, public sector reform and the growing albatross of subsidies to the energy-related uti¬lity such as the VRA, the ECG and TOR and to other state own enterprises. In the past costs over¬runs of these key expen¬diture items have put a heavy burden on the budget balance and have possibly contributed to a deterioration of the budget balance in the past by about almost 5 percent of GDP.

Already experts by a close re-examination of the budget estimate a financing gap of about GH¢500-800 million, which remains ‘unaccounted for’ in the budget that can worsen the already programmed fiscal deficit equivalent to 9.4 percent of the GDP. In view of the limited options in raising revenue and redu¬cing expenditure that the government has defined for itself it is important to be careful about the modus of the deficit financing. The government envisages to finance the overall budget deficit from both domestic and foreign sources in the proportions equivalent to 6.5 percent and 2.9 percent of GDP respec¬tively. This implies a more aggressive government borrowing from the domestic money market. Already the budget has programmed to increase domestic borrowing by 20.8 percent from GH¢1,152.6 in 2008 to GH¢1,392.2 million in 2009. On account of the fact that the average lending rate of commercial banks is already over the 30-33 percent boundary any increased domestic sourcing of financing for the 2009 bud-g¬et from the domestic banking sector is likely to put more pressure on interest rate. This would not only crowd out private sector investment but also shift monies from the productive sector to the bonds market as experienced in the late nineties and consequently negatively affect output growth, employment and inflation in the country.

Indeed the government has promised to come back to the people with mid year review. One can only hope that these issues would be considered to allow the country to overcome the present economic chal¬lenges and move the country forward in the right direction.

Kojo Appiah-Kubi (PhD) Published in the Daily Guide