Fiscal stability over growth agenda on point -- IEA

August 4, 2017
Source: Richard Annerquaye Abbey l thebftonline l Ghana
Fiscal stability over growth agenda on point -- IEA

The Institute of Economic Affairs (IEA), an economic policy think tank, is backing government’s decision to cut down its 2017 expenditure by as much as GH¢2.2 billion to support efforts at achieving fiscal consolidation.

The policy think tank presenting its views on the mid-year budget review said after a poor fiscal performance especially in the past year, it is better for government to focus on restoring macroeconomic stability even if it happens at the expense of economic growth.

According to Dr. Eric Osei-Assibey, a Senior Adjunct Research Fellow at IEA, “once you achieve that stability, you are able to attract much more investments into the country and your growth will begin to accelerate and you can now generate more jobs.”

The IEA’s comments come after government’s decision to cut its expenditure by more than GH¢3 billion in the first quarter of this year led to growth in the non-oil sector of the economy falling short of the intended target for the period.

According to the Ghana Statistical Service, non-oil real GDP grew by only 3.9 percent against 6.3 percent growth recorded in 2016, largely due to low activity in the services sector, which grew by 3.7 percent in the first quarter of this year compared with 6.6 percent in the same period last year.

Some economists attributed the low non-oil GDP growth to the government’s spending retrenchment, which severely hit expenditure on goods and services, capital expenditure and arrears payment.

They argue that payment of arrears helps to improve private sector liquidity and spending, while capital spending helps to support projects and also provide the much needed infrastructure, such as roads and power.

Thus, cutting back on capital spending and not paying valid arrears hold back economic activity, with serious consequences for domestic revenue mobilization.

But Dr. Osei-Assibey lauded government’s efforts at achieving fiscal consolidation saying that is better for the managers of the economy to get hold of the situation rather than take steps that may worsen the situation.

“Even if we achieve fiscal consolidation at the expense of growth in the short-term, we are better off. Studies have shown that in the long run, it will pay off. Within the first six months, the prudent thing to do, at this stage, was for government to cut its expenditure if revenue was not performing rather than spend to widen the fiscal deficit,” he said.

 

Renewed revenue mobilisation

According to the Dr. Osei-Assibey, despite government revising downwards its revenue target by GH¢1.4 billion to GH¢43.1 billion, the revised target may still not be achieved as the factors that led to the poor revenue performance remain.

“Government should therefore pursue a more aggressive domestic tax revenue mobilisation by ensuring that the compliance rate is increased substantially and the loopholes within the tax collection system are plugged.

Much more innovation should be introduced in the tax collection system particularly within the informal economy to reduce cost of collection and evasion,” he added. 

The policy think tank commended government for introducing the Fiscal Responsibility Act to enhance fiscal prudence and public expenditure transparency. 

“However, the lack of monitoring and enforcement institutions to safeguard fiscal discipline and enforce adherence to such fiscal rules remain a problem. We therefore urge government to make good its promise of establishing an independent fiscal council that will among other things independently assess government fiscal forecasts and ensure compliance to fiscal rules,” he noted.