Budget Day: Budget must be clear on path to recovery

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…economist say it:

  • Must not introduce new taxes
  • Grow the private sector
  • Outline debt management strategies

It is budget day again, and citizens, investors from around the world and other stakeholders are itching to hear the country’s economic policies for the rest of the year and how it will affect their lives. In fact, there is high interest in this year’s budget presentation as it is the first full year budget after the economy was ravaged by the coronavirus pandemic.

So naturally, everyone is expecting what plans and policies government has in store to reverse the damage. What even adds to the high interest in this budget, albeit on a lighter note, is the fact that it is the first budget in the history of the country to be presented by Osei Kyei Mensah-Bonsu, Minister for Parliamentary Affairs, as Ken Ofori-Atta, who is the finance minister-designate has not yet been vetted by the Parliamentary Appointments Committee due to some health issues.

According to a statement from the Ministry of Finance, the budget statement will focus primarily on prudent policies to bring the economy back on track and will also touch on the continuation of government priority programmes to ensure economic growth. Health care, digitization of the economy and sanitation issues will feature prominently, it stated.

But according to experts, the budget must touch on at least three main areas, lest it will disappoint many, as these are the major issues on the minds and lips of businesses, market watchers, investors and analysts. The issues are: the unsustainable debt situation, revenue shortfall, and policies to boost growth in the private sector. Let’s begin with the most worrying – the debt situation.

The unsustainable debt situation

Granted, high debt level is not new to the economy as all five administrations under the fourth republic have been saddled with debt at a point in their governance. However, the situation has been worsened by the coronavirus pandemic which has given government more impetus to borrow, in the name of ‘we are not in normal times.’

The Summary of Economic and Financial Data (January 2021) published by the Bank of Ghana (BoG) indicates that the country’s total public debt has hit GH¢286.9 billion as of November 2020, representing 74.4 percent of GDP, compared to 61.4 percent recorded a year earlier.

This means that for every GH¢1 value of productive activity undertaken in the country more than 74 pesewas go into paying debt – a sure cause for worry.

This also shows that between November 2019 and November 2020, the total public debt of the country has increased by 13 percentage points, higher than the 3.6 percentage points increase between November 2018 and November 2019, a true reflection that the debt accumulation level is getting out of hand – a situation which multilateral institutions such the World Bank and IMF have cautioned about. In fact, debt to GDP is projected to hit about 80 percent of GDP at the end of the year 2020.

Depleting revenue

Another situation that has been the bane of this government is consistent revenue shortfalls which have further been exacerbated by the impact of the pandemic. The pandemic’s effect on businesses affected revenue generation of efforts of government, leading to revision of the revenue targets.

Government, in the mid-year budget revised total non-oil tax revenue to GH¢40.7 billion (10.6 percent of GDP), which is GH¢4.3 billion lower than the pre-pandemic budget target of GH¢45 billion. The revision, according to the budget, was on account of a significant shortfall in import duties as well as shortfall in both the domestic direct and indirect taxes.

Total revenue and grants have also been revised to GH¢53.7 billion (13.9 percent of GDP) in 2020, representing a 20 percent decrease over the original 2020 Budget target of GH¢67.1 billion. Data from the Bank of Ghana indicates that as of November 2020, GH¢43.3 billion of total revenue had been mobilized, essentially meaning government needs more than GH¢10 billion in December alone to meet the revised target, a feat that historical data shows won’t be feasible.

Yes, that is how bad the situation is. And that also explains why the debt level has risen so high, as government has no option than to borrow to carry out its obligations.

Ailing private sector

One cannot underestimate the devastative impact of the pandemic on the country’s private sector. The pandemic led to a literal total or partial shutdown of some sectors and industries, plunging the economy into its first ever recession in 37 years.

The 2020 third quarter contraction, which actually led to the recession, is attributed largely to the hospitality sector as the hotel and restaurants industry saw a contraction of 62.1 percent, according to data from the Ghana Statistical Service (GSS).

The COVID-19 Local Economies Tracker published by the Ghana Statistical Service (GSS) also reveals that about 72 percent of businesses experienced a decline in production in May/June 2020, resulting in nine out of ten of those businesses seeing drastic decline in sales.

The GDP release published by the same organisation said that more than 161,066 businesses were closed as of June 2020.  Businesses in the services sector recorded the highest number of closures as more than 96,200 businesses were not operating within the period under discussion. Trade followed with more than 27,200 business closures, with accommodation and food also seeing more than 16,900 businesses closed in the period.

So based on the analyses above, it is vivid that the economy needs healing. And that is what the people will expect to hear today. Some analysts have shared their thoughts on what they think the budget should address.

Economists wants to see more from the budget

In an interview with the B&FT ahead of the budget presentation, Director of the Institute of Statistical, Social and Economic Research (ISSER), Professor Peter Quartey, said considering the pressure on the public purse which has been exacerbated by the pandemic-related expenditure, it will be extremely important for efforts to be channeled at devising new means, other than increasing taxes, to shoot up domestic revenue.

“Basically, we are coming out of recession and whatever it takes to help the recovery is very important. Government will have to find revenue in order to support the recovery process. It should find new ways of increasing revenue, not by increasing taxes, but being more efficient at collecting taxes. There is some tax revenue we haven’t been efficient in collecting, for example property rate.

And we also have state enterprises that government derives revenue from. Government should try and increase efficiency in these enterprises to derive more revenue. So raising more revenue to finance the recovery is very important,” Prof. Quartey said.

Another thing the professor urged government to be clear on is the progress it has made so far under the GH¢100 billion Ghana COVID-19 Alleviation and Revitalisation Enterprises Support (Ghana CARES) programme, which is meant to revive businesses and put them on the path of growth again.

He further advised that inasmuch as government wants to contain spending due to the mounting public debt, capital expenditure should not see a massive cut as that will further hurt the economy.

“We find that anytime we have revenue challenges, it is capital expenditure that we shortchange. This time around I would like to see some decent amount of funds allocated to capital expenditure because it is only when we invest that we can grow, so we need to invest more in capital expenditure,” he said.

Another senior lecturer at the University of Ghana, Dr. Patrick Assuming, also commenting on what he expects the budget to address, told the B&FT in an interview that it will be a wrong move for government to attempt to introduce new taxes especially during this pandemic period. Rather, the many tax exemptions granted businesses should be looked at, as well as taking advantage of the untapped potential of property rates.

“I will be surprised to see the imposition of new taxes. When we are in a crisis like this, this is not the time to impose new taxes. What is expected though is that there must be some indication about what we are going to do about the tax exemptions. It baffles my mind why we have not done enough. This is something the President himself has talked about and the IMF has even supported it, yet we haven’t done much.

The medium-term strategy of this government in raising taxes is through digitisation of the economy. A lot has been done in that area and is now time for us to see results. I hope the digitisation will change something about property taxes. Property tax is one area where there is a big potential to collect more revenue but nothing has been done. Crisis is a time to reform so we can pass the necessary reforms so that when we set the economy back on a path to recovery, we will be able to collect more tax revenue to improve our fiscal situation,” he said.

Secondly, Dr. Assuming urged government to be honest about the current economic situation facing the country and desist from trying to paint a fancy picture about the economy in the name of inspiring hope, but rather come out with strategies that will aid the recovery process.

“I hope the government is also honest about the true state of the economy. This is not the time to give the impression that the economy is doing well; the economy is not doing well. It is not necessarily through mismanagement. Is just that the COVID-19’s impact could not be avoided.

I expect the government to tell us what sort of strategies it will implement to aid us in the economic recovery. We are in a very difficult situation because economic activities have been slow and we need government to introduce some programmes to prop up the economy. On the other hand, we also know that government doesn’t really have much money because of our low revenue situation,” he said.

On the issue of debt, both economists say the budget should outline medium to long term strategies that will show how the country plans to reduce its mounting public debt which, according to the Bank of Ghana, is now more than 74 percent of GDP as of November 2020.

“COVID-19 has pushed our debts beyond our limit. But then I would like to see medium term strategies to reduce the debt. So government should tell us what strategy it has put in place to ensure that in the coming years we get out of this high debt situation,” prof. Quartey said.

“I also expect that there is some long-term plan on how we are going to put government finances back into proper place when the economy starts recovering. COVID-19 has worsened our debt situation and so I want to see we are thinking long-term on how to bring it on the right path,” Dr. Assuming stated.

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