Budget overrun likely – EIU warns …predicts 5.5% end-year deficit

Despite enacting the fiscal responsibility law that places limits on how much government must spend, the Economist Intelligence Unit (EIU) is predicting that government will side-step the law in order to deliver on its campaign promises.

The fiscal responsibility law, which was passed in 2018, seeks to limit budget deficit to a maximum 5 percent of Gross Domestic Products (GDP). But the EIU, in its country report for July, says government may miss it by 0.5 percentage points in 2020—the election year— due to rising expenditure.

The NPP government made a lot of ambitious promises in the run-up to the December 2016 election. They included: Free SHS; One District, One Factory; One Village, One Dam; US$1million for each constituency, and other infrastructural projects— all of which must be delivered before the country goes to the polls in December next year if the governing party is to retain power.

It is against these expenditures that the EIU is predicting that government will spend more, thereby hitting a budget deficit of 5.5 percent.

“Following completion of the IMF programme in April 2019, and a period of fiscal consolidation, we expect to see some spending laxity. Moreover, the authorities will remain reluctant to lower public spending ahead of elections. The public­sector wage bill — together with high interest payments and capital expenditure to help to deliver ambitious industrialisation and infrastructure development promises — will drive expenditure increases.

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“In December 2018, government passed a fiscal responsibility law aiming at limiting future budget deficits to a maximum 5 percent of GDP. However, overall, we expect the fiscal deficit to widen from 3.4 percent of GDP in 2018 to 5.5 percent of GDP by 2020 as a result of rising expenditure,” the EIU report stated.

The report further states, however, that public expenditure will be later tightened after the election year, as government will seek a return to fiscal consolidation.

“Over the 2021­23 period, we expect to see expenditure decline slightly as government seeks to limit the fiscal deficit. Such reductions are expected to come from moderation in growth of capital expenditure, although ongoing major government infrastructure development and industrialisation projects will keep such spending elevated…We then forecast a return to consolidation, leading to a lower deficit in 2023 of 3.3 percent of GDP.

“As a result of this tightening, the public debt stock will edge down from an estimated 53.5 percent of GDP at the end of 2018 to 45.8 percent of GDP by end-2023, owing to fiscal consolidation combined with robust economic growth. Nonetheless, longer-term debt sustainability will still require ongoing fiscal responsibility and sustained economic growth,” the report said.

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