Pro-electoral cycle spending and budget rigidities

Public sector spending aims to acquire goods and provide for services such as education, healthcare, social protection and ultimately enhance the living standards and conditions of citizens.

This enable governments everywhere to fulfil their economic needs and objectives as mentioned above. More often, governments meet these expenditures through taxation and borrowing. However, raising enough revenue through taxation to meet the levels of expenditures has been a threat to the appetite for huge spending especially by developing economies.

This leaves such economies in big deficits which are often financed through borrowing. Consequently, developing countries are faced with cutting public spending or increasing public debt. As bitter pills, both have their pros and cons.

With the pressure to provide basic amenities such as roads, schools, hospitals, food and potable water, developing countries do not like to cut spending, which makes them susceptible to the high public debt. Efforts to improve on government revenues among these economies have not yielded the necessary revenues to match up their expenditures.

In particular, Ghana’s annual growth public expenditure has averaged about 23 percent in the last decade. Specifically, in FY2012, domestic expenditure increased by 33 percent compared to 3 percent in previous year.

Similarly, growth in public expenditure was about 30.3 percent compared to 21.2 percent in 2015. Around the same periods, annual growth in revenue were 30 percent and 4.6 percent in 2012 and 2016 respectively. More importantly, expenditure to GDP ratio was 28 percent in 2012 while revenue to GDP ratio was 22 percent. This created an overall cash balance deficit of about 11 percent of GDP (see Figure 1).

The deficit remained beyond maximum threshold of 3 percent of GDP as set out in the ECOWAS Multilateral Convergence Mechanism. In 2015, the country recorded overall deficit on cash basis of 7 percent. The persistent weak macroeconomic fundamentals such high inflation, low domestic revenue, protracted balance of payment problems coupled with unsustainable public debt led Ghana to the IMF for the 16th bailout on April 3, 2015, in the country’s 60 years of independence.

Under the program, Ghana set a fiscal deficit target of 5.3 percent of GDP, nonetheless a deficit of about 9 percent was recorded at the end of 2016. The three-year extended credit facility program was extended to four years to ensure the government consolidate the macroeconomic gains. Admitting to the rebound of macro-fiscal stability in recent years, the fear of many is on slippages in election cycle spending.

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Figure  1: Revenue and Expenditures as % of GDP

Source: Authors’ construct; Data from MoF, Ghana

A stable macroeconomic environment is a condition for economic growth

As the country enters an election year in 2020, the government has a choice of controlling fiscal deficit below the target of 5 percent of GDP as stated in the fiscal responsibility Act or spend more to enable them to fulfil a lot of their manifesto promises on industrialization and infrastructure which would accelerate job creation. Binding fiscal targets call for restrictions to the fiscal policy of the government.

Workable strategy to increase domestic resource mobilization must be institutionalized. Historically, more than 45 percent of tax revenue is spent on wages and salaries of government workers. An astronomical increase in interest payment since 2013, point that, nearly 40 percent of tax revenues is spent on interest.

Figure 2, it has been estimated that interest payment will amount to about 45.5 percent of tax revenue while wages and salaries will constitute about 43.3 percent. Government will then have less than 15 percent of tax revenues to spend on other expenditure composition of government.

As debt service to tax revenue keeps rising, the economy is subjected to high debt vulnerability. Ultimately, if not checked, the country will be at high risk of debt distress.

 

Figure 2:  Wages and Debt Service as a share of tax revenues

Source: Authors’ construct; Data from MoF, Ghana

The rigidity imposed by the wages and debt servicing hinders the ability of the government to meet other budgetary obligations. Statutory transfers are often delayed attributable to low tax revenue performances while domestic finance of capital expenditure has been less aggressive.   For example, there has been a continual decline in capital expenditure as a share of total expenditure.

As can be seen in Figure 3, from 24 percent of total expenditure in 2012, capital expenditure declined to 15 percent in 2016 and further declined to 9 percent in 2017.  As election year approaches, the government is expected to spend the equivalent of 12 percent of her total expenditure on capital expenditure in 2019. And this even expected to go higher in 2020.

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This increases the potency of off-spending in election year as has been experienced in previous cycles. In the last three years, equivalent of 26 percent of Ghana’s expenditure has been on interest payment. Despite the re-profiling of public debts reducing earnings on money market instruments by banks and consequently driving down average lending rates, the debt reprofiling policy of government has not been successful in reducing the burden of public debt on the country. This imposes greater fiscal rigidity on the domestic revenue thereby crowding out investment in infrastructural development.

Figure 3: Expenditure composition

Source: Authors’ construct; Data from MoF, Ghana

Expectations in the next budget

  • Consolidating macroeconomic gains: estimates of the impact of policy objectives on macroeconomic assumptions especially fiscal targets are necessary in assessing if fiscal targets are realistic and sustainable. Also, conditions in meeting those targets must clearly be determined.
  • Realistic fiscal targets than overoptimistic targets: government should not overestimate revenues nor underestimate expenditure commitments because it has greater tendency to lead payment delays thereby accumulating arrears.
  • Binding fiscal commitments: Government must clearly outline measures to enhance efficiency and effectiveness in domestic revenue mobilization and control of expenditure over run. Boosting domestics revenue could lead to upscale in in public expenditure. This will reduce the dependence on external finance. While unchecked expenditures will in turn have adverse impact on budget deficit, this will lead to government’s over-reliance on debt financing.
  • Policy vehicle for economic and social priorities: the government must ensure expenditure is more development focused. Specifically, much attention should be paid to human capital development through quality and accessible education, improvement in health service delivery and infrastructure and industrialization to accelerate job creation.
  • Strengthen fiscal accountability on the use of public resources: efforts must be made to bring about more transparency and openness in fiscal spending. This will help prevent budget overruns especially, the pressure to spend more in order to be retained in power.

 

 

Authors are available at: amankwahgideon83@gmail.com and harrie.donkoh@gmail.com

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