CORONANOMICS: Ofori Atta’s headache … Revenue shortfall vs election spending

Containing spending in an election year has always been a question for all of Ghana’s finance ministers since independence, and Ken Ofori-Atta is no exception. But his response has always been positive, saying he will ensure that the fiscal deficit does not widen beyond the 4.7 percent target presented in the budget.

Then Coronavirus reared its head and is currently impacting revenue negatively due to collapsed oil prices, slowdown in the tourism sector, closure of borders, and a general decline in economic output. At this rate, only extraordinary strategies can allow Mr. Ofori-Atta to achieve the needed target.

Already, there are doubts among research institutions and experts as to whether government will not follow the general practice of overspending to please electorates ahead of the December polls, as revenue shortfalls have been a main characteristic of this administration.

For example, in 2019 government projected total revenue and grants to hit 15.8 percent of GDP. But at the end of the period, it had missed the target by 0.5 of a percentage point.

For this year, government has projected total revenue and grants to rise to GH¢67.1billion, 16.8 percent of GDP. Domestic revenue is estimated at GH¢65.8billion, while non-oil tax revenue is projected at GH¢45billion, 11.3 percent of GDP; and receipts from upstream petroleum activities are projected at GH¢8.9billion, 2.2 percent of GDP.

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But all these figures will not be realised due to the coronavirus pandemic’s impact on trade and other economic activities. First, import and export restrictions between and among the country’s trading partners will create supply chain shortages for local businesses; and this is expected to negatively affect domestic tax revenues.

Also, as an exporter of crude oil – which pegged its price at US$62, and with a sharp drop in oil prices to around US$27 – there is no way that GH¢8.9billion projection will be realised; thereby exacerbating the low revenue situation. In fact, the Africa Centre for Energy Policy (ACEP) has warned that the economy stands to lose more than half of its revenue target from oil this year, which translates to more than US$740million.

What this essentially means is that if government spending in the budget – which puts total expenditure (including clearance of Arrears) at GH¢85.9billion, 21.6 percent of GDP – is held constant, then automatically the fiscal deficit target of 4.7 percent has widened. But this is not a good time for that, as the Fiscal Responsibility Act only permits deficits of no more than 5 percent – a target Mr. Ofori-Atta and the president himself have promised heaven and earth not to go beyond.

But the main concern is that this is an election year and the president is seeking re-election for a second term. In order to convince electorates, he has to spend big to satisfy some of their demands – especially in the area of infrastructure.

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In fact, the finance minister said in the 2020 budget that this is the year of roads. So, cutting spending will be a difficult thing to do as citizens do not care whatever pandemic or situation is in place. All they care about is ‘no developmental project, no vote’, a statement government will not treat lightly at this point in time.

Unfortunately for government, too, no amount of words will convince citizens to accept the usual approach to boosting domestic revenue – i.e., increasing taxes or introducing new ones. It will also be a very difficult decision to take the advice of tax experts and scrap the reduction in benchmark values; unless he wants to invite the anger of importers.

It therefore requires thinking outside the box to introduce other measures that will not cut spending but rather improve the revenue situation for government to have enough resources to fulfil its ambitious promises made to citizens; otherwise, the president’s re-election bid is on the line. Whatever the situation, Mr. Ofori-Atta will have to inform Ghanaians in the mid-year budget review, if not earlier.

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