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2015 Budget Statement: Transformational agenda or a stabilisation tool?

The Minister for Finance, Seth Terkper presented the Budget Statement and Economics Policy of the Government of Ghana for the 2015 financial year to Parliament on November 19, themed “Transformational Agenda: Securing the Bright Medium Term Prospects of the Economy.” 

Specifically, the Budget Statement, according to the minister, seeks to create a promising environment for inclusive growth, value addition and diversification. 

An assessment of the 2015 Budget Statement should, therefore, be on the basis of whether or not it has the potential to transform the economy and achieve substantial growth. 

The finance minister, therefore, admits that the goal of the Budget Statement is to address the short term vulnerabilities that the economy faces to safeguard the nation’s bright medium term prospects for strong growth and job creation. 

The goal is purposively to reduce the fiscal deficit to 3.5 per cent of GDP by 2017. This, therefore, is the main point of the 2015 Budget Statement. 

It is imperative therefore to critique the budget within the context of the strategies, actions and policy statements which have been outlined in the budget statement aimed at achieving this fundamental goal. 

Ultimately, there are two major components of the Budget: revenue and expenditure. The policy initiatives aimed at achieving the goal of the Budget relate to either of them. 

These initiatives have been enumerated as Tax Policy, Improved Management of Public Funds, Debt Management, Revenue Administration and Expenditure Rationalisation.

Tax policy 

The Government did not meet its revenue target in the previous fiscal year. This was attributed to lower export earnings as a result of the fall in gold prices and inefficiencies in the tax collection system. 

To correct this anomaly, the government proposes to expand the tax net by implementation of new Value Added Tax (VAT) measures for fee-based financial services, commercial real estate and petroleum products. 

Economists, no doubt, agree of the need to expand the tax net. While few (if any) will have any difficulty regarding the tax imposed on commercial estates, the real concern is the extension of VAT to cover fee-based financial services and petroleum products. 

The non-banking population is large and one would expect policies that would encourage the population to bank. 

The imposition of special levy on some petroleum products would no doubt increase government revenue as taxes on inelastic products like petroleum are easy to collect. 

On the other hand, it is incontrovertible that its effect on disposable income of citizens is far reaching. 

Considering the fact that inflation is approaching 17 per cent, this latest development is likely to worsen the situation. 

Successive governments have taken the least line of resistance when it comes to expanding the tax net. Otherwise, how can one explain this obvious phenomenon where there exits a large informal sector who virtually pay no direct tax and yet a regressive tax like VAT is imposed on no less a product like petroleum products? 

While it is true that some petroleum products are still exempt and zero rated, the negative effect of the special levy will still be felt by the most people, especially the very poor.

Improved Management of Public Funds

One of the key challenges that has bedeviled managers of the economy is the issue of management of public funds. It is therefore in the right direction that government is seeking to improve this area. The public sector wage bill is said to average 50 per cent of GDP. Obviously this is on the high side. 

The Budget therefore seeks to observe budgeting constraints on the wage bill to ensure sustainability of the Single Spine Pay Policy. 

In addition, Government is seeking to place a net freeze on employment in all sectors of the economy (with the exception of education and health) and implement the existing price adjustment mechanisms for utility tariffs. 

Effective implementation of this policy directive would contribute to keeping expenditures within limits and hence helping to narrow the gap regarding budget deficit which currently is still double digit. 

This would however come at a cost. There are teeming unemployed graduates and non- graduates in society and therefore their only hope will be in the private sector. 

The high cost of credit prevailing now makes it difficult for the private sector to borrow from the banks and thus limiting their expansion drives and creating employment opportunities for the unemployed. 

The government must keep strictly to its promise not to overspend. It must continue exorcising the ghosts from the payroll to ensure that only genuine workers earn salaries. 

Implementing the automatic price adjustment mechanisms for utility tariffs must correlate positively with quality of service. 

One mind-boggling question is how come in spite of the persistent power- cuts, electricity bills of residents remain the same when they have not added to their gadgets or use power excessively? Something is wrong. The government, through the Public Utility Regulatory Commission (PURC), must investigate this phenomenon.

Debt management

The Budget Statement reveals that public debt as a percentage of GDP has increased from 36.3 percent in 2009 to 60.8 percent in 2014. This is attributed to increase in external net disbursements for infrastructure projects and net domestic issuance, and the depreciation of the cedi. Infrastructural development is key to national development and the attraction of foreign direct investments (FDI) to the economy. Investment in that area is most welcome especially so if one considers the state of infrastructure in Ghana. 

What is alarming however is the public debt percentage of GDP which has crossed the 60 percent mark. It means the country is perilously drifting towards HIPC one more time. Part of the reason for this negative development is the depreciation of the cedi. Government and the Central Bank through fiscal and monetary policies must make the right decisions and implement the right policies to stabilize the currency. Equally important is the need for government to invest prudently and avoid waste to prevent the debt from skyrocketing. Failure to reduce expenditure and/or increase revenue to close the deficit have far reaching implications for the economy and attraction of FDI.

Revenue Administration and Expenditure Rationalization

According to the Minister, the total revenue and grants for 2015 is estimated at GH¢33.0 billion (24 percent of GDP) and an estimated total expenditure of GH¢41.1 billion (30.5 percent of GDP). It is commendable that the revenue estimate for 2015 represents a 31.5 percent increase over the projected outturn for 2014 whilst the estimated expenditure for 2015 represents a comparatively lower increase of 15.6 percent over the projected overturn for 2014. 

The real issue however is government’s ability to meet these targets. If these targets are met, the 2015 budget will result in an overall budget deficit of GH¢ 8.8 billion, equivalent to 6.5 percent of GDP and expected to be financed largely from domestic sources (GH¢ 7.6 billion) and a small proportion from foreign sources (GH¢ 1.3 billion). 

An attempt to reduce the deficit to a single digit for the first time in three years is most welcome. Government must do everything possible within its power to achieve this target as a double-digit deficit for the third year running would have adverse implications for inflation, exchange and interest rates, which has the potential of making an already bad situation worse.

Conclusion

So, is the Budget Statement and Economic Policy for 2015 transformational in nature? The Budget aims to achieve an overall growth rate of 3.9 percent. Certainly, this is not audacious enough especially for an oil-  and gas-producing economy like ours. 

For the Budget to have a transformational agenda, bold decisions would have to be taken regarding industrialization, mechanization of agriculture, infrastructural and human resource developments. Perhaps, looking at the myriad of challenges confronting government, a cautious approach is expected. In my view therefore, it is fair to describe the budget as a stabilization tool. 

The author is the Dean, Management Faculty, University Of Professional Studies, Accra.

 

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