Reducing the fiscal deficit more quickly to bring down the economy' exorbitant interest rates and encourage private sector expansion is the government's most pressing challenge as Finance Minister Mr Seth Terkper prepares to unveil the 2015 budget tomorrow.
For now, the pace of fiscal consolidation, which is the reduction of deficits and control of government borrowing, has been slower than expected, creating an environment of high interest rates, currency weakness and slowing growth.
The economy also remains highly vulnerable to external shocks, which have already showed up in weak commodity prices, especially of gold and oil.
The government has twice missed the deficit targets in its home-grown stabilisation programme due to the slowdown in economic growth, underperformance of tax revenue and the weak restraint on expenditure, especially in relation to public sector wages and subsidies.
The IMF is expected to ask government to step-up its efforts to control the deficit and will likely propose measures to improve revenue and rein-in expenditure. The most critical expenditure issues are the wage bill, government interest costs and subsidies.
Getting a grip on these elements of spending is a critical requirement for lower deficits, which will pave the way for reductions in inflation and interest rates to support private sector growth while raising business confidence.
The completion of the gas pipeline is a plus for the growth outlook, as it could ease the challenges in the energy sector. However, the external environment poses risks and that calls for policies that will make the economy less vulnerable to external shocks.
Beyond using the budget to address some of these challenges, the Institute of Statistical, Social and Economic Research (ISSER) of the University of Ghana said it expects the 2015-2017 budget to outline policies that will help channel more financing into the private sector to enable them to play a leading role in the development of the economy.
The Director of the Institute, Professor Peter Quartey, said ISSER, which had already made inputs into the budget, expected to see interventions that could support the private sector with credit with reasonable interest charges.
This would enable the private sector to unleash its potential and play a leading role in job creation and improving the production base of the economy, especially when the economy would continue on the path of austerity to correct the fiscal slippages of the last few years.
“I don’t think the budget will be expansionary because we have not made gains in raising revenue. We expect to see some measures to reduce the fiscal deficits,” Prof. Quartey told the GRAPHIC BUSINESS on November 14 on his expectations of the budget and economic policy of the government set to be laid before Parliament on November 19.
ISSER is a key stakeholder in shaping the country’s economic policy and they take advantage of the opportunity to be part of budget hearing, where it makes inputs as well as periodic reviews.
Viewed against the background of an International Monetary Fund (IMF) programme, Prof. Quartey believes that the Fund would be hard on the government to raise more revenues and reduce expenditures, which could tighten the outlook of the economic policy and estimates document.
This means that the government would continue to reduce its expenditure envelope, which could have dire consequences on business operations as well as individual disposal incomes.
One area the expenditure streamlining could hit would be public sector wages and salaries, which currently consumes about 64.9 per cent of non-oil tax revenues (excluding exemptions) or nine per cent of the total value of goods produced within the economy.
Prof. Quartey said reduction in the wage bill or as a ratio to GDP could lead to retrenchments in the public sector, especially if revenues were not performing well.
ISSER itself wants the government to streamline its expenditure and focus on removing ghost names from government payroll.
In 2010, the government conducted a biometric registration of all public sector workers with the view to weeding out ghost names on public sector payroll and saving more than GH¢600 million, but the outcome has not been made known.
The ISSER director wants adequate reporting on such projects for the general public to understand the progress made and how results had been achieved.
“Often, there is no information to the public. There needs to be clear reporting on deliverables so that we can understand whether a particular project was successful or not,” the economist and researcher said.
The IMF programme and the government’s own consolidation exercise could lead to the removal of subsidies on some key services.
But Prof. Quartey wants that exercise to be executed with caution to ensure that subsidies were well-targeted at the poor and not skewed in favour of the rich, the situation most social intervention programmes in the country were saddled with.
A World Bank study on improving the targeting of social programmes in Ghana has identified only Livelihood Empowerment Against Poverty (LEAP) as the only social intervention programme to have covered more than 50 per cent of its targets.
For instance, the data analysed suggested that three-fourths of the transfers provided by the LEAP reached the bottom two quintiles of the population and the share reaching the poor is estimated at 57.5 per cent.
The National Health Insurance Scheme (NHIS) reached less than 50 per cent of its target being.
The Ministry of Education’s school uniforms programme, which has been touted as highly successful, also seemed to have reached 43 per cent of its target
Expanding the tax net
ISSER wants the tax net to be broadened to cover the large informal sector, which covers about 90 per cent of all commercial activities in the country.
Prof. Quartey said majority of the people who operated in the informal sector earned about GH¢132 a month, and yet did not pay taxes, leaving only the formal sector workers confronted with that obligation.
But to succeed in expanding the net, an exercise which has eluded the country for decades, ISSER is proposing a robust national identification system to make for easy identification of people, where they lived, their occupation and other demographic details.
“We need to do a lot more efforts to expand the tax net to capture people in the informal sector, who earn above GH¢132 a month but are left out of the tax system,” the eminent professor of economics said. GB