The Institute for Fiscal Studies (IFS) has raised concerns about government’s expenditure rigidities in the form of earmarked funds, wages and debt service that virtually leave little or no fiscal space to address critical development and social outlays.
At a press conference yesterday in Accra, the IFS said with such limited fiscal space, it has become more important to restrict consumption spending related to travel, entertainment, subsidies, free allowances, among others.
“Expenditure on what is obviously a bloated public sector needs to be curtailed through appropriate reforms, including possible downsizing of the sector. In this regard, some of government’s policy initiatives, especially the consumption-based ones, such as nursing trainee allowances, teacher trainee allowances and some components of the Free SHS policy, may have to be re-examined to reduce costs while exploring other non-government funding alternatives.
“A stark consequence of the large shortfalls in revenue has been a severe depression of critical capital and social expenditure.”
Development budget cut
Dr John Kwakye, a senior fellow at IFS, who addressed the conference, said Ghana’s development budget had been cut to the bone.
“Capital expenditure (CAPEX) in the 2018 budget was a mere 2.9 percent of GDP. This was further reduced to 2.6 percent in the mid-year review. Comparatively, wages and interest accounted for 6.9 percent and 6.2 percent respectively of GDP in the 2018 budget. The continuing skewing of expenditure against CAPEX is a trend that is inimical to long-term growth and needs to be reversed as a matter of urgency.
“It’s our expectation that serious expenditure rebalancing will be effected in the 2019 budget in favour of productive capital spending to enhance long terms development.”
Borrowing and debt
Dr Kwakye also said as a result of borrowing to finance average high budget deficits, Ghana’s debt had risen from a HIPC relief-influenced low of 26 percent of GDP in 2006 to 65.9 percent in July 2018.
“In absolute terms, the debt stock at the end of July 2018 was GH¢159 billion compared with GH¢122 billion as at end of December 2016, implying an increase of GH¢37 billion over that period.
“Debt-to-GDP ratios are used internationally to roughly gauge the sustainability of countries’ debts. In this connection, 60 percent has become a rough sustainable threshold, although the exact threshold will vary from country to country depending on individual circumstances.
“For Ghana, IMF has repeatedly warned about the country facing a high risk of external debt distress in its reviews of the country’s ECF-supported programme.”
He said while the debt stock may be used to indicate the degree of distress, it was actually the debt service that represented an immediate burden.
Ghana currently spends over 40 percent of its tax revenue to service its debt.
“As mentioned above, this, along with other statutory obligations, has placed considerable strain on the budget, leaving limited space for critical development and social outlays.”
Widening tax net
Dr Kwakye stated that roping most of the informal sector into the tax net is key to increasing the overall intake.
“There is the need to completely overhaul the tax exemptions regime, plug all loopholes, deal with vested interests, check abuse and reduce exemptions to the minimum.”
The IFS advised that tax rebates granted to the mining sector and the free zones should be reviewed to maximise intakes from those sectors.
“Some of those tax rebates were granted decades ago; they have become obsolete and are inimical to Ghana’s interests. The tax rebates need to be renegotiated to bring them in line with modern trends and standards.”
It called for revaluation of real properties periodically to ensure that assessed taxes were commensurate with the commercial values of the properties.
“District Assemblies (DAs) who are responsible for collecting such taxes seem to lack the capacity and resources to undertake the property revaluations and collect the due taxes. The DAs should therefore be resourced to carry out their responsibilities fully.”