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IFS PRE-BUDGET FORUM 2017

1.0 Introduction

The Institute for Fiscal Studies, IFS, held its annual Pre-Budget Forum for 2017 at the Kempinski Hotel in Accra on Monday, 13th February 2017 under the theme: “Towards a Healthy National Budget”.

The forum was attended by about 100 participants from diverse stakeholder organizations. These included: Members of the Finance Committee of Parliament; representatives of Ministries, Departments and Agencies; World Bank, IMF, USAID and other development partner organizations; Bank of Ghana; High Commissions and Embassies; Civil Society Organizations; the business community; and other stakeholder groups.

Seated at the high table were Hon. Dr. Kwabena Duffuor, the Founder and President of the IFS and a former Governor of Bank of Ghana, as well as a former Finance Minister; Mr Alex Ashiagbor, Chairman of IFS Governing Council and a former Governor of the Bank of Ghana; Prof. S.K.B. Asante, a member of the IFS Governing Council; Hon. Dr. Assibey-Yeboah, Chairman of the Finance Committee of Ghana’s Parliament; and Prof Newman Kusi, Executive Director of the IFS.

Prof Kusi, who chaired the function, delivered a keynote and welcome address to open the forum, after which two presentations were delivered to set the stage for discussions. The program was moderated by Bernard Naasara Saibu, a broadcast journalist with Starr FM.

2.0 Summary of Keynote Address (by Prof Newman Kusi, Executive Director of IFS)

The title of the keynote address was Creating Space in the Government Budget for Policy Manoeuvre.  Prof Kusi noted that Ghana’s IMF-supported program aims at restoring debt sustainability and macroeconomic stability to foster a return to high economic growth and job creation, while protecting social spending. The program, he continued, calls for a strong front-loaded fiscal adjustment; structural reforms to strengthen public financial management and enhance fiscal discipline; a rebuild of external buffers to increase resilience to shocks; and high effectiveness of monetary policy by limiting its fiscal dominance.

Prof Kusi noted that after two years of the IMF-supported program, the IMF has insisted that strong efforts at fiscal consolidation are required to support debt sustainability. He pointed out that the fiscal consolidation effort is currently taking place in the context of a slow growth and commodity price slump environment, with serious dampening effects on revenue generation capacity. Revenue earmarking, he noted, consumes a large proportion of government budget, leaving limited space for discretionary spending. Consequently, the government has inadequate space for policy manoeuvre, consequently crippling fiscal policy.

By way of recommendations, the IFS boss recommended that as part of government’s efforts to enhance fiscal policy effectiveness, it has to ensure that future budgetary resources are not exhausted by projected earmarked expenditure commitments. He noted that a successful fiscal consolidation effort under the IMF-supported program can be achieved by increasing tax revenue share of GDP and rationalizing expenditure; and mobilizing additional resources from borrowing. He again pointed out that government may choose to borrow without taking specific account of the direct returns from the particular expenditure item. Government must do so, however, within the context of an assessment of overall sustainability of its borrowing program, given the size of the existing obligations for debt service and principal payments.

Prof Newman Kusi further identified grants as a channel for providing fiscal space in contrast to borrowing. He however cautioned that external grants and loans may reduce the incentive of the government to improve its revenue mobilization efforts and may create dependency and rent-seeking effects within government bureaucracies. Therefore, assessments of fiscal sustainability must necessarily look at such disincentive effects, particularly given the uncertainties on the long-term sustainability of external assistance inflows.

3.0 Summary of Presentation on Revenue Earmarking in Ghana; Management and Performance Issues (by Leslie Dwight Mensah, Economist, IFS)

Leslie Mensah defined Revenue Earmarking (RE) as the budgeting practice of assigning or dedicating revenue from taxes, fees or other sources to specific government programs or projects through a statutory enactment or constitutional clause. He cited examples as the GET Fund, Road Fund, Ghana Infrastructure Investment Fund, among others. He explained that the goal of  RE is to protect and insulate what is considered important expenditure items from the vagaries of the political process by linking those expenditure items to a particular revenue source. The presentation identified the pros and cons of earmarking. Among the arguments for earmarking are that it guarantees funding and therefore leads to better planning; ensures lower cost and speedy completion of projects; overcomes resistance to tax increases; and satisfies the benefit approach to equity in taxation. Critics of earmarking point out that it generates budget inflexibilities; leads to poor scrutiny of funding arrangements; facilitates resource misallocation and infringes on government’s powers of discretion. The speaker noted that in spite of the arguments for and against earmarking, there is general agreement across the board that earmarked funds should be effectively and efficiently managed; the automaticity principle of earmarked arrangements should not be violated; and earmarking should not lead to fiscal complications.

The presentation delved into six earmarked funds namely, the Social Security Fund, District Assemblies Common Fund, Road Fund, GET Fund, National Health Insurance Fund, and Ghana Petroleum Funds. It traced the history of each Fund, reasons for their establishment, peculiar institutional arrangements, while discussing the challenges associated with the management of the Funds.

It came to light that earmarking in Ghana faces serious challenges of management inefficiencies and ineffectiveness. Earmarking contributes significant inflexibility to Ghana’s budget, accounting for 30% of government revenue and grants.

  • Summary of Presentation on Fiscal Rigidities and their Effects in Ghana (by Dr. Said Boakye, Senior Research Fellow, IFS)

Dr. Boakye identified Fiscal Rigidities as institutional, legal, contractual or other constraints that limit the ability of the government to change the size and structure of the public budget. He identified three types of rigidities namely: Expenditure Rigidities (e.g. wages and salaries, debt service), revenue rigidities (e.g. revenue earmarking) and other rigidities (e.g. tax expenditure). He noted that Ghana’s budget is characterized by high levels of rigidity, and explained that budget rigidities create fiscal complications for government. These complications include:

  • Governments are unable to create enough fiscal space without resorting to borrowing
  • Governments become ineffective in managing fiscal crisis
  • The quality of fiscal adjustment reduces
  • Incentives to improve efficiency in spending is lowered
  • Misallocation of resources may arise
  • Government spending becomes pro-cyclical.

 

The presentation identified 4 main rigid expenditure categories in Ghana’s budget – Earmarked Expenditure, Wages and Salaries, Debt Service Expenditure, and Tax Expenditure.

Dr. Boakye noted that since 2013, total rigid expenditure in the public budget has been extremely high, considering that it exceeded total government revenue and grants. Consequently, there is no room for discretionary spending. He noted that Ghana’s ongoing macroeconomic difficulties is largely as a consequence of this fiscal predicament. He recalled that when Ghana found itself in a similar situation in 2000 and 2001, it was rescued by debt reliefs the government gained through the HIPC and Multilateral Debt Relief Initiatives. Unfortunately, however, those options are no longer existent in current times. The presentation ended with some key recommendations:

On earmarking,

  1. The establishment of new earmarked funds should be avoided, at least until the country is able to significantly reduce the total rigid expenditure ratio below the revenue limit.
  1. The existing earmarked funds should also be urgently reviewed with the goal to:
    1. cut, where necessary, parts of the earmarked revenues and return them to the general budget in order to gain some level of flexibility to address the enormous fiscal challenge.
    2. close down nonessential funds so that the monies involved could be passed through the general budgeting process.
  1. For those funds that cannot be closed down, greater management efficiency should be pursued, since most of these funds have been managed inefficiently. In this regard,
    1. Political interference that has the tendency to undermine the usefulness of earmarked funds should be halted.
    2. The management boards of the earmarked funds should be made to sign performance contracts and the provisions therein should be enforced to the letter. The contracts should aim at cost minimization.
  1. The current practice whereby the parent MDAs seek to perform some of the same functions delegated to the funds’ managers, as if transfers to the earmarked funds are mere statutory obligations that do not form part of the government’s programs, should be brought to a halt. This creates duplication in the system.

On Wages and Salaries:

  1. The rate of growth in wages and salaries of public sector workers should not be allowed to exceed the rate of revenue growth anymore. This should serve as a guiding principle during wage negotiations and when forecasting the ‘wage bill’ for the budget.
  2. A thorough review of public sector employment should be undertaken in order to right-size the sector by getting rid of redundant workers.
  3. Public sector recruitment and the payroll system should also be effectively managed. While the efforts being made to remove “ghost” names from the payroll systems is commendable, there should be constant auditing of the payroll to prevent new “ghost” names from entering the system.

On Debt Service Expenditure:

  1. The country is clearly caught in a debt trap. Therefore, budgetary expenditures should not be allowed to follow their current trajectories.
  1. Discretionary expenditures should be drastically cut while making sure that growth is not badly affected. Importantly, all non-essential discretionary expenditure items should be eliminated.
  1. A complete moratorium on borrowing may not be feasible in the short term given that total rigid expenditure currently exceeds total revenue and grants. However, borrowing should be significantly reduced by directing it to finance only most essential expenditure items.

He also stressed on the need to boost revenue growth, while taking measures to change the growth patterns of earmarked expenditure.

4.0 Summary of Discussions

Hon. Dr. Assibey-Yeboah, Chairman of the Finance Committee of Parliament, described the presentations as insightful. He mentioned that the Finance Committee would benefit from engaging the IFS in future on the issues raised. Hon Dr Duffuor remarked that in view of the extent of rigidity in the budget, the government should consider placing a temporary moratorium on the transfer of deductions to statutory funds and rather use it to support budgetary expenditure. This, he noted, would create fiscal space for the government to operate. He further advised that proceeds of the Heritage Fund should be invested in long-term instruments to yield greater returns. The point was made that removing earmarking arrangements would restore discretionary spending powers to politicians, a move that could be risky. It was however argued that politicians, having been elected by the electorate, needed to be given adequate flexibility to take decisions on the economy. The point was made that it was not prudent for government to invest in low-yielding instruments while borrowing funds at exorbitant rates. Participants generally welcomed the recommendation of the presenters that government should undertake a careful review of all earmarked funds with the view to closing down or cutting back non-essential ones in order to create more fiscal space for policy manoeuvre.

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