Regional News of 2014-07-24

Reduce size of government – IEA

The Institute of Economic Affairs (IEA), a policy think tank, has urged the government to downsize the public sector and reduce the size of the government.

“In this era of liquidity crunch, government must send strong signals that it wants to take a lead in the needed belt-tightening and sacrificing by making serious cuts in spending on government,” it said.

According to a senior economist of the institute, Dr J.K. Kwakye, that would go to help in quelling labour agitations.

He commended the government for merging the Information and Media Relations Ministry with the Ministry of Communications, adding that more of such moves were necessary to cut down government expenditure.

Currently, there are more than 700,000 people earning their keep from the public purse. This figure is in addition to 81 ministers and deputy ministers, 678 members of staff at the Presidency, 275 Members of Parliament and 23 Council of State members.

Job cuts elsewhere

Across the world, austerity measures are on the table, as governments try to reduce deficit and control their expenditure. These measures include the laying off of public sector workers, a slice in wage bills and refusal to hire replacements for retirees.

In the UK, for instance, a report by the Institute for Fiscal Studies found that the planned 40 per cent reduction in public sector jobs would hit the poorest parts of the country the hardest. About 1.1 million jobs in the public sector are set to go between 2010 and 2019 as a result of austerity measures.

In Greece, the redeployment of workers in the public sector, as part of the International Monetary Fund (IMF) and the European Union (EU) 240 billion euros bailout has attracted the wrath of workers’ unions. Over the last few years, around 20,000 public sector employees have been partially laid off and the aim is to reach 25,000 by the end of 2014.

IEA views

At the IEA’s 2014 mid-year economic review press briefing in Accra, which also touched on economic growth, inflation, fiscal management, the country’s public debt, exchange rates and reserves and the overall outlook for 2014, Dr Kwakye said the genesis of the country’s current economic challenges started in 2012.

“The borrowing and over expenditure in 2012 have come to haunt us,” he said.

According to Ministry of Finance figures, the country’s wage bill more than tripled between 2009 and 2012, rising from GH¢2.9 billion (62 per cent of tax revenue) in 2009 to GH¢9 billion (73 per cent of tax revenue), including salary arrears, in 2012.

This figure is way above the regional averages and the 35 per cent threshold by the West African Monetary Zone (WAMZ) secondary convergence criteria.

Gov't mid-year budget review

Last week, the Minister of Finance, Mr Seth Terkper, took his mid-year review budget to Parliament, in which he highlighted the key challenges facing the economy, revised some of the key targets in the 2014 budget and asked for an extra GHc3.1 billion to finance government expenditure.

The government is struggling to stabilise public finances, especially an unflinching budget deficit, increasing public debt and a cedi that has been on the slide against the major currencies since January.

Among the key reviews are a new target for the budget deficit at 8.8 per cent of gross domestic product, compared with an initially targeted 8.5 per cent; economic growth of 7.1 per cent this year, slashed from an initial eight per cent, and a year-end inflation rate of 13 per cent, compared to an earlier 9.5 per cent forecast.

Other issues

Providing a basis for the slow growth, Dr Kwakye listed the factors, including erratic power supply, low public investment, macroeconomic instability and low public investment as a result of a cut in capital expenditure.

He said at the rate the economy was being managed, it was time to either implement home-grown fiscal policies or run to the IMF for help, at the risk of having unpalatable conditions attached to whatever support would come from the fund.

He questioned the sustainability of the Single Spine Salary Structure (SSSS) and stated that if the structure would be maintained, the government should be able to demand high productivity and value for money from workers.

On inflation, the IEA senior economist expressed displeasure at the government’s decision to peg the forecast at 13 per cent.

“It is unfortunate that we seem to be validating high inflation, instead of trying to rein it in,” he said.

He attributed the increasing inflation to factors such as the periodic increases in fuel and utility prices, cedi depreciation and the unusually high food prices.

Dr Kwakye noted that the 2007 denomination was also to be blamed for the inflation the country was experiencing, as the cedi was given much higher value than it deserved.

That aside, he said given the fact that small pesewa coins had lost their value, traders were forced to round up figures to the nearest valuable pesewa, 50Gp, unlike the practice in the United States where every single cent was necessary in pricing.

With statutory funds in arrears, much-lower-than-budgeted grants, higher-than-budgeted wage payments, a squeeze of capital spending, among other factors which the IEA believed were influencing the budget deficit, he described the budget as one that was “seriously cash-strapped”.

On the sources of budget finance, he said a worrying development was the substantially higher-than-budgeted Bank of Ghana (BoG) financing, as commercial banks and non-banks alike reduced their support.

The way forward

To turn the situation around on the revenue side, he said it was time the government reduced the spate of tax exemptions, phased out universal subsidies and strengthened social intervention programmes targeted at the poor, in addition to broadening the tax base, tackling tax fraud and corruption and recovering ‘illegal’ judgement debts and other known misappropriated public funds involving the Savanna Accelerated Development Authority (SADA), the Ghana Youth Employment and Entrepreneurial Development Agency (GYEEDA) and Subah Infosolutions Limited.

According to an ISODEC and ActionAid Ghana study, Ghana loses approximately $1.2 billion in tax incentives offered foreign companies every year.

Dr Kwakye also prescribed a long list of antidotes for public expenditure, including reduced borrowing to the extent possible in order to reduce interest cost and reduce recurrent expenditure as a whole to create room for higher capital spending in order to boost growth.

Source: graphic.com
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