2023 budget should provide indicators towards fiscal discipline - IEA to government

The Institute of Economic Affairs (IEA) is calling for a comprehensive 2023 budget that will provide indicators towards entrenching fiscal and monetary discipline to ease demand pressures in the economy and on the exchange rate.

Among many propositions, the institute wants economic and financial buffers to enable the economy to withstand unanticipated shocks, interventions directly targeting supply and cost influencers of inflation to supplement the Inflation Targeting (IT) framework, and a strategy to restructure the economy to make it capable of generating higher export receipts and producing import substitutes domestically to alleviate pressure on the exchange rate.

It described the 2023 budget as “a make-or-break one,” saying if it fails to get it right, near-irreversible damage could be done to the economy.

According to the institute, the budget must not be business as usual.

“It must break from the past and chart a new course to restore macroeconomic stability while laying the foundation for long-term sustainable growth and poverty alleviation,” Dr. John Kwakye, Director of Research at the IEA, revealed at a pre-budget conference.

“The 2023 budget must break from this unacceptable past. We believe that we should be able to increase tax revenue/Gross Domestic Product to at least 15-16% in 2023 and further to 18-20% in 2024. At the same time, total revenue/GDP could be increased to 18-20% in 2023 and 22-25% in 2024”, the IEA stressed.

It, therefore, wants the closure of the tax loopholes and the address of inefficiencies within the tax collection space.

On extractive tax, Ghana derives inadequate revenue from its huge natural resource wealth due to a combination of inappropriate fiscal regimes and lack of enforcement of agreed regimes. IEA, therefore, wants the government to review all extractive tax regimes to ensure that Ghana derives adequate benefits. It must also ensure that agreed regimes are fully enforced.

Regarding the Electronic Transaction Levy, the IEA noted that the levy is not only a multiple tax but also a nuisance tax that has failed to live up to its expectation.

However, rather than scrap it completely, “we suggest reducing the rate from 1.50% to 0.50%. By doing so, it may prevent people from trying to evade the levy, and Government may in the end rake in more than under the current 1.50% rate”.

Dealing with expenditure rigidities and imbalances

In terms of dealing with expenditure rigidities and imbalances, the institute wants the anomaly in the country’s expenditure in both economic and functional terms. Economic classification of expenditure is based on the recurrent-capital divide, while functional classification is based on sectoral allocation.

In terms of recurrent and capital expenditure, it pointed out that expenditure has been heavily skewed in favour of the former and against the latter. This, it explained, constitutes wrong prioritisation of expenditure and is inimical to growth.

Using the 2022 budget as an example, recurrent expenditure accounts for almost 90% of the total, while capital expenditure (CAPEX) accounts for a mere 10%.

On functional classification of expenditure, it stressed that it is useful to look at expenditure allocation on a functional basis to ascertain the importance attached to each sector of the economy.

“In the 2022 budget, out of the five broad sectors—administration, economic, social, infrastructure, and public safety—the social sector tops the list by far with about 50% of the total allocation, followed by public safety and then closely by administration, while the infrastructure and economic sectors fall far behind,” it added.

Credit: Daily Analyst