Budget built on weak foundation - IFS

Economic fundamentals remain weak, and so the 2017 budget lacks a strong foundation, the Institute for Fiscal Studies (IFS) has said, asking the new government to hasten slowly on its ambitious plans.

According to the Executive Director of the economic policy think tank, Prof. Newman Kusi, the ambitious nature of the budget which is titled, “Sowing the Seeds for Jobs and Growth,” is not supported by the weak economic foundation the government inherited.

Whilst the budget contains a number of policy initiatives capable of delivering the overarching goal of generating jobs and growth, Prof. Kusi said, “the critical issue here is that the government is desirous of achieving this goal in a very rapid manner, yet the prevailing economic conditions do not support the pursuance of this ambition in such a rushed manner.”

A weak infrastructure base, for example, has become a key factor limiting agricultural and industrial growth in the country, he said, at the institute’s review of the 2017 budget.

He added that fiscal consolidation is yet to be achieved, and restoring macroeconomic stability and achieving debt sustainability appear to be far off.

Leslie Dwight Mensah, an Economist at the IFS, also said the performance of the local currency, which has depreciated cumulatively by about 9 percent year-to-date, is now nearing crisis level.

Economic growth and job creation on a sustainable manner, he said, cannot be achieved without first providing the preconditions – addressing the infrastructure challenges, achieving fiscal consolidation, and restoring macroeconomic stability.

Ignoring the frail economic fundamentals will be akin to building a house on a weak or non-existent foundation, he added.

The new government has said it intends to achieve a growth rate of 6.3 percent, spurred by the creation of an enabling environment for the private sector, which includes wide ranging tax cuts as well as the introduction of a number of initiatives like One District One Factory, One Village One Dam, Free SHS, One Constituency One Million Dollar, Zongo and Inner City Development.

The IFS argues, however, that: “To successfully grow the economy, create jobs, increase incomes and reduce poverty will require a comprehensive planning and packaging of programmes and projects; developing proper implementation strategy and right sequencing of programmes and projects; forging right coordination among the levels of government and relevant institutions, and establishing discipline in execution.”

The government, it said, should also ensure that the preconditions for take-off, including adequate funding, are all in place.

“Above all, the government must ensure that the processes are all-inclusive.”

Stability

In its pre-budget forum held last month, IFS identified statutory payments as being the cause of the high level of rigidities in the budget, which holds back efforts to achieve fiscal consolidation and sustainability.

Together with wages and salaries and debt servicing, transfers to earmarked funds have consumed much of the fiscal space, leaving no room for other priority spending.

The IFS, therefore, proposes a kind of moratorium on the creation of earmarked funds, pending a critical review of the existing ones.

“We, therefore, think that it is in order that the budget has capped transfers to earmarked funds at 25 percent of tax revenue, pending a review of the existing relevant legislation so as to break the cycle of rigidities in the budget,” Mr. Mensah said.

In making these points, however, the IFS said it is not unmindful and would hope that stringent efforts are made to achieve the government’s lower fiscal deficit of 6.5 percent of GDP, as compared to the 8.7 percent for 2016.

Achieving the projected fiscal deficit for this year is subject to the ambitious revenue target being attained, otherwise the deficit target would be overrun unless expenditure is retrenched in the process, it said.

“We also note that the financing of the deficit will be done entirely from domestic sources, as the projected huge amortisation expenditure of around GH¢6billion will lead to negative net foreign financing.

The IFS suspects that the planned domestic financing will involve issuing debt in local currency but opening it to foreign participation. Either way, this will add to the mounting public debt stock, [approximately GH¢122 billion as at end 2016] with serious implications for debt servicing, and thus fiscal consolidation.”