Feature: Economic traps the new government should avoid

In December last year I analyzed the economic vision of the NPP as presented by their vice presidential candidate, Dr Mahamudu Bawumia.

The NPP campaigned on a vision of fiscal discipline, macroeconomic stability and debt sustainability all while reducing taxes and restoring some public sector benefits cut by the NDC government.

The party believes that by formalizing the economy, it will be able to bring in extra tax revenue. It also believes that the reduced taxes will stimulate economic activity that will actually increase the tax revenue collected – your classic supply-side economics.

Having emphatically won the election, pressure has started mounting on the incoming government to immediately implement their promises to restore allowances to some public sector workers and to scrap some taxes.

This pressure even before the NPP’s Nana Akufo-Addo is sworn in as president is an indication that many interest groups expect him to do away with the austerity implemented under the country’s programme with the IMF.

Even though I expect Nana Akufo-Addo to keep his campaign promises, I believe that he has to continue on the path of fiscal consolidation under the IMF plan until it expires in April 2018. The economy is set to grow at between 7% to 8% next year as oil production from the TEN fields kicks in. OPEC’s new deal is also expected to secure better oil prices than we had this year.

These developments present an opportunity for the new government to ensure a sound macroeconomic footing for the development and policies they wish to undertake.

Ghana’s public debt is approaching 70% of GDP with an external component that is 39% of GDP. It is important to maintain currency stability if interest payments are not to eat too much into the budget. Already, the hawkish stance of the Federal Reserve and the uncertainty over the election period have affected the cedi as shown below.



Source: Bloomberg.com

If Akufo-Addo starts to show that his government does not intend to keep up fiscal discipline the currency could come under more pressure.

This could happen if he intends to push through the tax cuts right away and we do not get enough revenue from commodities to make up the difference. Keep in mind that the reforms needed to formalize the economy and widen the tax net will take time.

Also I am skeptical about how much tax can be raised from the informal sector as well the ability of tax cuts to raise tax revenue as promised by the Laffer curve.

The moment the new president starts granting tax concessions to some industries, others will soon clamour. After winning a mandate of 53% in the election, he is unlikely to lose popularity in the short-term if he explains that he needs fiscal stability first to implement his plan. But if he should implement his plans right away and the fiscal pressures force him to rollback his stimulus, the political backlash could be worse.