Confronting the budget deficit

I count him braver who overcomes his desires than him who conquers his enemies; for the hardest victory is over self.-Aristotle

By Appiah Kusi Adomako

For the first time in many years the issue of budget deficit has monopolized the pages of the press and crowded the conversation of parliamentarians and the citizenry. The Minister of Finance has told Ghanaians that the budget deficit as at December 31st, 2012 was GHC 8,648.7 million which represents 12% of GDP against the target of 6.7% of GDP. This means that the government’s outlay was in excess of the revenue received. To put it bluntly, the Government of Ghana spent more money than it made. Period! The Minister of Finance in his submission to the Parliament stated the reasons which accounted for that figure:

• Shortfalls in corporate income taxes, notably from the petroleum sector – GHC708.2 million (1.0 percent of GDP);

• Shortfall in grants from our development partners – GH¢389.4 million (0.5 percent of GDP);

• Implementation of the single spine salary structure – GH¢1.91 billion (2.7 percent of GDP);

• Higher interest cost – GH¢245.0 million (0.3 percent of GDP);

• Utility and fuel subsidies – GH¢339.0 million (0.5 percent of ? GDP); and

• Higher spending on goods and services (which is already constrained by other expenditures) – GH¢354.7 million (0.5 percent of GDP).

What the Minister did not tell Ghanaians are other causes which have brought us into the ditch. The high deficit has come about as a result of over spending by the MDAs. It is been bandied around that the Office of the President overspent a whopping GHC 600 million without parliamentary approval. It was not only that of the Presidency that overspent. The Ministry of Youth and Sports, and National Disaster and Management Organization (NADMO) have both been cited for spending in excess of their budgetary allocation. The cause of the soaring budget deficit has mainly been over-runs in public expenditure.

Though the government has projected a deficit rate of 9% of GDP for the fiscal year 2013, I can forecast that the projection will be unattainable unless there is structural reform in our public finance. It is more likely that the wage bill will go up again due to the ongoing Single Span Salary Structure (SSSS). The irony is that as government has spent more on public sector salaries, productivity has not improved. Government after government in the country has not been able to demand public sector accountability when it comes to productivity. In an era where MDAs are not spared from the albatross of the current load shedding, productivity at some of these MDAs would go down. I recently visited a government department in Accra and the workers there were sitting idle. I asked and was told that they had no electricity to work. It is a pety that we pay people go to work, and yet cannot provide them with power when all these MDAs are income generating units for the government.

At the rate at which the government is borrowing, loan repayment and interest cost would go up in the coming year. Since government’s external borrowing is denominated in dollars, when the cedi tumbles against the major currencies, it increases the country’s liability. This means that a strong cedi is a bulwark against the soaring public debt. Does this mean that government should borrow from the domestic market? While it is easy for a government to borrow from the domestic market, the downside is that domestic borrowing can crowd out private sector credit with adverse consequences for private investment, and increase interest rates.

The 2013 Budget Statement also mentioned utility and fuel subsidies amounting to GHC339.0 million (0.5 percent of GDP). The inability of government to allow the petroleum pricing formula to operate fully and freely cost the nation GHC 339 million. Though it is economically efficient to allow the fuel prices to be dictated by the market forces, government after government in the country have found it politically inexpedient - for fear of losing elections. Fuel subsidies are never good a thing. It is like what Dr. King said that it has been like tranquilizing thalidomide, relieving the emotional stress for a moment, only to give birth to an ill-formed infant of frustration. Fuel subsidies never help the poor. It is only the few rich who benefit. Economists say that fuel subsides create “dead weight loss.”

REDUCING THE DEFICIT

Most economists contend that we should not seek to balance the budget, even if it is politically feasible. To cut spending or raise taxes enough to bring the deficit to zero would arguably wreck the economy. Under the Keynes’s theory, a deficit is acceptable if it helps an economy to reach full employment, increase consumer spending and take people from welfare to payroll. There has been a widespread agreement in seeking a deficit reduction solution. . However, there is very little agreement in the proposed solutions. The minority believes that deficit reduction requires prudent management of limited public resources. By this they want the government to cut waste in the system. The majority on the other hand wants some form of upward review of tax rates. Both groups are treating the proposed solutions as mutually exclusive offers, which should not be. A comprehensive solution will require both, to varying degrees. However, when prioritized, the lowest hanging fruit is reducing government waste. In Europe and North America, the response to their economic crisis was cutting public sector waste and reducing some social intervention programs. In our case, it is never the right thing for the government to cut its social intervention policies. I think we need more. Thankfully enough, the 2013 budget saw an increase in government’s social welfare programs.

1. REDUCING WASTE IN THE SYSTEM

The first approach in every budget deficit reduction is the removal of government waste. Waste in government manifests itself in over-invoicing, redundant roles at the MDAs, largesse spent on government officials (including fuels, allowances for meetings, etc.). Judgment debt is an avoidable debt which can be prevented in the first case. The list of waste in the system is endless. Reducing the waste implies sealing loopholes. Government and its operation is becoming bigger while its positive impacts to the taxer is diminishing. If MDA services were to be outsourced to private companies in Ghana, I have every reason to believe that the running cost would be cheaper and better performance than the way it is been managed. The recent Joy FM expose on systematic looting of tax payers’ money at the National Youth Employment Program (NYEP) gives eloquent testimony that the public purse is being looted.

Ghost names also cost tax payers about 1.3 percent of Ghana’s GDP, translating into over GHC 1 billion that was paid to non-existent public sector employees, according to analysis done by the Centre for Policy Analysis (CEPA).

Restructuring the public sector and the government business to conform to international best practices would not only reduce the gargantuan waste but also increase service delivery while enhancing customer satisfaction..

2. FISCAL DISCIPLINE

It was Aristotle who once said that “I count him braver who overcomes his desires than him who conquers his enemies; for the hardest victory is over self.” In this present crisis when economic health of our country seems to be weak, the strongest thing that the government needs to do is to engage in fiscal discipline.

Unrestrained borrowing by government and needless expenditure has been the bane of this country. Regrettably, the legislative hall of our parliament has been reduced to a loan approving center. Almost no loan agreement has ever been turned back by Parliament even when credible information suggests otherwise. The phenomenon of “group think” and “Abilene Paradox” is what drives the affairs on the majority side. Majority may carry the vote but they may necessarily not carry the right decision. Parliament has lost its oversight responsibilities on the Executive and it has placed consensus thinking above rational decision making.

Maintaining fiscal discipline from one administration to another requires a budget process that is fully institutionalized within a country’s legal and regulatory systems and in its legislative procedures. There are several things government can do to control the outruns of public expenditure: 1. Prohibition of unfunded expenditures (defined over the business cycle, with saving taking place during good times and dis-saving during bad times 2. Legal ceilings on total public sector indebtedness relative to GDP 3. Standards and obligations for disclosure of the entire fiscal cycle— budget preparation, approval, and execution—to improve accountability of fiscal authorities and enable better monitoring by voters

4. Fiscal contingency funds that set aside unexpected revenue due to high world prices of oil, copper, and other natural resources

3. MAXIMIZATION OF TAX REVENUES

Budget deficit and the government’s unending drive to borrow from both the international and domestic market is clear indication that government’s appetite (expenditure) far exceeds its pocket (revenue). It is understandably clear that the required amount of funds needed to bring Ghana’s infrastructure development to a level comparable with BRIC (Brazil, Russia, India and China) counterparts, will require government to look for foreign aid and the international capital market to fund development projects.

However, with the rebasing of Ghana’s economy in November 2010 which in statistical terms labels the economy as a middle income nation, it means that government should be doing well on revenue mobilization than it is doing now. It speaks in volume an underworld economy of untaxed people and activities. With the consolidation of all the revenue agencies under one umbrella, revenue mobilization has improved relatively. Nevertheless, there are a lot of individuals and businesses that are still on the outside of the tax handle of the Ghana Revenue Authority (GRA). I think there is no need for a new tax to be introduced at this moment.

At the top public senior high schools, teachers are making tons of money from extra classes, and yet the GRA is unable to tax them. Publishers are making lots of money through the sales of pamphlets and yet they remain untaxed. The GRA is unable to tax capital gain taxes appropriately. People who work in multiple places also do not pay the right income bracket..

Tax incidence in this country is unfair. People must pay their fair share of the taxes. I believe in horizontal and vertical equity in tax administration.

4. PARLIAMENTARY OVERSIGHT

Parliamentary oversight on the Executive and its expenditure will spare the autopsy work done by the Public Account Committee (PAC). Over the years, the work of PAC has been commendable but too late for implementation. The question is why should we allow someone who is sick of malaria to die and come to perform postmortem when the person could have been cured in the first place? This is what defines the work of the PAC. Whilst their work is laudable, I think that something like the US Congressional Budget Office (CBO), a non-partisan federal agency within the US Congress that provides economic data to the US Congress can be of value to us. In Ghana such an office can go further in tracking public expenditure on monthly basis and report to Parliament.

A proper parliamentary oversight on public finances will prevent the executive from always spending outside budgetary allocation. It would also save the tax payers for paying for the untamed actions of politicians who would put party interest above that of the nation.

CONCLUSION

Reducing the budget deficit is essential towards our forward match in reducing the national debt stock. It requires fiscal discipline on the part of the executive, oversight responsibility from the Parliament and above all everyone paying his or her fair share of taxes.

Editor’s note: The writer is public policy analyst and management consultant. He can be contacted through: appiahkusi@gmail.com or 024-392-0926