The 2020 budget’s 5 or 6 per cent fiscal deficit ceiling, there is no incentive against overspending

John Gatsi Econo Prof. John Gatsi

Thu, 21 Nov 2019 Source: thebftonline.com

The reading of the 2020 budget amplified the authority of the Fiscal Responsibility Act, especially section 2(a) in which the overall fiscal balance on cash basis shall not exceed 5 percent of Gross Domestic Product (GDP) for a given fiscal year. This condition must be achieved together with section 2(b), where it is required that an annual positive primary balance should be recorded. Primary balance does not recognise interest-bearing expenditures like interest cost.

Interest cost of about GH¢18.6billion in 2019 and over GH¢21billion in 2020 are not included in computing primary balance, though the projected interest cost is just a little lower than the wage bill of over GH¢22billion.

By third quarter of 2019, a deficit target of about 4.1 per cent of GDP could not be achieved by government. There is overspending of about 0.3 per cent of GDP pending the end of the fiscal year. The deficit target for 2020 of 4.7 per cent given the outturn in 2019 indicates possible overspending.

Also, given an expenditure envelope of more than GH¢85.5billion with about GH¢55billion revenue target excluding non-tax revenue and grants, there must be a conservative borrowing amounting to more than GH¢30billion in 2020. If non-tax revenue and grants are added, then there is likely to be a minimum of GH¢11billion borrowing in 2020.

The real picture is that revenue will just not perform magic, hence revenue expectation may be the same as 2018 and 2019. In 2020, two compulsory expenditure items, namely wages and interest payments which are not negotiable, will consume about 79 per cent of the projected revenue. The rest will not be enough to pay NHA, DACF among others. There will be an estimated borrowing of 2 per cent of the projected revenue to be able to settle statutory funds. Implementation of programmes and projects are not inclusive. This means there is no direct investment of tax revenue.

Using total revenue of more than GH¢67billion, that is if non-tax revenue and grants are added, then 32 per cent of the revenue goes to cater for wages while 31 per cent settles interest cost on loans. This also means 63 per cent takes care of interest on loans and wages.

This threatens the 5 per cent deficit requirement in an election year with lower capital expenditure budget. The Finance Minister, in an election year, may not be guided by the 5 per cent ceiling because of the provision in Section 4 of the Fiscal Responsibility Act, indicating that the basis for censuring the Finance Minister by Parliament can only take place when he breaches the 5 per cent rule by more than 1 per cent.

This also means with 6 per cent there shall be no censure. So, in an election year, there is a cover to overspend. In a crucial election year with this cover in the Fiscal Responsibility Act, will there not be overspending beyond 5 per cent?

Another incentive for overspending in an election year is in Article 82, where a two-thirds majority of all members of parliament is required to ensure the Minister of Finance. How will this be achieved when the overspending benefits the majority? Again, the minister has the right to be heard during the censure debate. At that point, he will justify the overspending with some projects and programmes.

The point is that the overrated Fiscal Responsibility Act, together with Article 82 of the 1992 Constitution, is not strong enough to discourage over expenditure even beyond 6 per cent when a government has the majority in parliament. It is all about the maximum 21 days of moving a motion followed by usual partisan debates. Even in the worst-case wherein Parliament votes by two-thirds to censure, the President may revoke his or her appointment, not shall revoke.

This analysis excludes promises in terms of projects and programmes because revenue and expenditure define their implementation, hence the focus on revenue, expenditure and their related issues. In an election where over-expenditure is normally noticed during the transition period, are we expecting the majority in parliament whose party is defeated to vote to censure their Finance Minister?

Whether or not the Fiscal Responsibility Act and Article 82 are the magic bullets against overspending, the unbridled deficit is a cost that will affect the management of the economy – especially when the over-expenditure is not productive.

The roadmap to over-expenditure in 2020 is clearly seen in how the deficit target of 4.1 per cent was not achieved, and the deficit for 2020 is very close to the so-called 5 per cent ceiling. Therefore, the year 2020 will be a year of huge borrowing, increased deficit, and unattractive fiscal ratios because of the elections. The temptation is there to overspend, but the government must flee from it.

The writer is the Head, Department of Finance, at the University of Cape Coast (UCC)

Columnist: thebftonline.com