2019 Budget’s slower fiscal consolidation

Finance Minister; Ken Ofori-Atta

As expected, the 2019 budget aims to slow the pace of fiscal consolidation and provide a public sector boost to economic output. TOMA IMIRHE examines the incumbent government’s first cautious steps towards a post IMF supply side driven growth strategy

The 2019 budget has been intensely anticipated because it is meant to reveal whether the incumbent government is as committed to replacing International Monetary Fund driven demand management with supply side economic policy, as it claimed it was on the electoral campaign trail in 2016.

Since assuming power, the following year, several top tier government officials have reaffirmed that commitment and indeed the government has not hidden its desire to get out of the IMFs supervision as quickly as possible. That desire was delayed by one year at the firm insistence of the Fund to enable Ghana correct the fiscal slippages suffered in the run up to the 2016 general election; yet, for 2018 government refused to cut its fiscal deficit target to the 3.9% of Gross Domestic Product set by the IMF, opting instead for slower fiscal consolidation with a target of 4.5%.

Instructively, for 2019, although government is continuing fiscal consolidation by lowering its fiscal target to 4.2%, this is still higher than the 3.9% the IMF wanted Ghana to end its Extended Credit Facility programme with.

All this confirms that Ghana is on the cusp of a sharp change of economic management strategy, but even with the IMF preparing to depart, government is still going about it with lots of caution. This is prudent, not just to ensure that the recent gains with regards to the restoration of macro-economic stability are sustained, but also because the Fund still has the power to influence the international financial, investment and development assistance communities and Ghana needs them all more than ever, despite its determination to take the country “beyond aid.”

Instructively, government has reset its medium-term fiscal deficit target at between 3.5% and 5%, up from its earlier target of an average of 3.5%. Indeed, government intends to legislate a 5% cap on the annual fiscal deficit and establish a Fiscal Council to enforce it.

However, even with slower fiscal consolidation than under the IMF, government knows it will need lots of private investment, much of it from abroad. Its success in negotiating major new financing deals, and expectations that it can conclude more next year have encouraged it to plan a 55% increase in capital expenditure, to GHc8.5 billion.

The first US$500 million tranche of the US$2 billion bauxite leveraged infrastructure financing deal is being expected during the first quarter of 2019. VAT receivables will be used to support US$1.5 billion in debt financing, to be received in three tranches, for educational sector infrastructure. Government is also planning another Eurobond issuance in 2019, of up to US$3 billion. While US$1 billion will be used to part finance the 2019 fiscal deficit and another part will be used to refinance already existing debt, up to US$1 billion would be available for financing new infrastructure.

Spending is to be stepped up for the one district one factory initiative and the rehabilitation of viable but distressed enterprises as well.

This is aimed at both improving the operating environment for business and injecting more liquidity into the economy. Government’s supply side driven economic growth aspirations have been given a further boost by the recent rebasing of the economy which has reduced Ghana’s public debt to GDP ratio to about 55%, much lower than the peak of 73% reached in 2016 and government sees this as more room for borrowing.

The rebasing has also given government a strong case for generating more tax revenues. Following the rebasing Ghana’s tax revenues as a proportion of GDP has fallen to just 21.5%, barely half of the average range of between 22% and 25% achieved by other countries ranked as lower middle income.

At last, a government of Ghana has devised a strategy to broaden the tax net to capture many, if not most of the eight million or so people in the country who are earning incomes but are not paying any income tax. Presenting next year’s budget to Parliament, Finance Minister Ken Ofori Atta warned that tax evaders will henceforth be deprived of access to all sorts of public goods and services and even run the risk of prosecution. However, government will have to work fast at this or the opportunity may pass for now; the closer it gets to the next general election, the less political will government will be able to muster to tackle members of the electorate who are evading taxes.

For 2019, significantly improved tax compliance and administration will be crucial since government is counting on a 25.5% increase in domestic revenues – to GHc57.8 billion- over the projected out turn for 2018 to fund an increase in public expenditure. Non-oil tax revenues will make up most of this, projected at GHc42.5 billion, but shortfall of nearly 10% in revenues over each of first two years of the incumbent government’s tenure has raised concerns as to whether the 2019 target can actually be met.

Importantly, government is also expected newly recapitalized banks, with cleaned up balance sheets to increase their credit growth to the public sector as well. Indeed, government is prudently looking up to private sector financing, in the form of public private partnerships and direct investments, to increase Ghana’s economic output capacity.

This means the objectives of the budget can be largely achieved even if all the financing planned for is not secured. Just as importantly, it creates the possibility of supply side driven economic growth being achieved without compromising fiscal consolidation. Even if the pace is slowed somewhat.