Law to limit fiscal deficit under preparation – Bawumia

Business News of Wednesday, 24 October 2018

Source: goldstreetbusiness.com

2018-10-24

Mahamudu Bawumia DrDr. Mahamudu Bawumia, Vice President

Government is looking to present a bill to Parliament before the end of 2018 that will enforce a limit of the size of the fiscal deficit in any given year, Vice President Dr Mahamudu Bawumia has told a gathering of investors in London at the Ghana Investment and Opportunity Summit organized by the Ghanaian High Commission in the United Kingdom.

The President Nana Akufo-Addo administration has been pushing for legally enforceable cap on the size of government’s annual fiscal deficit since its electoral campaign that swept it into power at the December 2016 polls. Vice President Bawumia has now confirmed the declaration by senior minister Yaw Osarfo Marfo in September that government plans to push for legislation that caps the fiscal deficit in any given year at not more than 5% of Gross Domestic Product.

Proposed cap

The proposed cap is slightly higher than the 4.5% fiscal deficit target set for this year and significantly higher than government’s medium-term fiscal deficit target of between 3% and 3.5%. However the proposed cap is considerably lower than the 6% of GDP out turn for 2017 and the 9.3% deficit incurred by the Mahama administration during 2016, its last year in office.

To enforce a cap on the fiscal deficit, when passed into law, ostensibly during the first session of Parliament next year, government has declared its intention to establish a non-partisan Fiscal Responsibility Council, made up of economic and financial experts which, according to Dr Bawumia will hold the executive arm of government accountable through analyses of the budget and fiscal risk controls, commitments and expenditures.

Key issues

While government is committed to the fiscal responsibility act in form, there are still some technical issues that have not been decided on finally by the proposed law’s architects. For instance there is still debate as to whether the 5% cap should be applied on cash basis or on commitment basis. If applied on cash basis government would still have the leeway to commit to a higher fiscal deficit as long as the extra spending is in the form of payment arrears rather than actual payments.

Another debate centres around whether the proposed law should allow for a higher cap of the fiscal deficit in election years, when successive governments have customarily increased deficit spending to inordinate levels. While the impending new law aims in part to curb this practice, which tends to generate macroeconomic instability, some government economists and finance experts point out that genuine increased election year spending, particularly on holding the elections themselves, is inevitable, and needs to be accommodated in the new law.

Yet another area of controversy is about whether one-off spending for special, unusual circumstances should be part of the fiscal deficit cap. For instance although this year’s fiscal deficit is computed as 4.5% of GDP, in actual fact it ignores government’s issuance of bonds to the tune of some GHc12 billion to finance the capital shortfalls of seven liquidated banks and which, if included in the computations would take the deficit for this year to over 6% of GDP.

If the fiscal responsibility law is passed successive governments will be forced to either cut public expenditures, increase tax revenues or combine both, just as the incumbent government has done last year and this one, in order to stay within the fiscal deficit cap and thus not fall foul of the law.

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