A former Finance Minister, Dr Kwabena Duffuor, has advised the government to focus on stabilising the economy this year rather than pursuing growth, since the economic fundamentals are weak.
Although he lauded the government’s initiatives introduced in this year’s budget, he said it was necessary for care to be taken in ensuring that the fiscal and the macroeconomic environments were more conducive.
Dr Duffuor, who is the Founder of the Institute for Fiscal Studies (IFS), a policy think tank, was sharing his views on the 2017 Budget Statement and Economic Policy in an interview with the Daily Graphic.
He was contributing to issues raised at a press briefing organised by the IFS on the 2017 Budget Statement and Economic Policy in Accra yesterday.
“We agree that accelerated growth of the economy is critically needed, but that cannot be achieved in adverse fiscal and macroeconomic environments.
“Once the economic fundamentals become stabilised and strong, it is easier to achieve growth. In fact, growth becomes automatic,” he said.
Budget addressing challenges
The Executive Director of the IFS, Professor Newman Kusi, who addressed the press, said the 2017 Budget Statement had recognised the excessive degree of fiscal rigidity as a major cause of the country’s fiscal difficulties and had thus proposed measures to address it.
“Specifically, the government has proposed to reduce the degree of rigidity in the budget by capping earmarked transfers (one of the three major rigid expenditures in the budget) at 25 per cent of tax revenue. This is in line with the recommendations we offered at IFS’ 2017 Pre-Budget Forum organised on February 13, 2017,” he said.
He said the fiscal deficit was projected to reduce to 6.5 per cent of gross domestic product (GDP) in 2017 by sharply increasing total revenue and grants by 33.5 per cent, and by reducing the rate of growth in total expenditure (including arrears payment) to 13.7 per cent in 2017 from the 22.6 per cent growth rate recorded in 2016.
The budget, he said, was quite ambitious with regard to economic growth, for which reason fiscal policy had largely been directed towards accelerating the real GDP growth rate.
Real GDP growth rate is projected to increase sharply to 6.3 per cent in 2017 from the provisional rate of 3.6 per cent in 2016.
“The government plans to achieve this by creating the enabling environment for the private sector, which includes the provision of a number of tax cuts. Also, the government has proposed to direct funding towards special initiatives to help achieve the accelerated economic growth. The special initiatives include One District One Factory, One Village One Dam, Free SHS, One Constituency One Million Dollars, Zongo and Inner City Development,” he said.
Prof. Kusi reiterated the need for the government to pursue fiscal consolidation in 2017 to enable it to pursue its growth agenda.
“While we agree that accelerated growth of the economy is critically needed, we believe a more conducive fiscal and macroeconomic environment should be sought in 2017 before the government rolls out the ambitious growth policies in later years,” he said.
He added that because macroeconomic stability depended largely on fiscal outcomes in Ghana, a stronger fiscal consolidation strategy should be pursued in 2017. Thus while the projected fiscal deficit of 6.5 per cent of GDP for 2017 represents 2.2 percentage points reduction over the 2016 outturn, “we believe that the government could have targeted a lower deficit ratio to minimise borrowing, which has been budgeted to amount to GH¢16.75 billion in 2017 (GH¢12.09 billion in domestic borrowing and GH¢4.66 billion in international borrowing).”
Prof. Kusi explained further that a lower fiscal deficit could be targeted by directing the earmarked funds above the proposed cap to fund some of the existing or traditional expenditure items, instead of directing them to fund new expenditure items brought on board by the new initiatives.
The IFS also said reducing the fiscal deficit in 2017 would significantly reduce the rate of borrowing and thus the rate of debt build-ups, and help stabilise the economy to create the enabling environment for ambitious growth policies to succeed later.