IMPROVING FISCAL MANAGEMENT IN GHANA: THE ROLE OF FISCAL POLICY RULES

Size: px

Start display at page:

Download "IMPROVING FISCAL MANAGEMENT IN GHANA: THE ROLE OF FISCAL POLICY RULES"

Thomasina Sutton
5 years ago
Views:

1 IMPROVING FISCAL MANAGEMENT IN GHANA: THE ROLE OF FISCAL POLICY RULES Institute of Economic Affairs Accra, Ghana 16 th June, /16/2015

2 Introduction Ghana has a long record of poor fiscal management with attendant macroeconomic instability and rising debt. This paper discusses the role that fiscal policy rules can play in improving fiscal management in Ghana.

3 Specifically, the paper addresses the following issues: How fiscal rules can help to improve fiscal management in Ghana Fiscal rule options and an illustrative rule for Ghana The importance of supporting institutions and arrangements

4 Ghana s Fiscal Management in Context But before we delve fully into the issue of fiscal rules, let us take a brief look at Ghana s fiscal policy record. Fiscal deficits have been generally high --and they tend to escalate in election years

5 Fiscal deficit (percent of GDP) High fiscal deficits are common in Ghana and tend to worsen in election years 1.0 Figure 2. Ghana: Fiscal performance ( ) Red shaded bars represent election years -13.0

6 Borrowing to finance the high deficits has led to a mounting public debt, currently running at about GHc88 billion or close to 70% of GDP.

7 Central government gross debt (percent of GDP) rising public debt 140 Figure 3. Ghana: Total Government debt ( ) 120 Red shaded bars represent election years

8 Revenue and Expenditure Trends The high deficits emanate from revenue and expenditure gaps. It is standard practice, especially in debt analysis, to focus on the primary fiscal balance. This measure excludes interest payments on existing debt. The primary fiscal balance is then defined as domestic revenue less primary expenditure (which excludes interest payments)

9 Revenue performance has improved but primary spending has also increased

10 Composition of Government Spending capital spending wages and salaries Interest payments Subsidies Goods and ser vices Figure 5. Ghana: Composition of Total Expenditure (Percent of GDP)

11 Achieving fiscal and debt sustainability An ambitious fiscal consolidation strategy will be required to rein in the debt This paper argues that adopting some kind of fiscal rule can be an important tool in achieving fiscal consolidation and debt sustainability

12 Fiscal Rule and Types A fiscal rule is a permanent constraint on fiscal policy through simple numerical limits on budgetary aggregates. Four types of rules can be identified fiscal target rule, debt rule, expenditure rule, and revenue rule.

13 Types of fiscal rules Fiscal deficit rules set limits on the deficit geared to ensuring that the debt-to-gdp ratio converges to a finite level. Debt rules normally set explicit limits or targets for public debt as a percentage of GDP.

14 Expenditure rules usually set permanent limits on spending. Revenue rules usually set floors on revenues and are aimed at boosting revenue collection. In unusual cases, the rule may set a revenue ceiling if this is needed to prevent excessive tax burden.

15 Several countries around the world have adopted fiscal policy rules. There are currently 76 countries with fiscal rules, up from only 5 in 1990.

16 The Literature on Fiscal Policy Rules Fiscal policy rules are statistically known to be associated with better fiscal performance. Marneffe et al (2011) examined the impact of fiscal rules on public finances in the Euro Area They found that fiscal rules have in most cases a significant positive effect on the fiscal balance Fiscal rules have been identified as an important factor accounting for the success of fiscal consolidation.

17 An Illustrative Fiscal Rule for Ghana Given the problem of rising debt in Ghana, an illustrative simple fiscal was calibrated for Ghana based on the debt sustainability approach, targeting a debt-to- GDP ratio of 50% by The baseline scenario, based on gradual fiscal consolidation, with the fiscal deficit declining from 10.2% in 2014 to reach 4.1% in 2020, shows that Ghana s debt-to-gdp ratio increasing from 51% in 2012 to peak at 70% in 2016 and fall to 60% in 2020.

18 Using a debt-rule targeting the debt-to-gdp ratio in 2020 at a sustainable level of 50%, on the other hand, and requiring a front loaded fiscal adjustment with the deficit decreasing from 10.2% in 2014 to 1.2% in 2020 on the other hand, shows the debt rising to 51% in 2012, peaking at 68% in 2015 and falling to the target of 50% in On average, a fiscal deficit of 4% per annum will deliver the debt target in 2020.

An illustrative fiscal rule for Ghana The Debt Sustainability Framework (DSF) determines a floor on the path of overall balances that could achieve the debt ceiling by a given target date. Table 5.

19 An illustrative fiscal rule for Ghana The Debt Sustainability Framework (DSF) determines a floor on the path of overall balances that could achieve the debt ceiling by a given target date. Table 5. Ghana: Illustrative Fiscal Rule and Baseline Compared (Percent of GDP) Baseline Fiscal balance Adjustment Central government gross debt Central government net debt Debt rule Fiscal balance Adjustment Central government gross debt Central government net debt

20 An illustrative fiscal rule for Ghana 14 Figure 8. Ghana: Fiscal Balance under Illustrative Debt Rule Baseline Debt rule

21 An illustrative fiscal rule for Ghana 75 Figure 9. Ghana: Public Debt under Illustrative Debt Rule Baseline Debt rule

22 For purposes of comparison, under the current Ghana- IMF programme, the debt-to-gdp ratio is forecast to peak at 72% in 2015 and to fall to 58% by 2019 and further to 39% by These forecasts are based on progressive fiscal consolidation and continued decline in the fiscal deficit.

23 Additional Supporting Rules and Procedures For the fiscal rule to be effective, there is a need for additional supporting rules and procedures. There is a need for periodic reviews of the numerical targets and economic assumptions. Mechanisms are needed to encourage compliance with the annual fiscal targets 23

24 Appropriate coverage of the fiscal rule is needed to ensure transparency and capture government and quasi-government activities: i.e. central government, local government, public -owned enterprises and corporations. An Escape Clause may be included to allow deviations from the fiscal targets in exceptional situations

25 Strengthening the sanctions regime would also enhance credibility. A Fiscal Policy Council, defined as a publiclyfunded, non-partisan institution, may be required to perform, among others, the following functions: 25

26 To evaluate fiscal policy, To monitor fiscal performance, and/or To advise policymakers on policy options

27 In some jurisdictions, the FPC takes the form of a Parliamentary Budget Office (PBO), manned by preferably independent budget experts. The PBO essentially monitors and oversees the budget from preparation through implementation. IEA has suggested formation of a PBO in our earlier work

28 In contrast to audit institutions, FPC/PBOs analyze public finances ex-ante. An independent FC/PBO could have a key role in assessing the reliability of the macroeconomic and budget assumptions

29 Forecasts produced by FCs/BBOs can serve as a neutral baseline to assess the fiscal cost and macroeconomic impact of policy proposals. In some countries, FCs/PBOs also play a watchdog role by monitoring compliance with fiscal rules

30 Embedding Fiscal Rule in Legislation For the FR rule to be effective, it may have to be embedded in legislation a kind of Fiscal Responsibility Law (FRL) as Chile did. The FRL will back the FR by providing for enforcement and sanctions provisions, among others. Many of the existing Ghanaian public finance legislations are weakened by lack of sanctions provisions.

31 The Chilean Experience with Fiscal Rules Chile has successfully used fiscal rules and its experience is a useful blueprint. Chile adopted a fiscal rule after reducing its debt from 165% in 1985 to 20 % of GDP in 2000.

32 The rule requires that the cyclically adjusted primary balance be in surplus and was written into law in The ceiling under the budget balance was originally set as 1 percent of GDP.

33 The calculation of ex-ante revenues is the lynchpin of the rule. The computation takes into account cyclical factors and copper price fluctuations.

34 The fiscal surplus rule adopted implies that eventually the government must be a net creditor. Every country is different though and appropriate rule will be necessary in each case.

35 Some of the Reasons for the Chilean Success The existence of a Committee of Independent Experts to oversee the budget process: They are responsible for providing the Government with assumptions regarding GDP and long run copper prices. They are involved in the budget process and produce cyclically-adjusted figures.

36 The transparency of the process: The calculation of the cyclically adjusted balance is presented and explained to the public. The special relationship and roles of the Legislature and the Executive: The power to set the budget is entirely in the hands of the Executive. The Legislature is not allowed to reduce taxes or raise spending.

37 Summing -UP Weak fiscal management has worked to undermine Ghana s economic progress by exacerbating macroeconomic instability, creating a looming debt crisis and crowding out the private sector Adoption of a fiscal rule would enhance transparency and improve fiscal performance

38 To be effective, the Fiscal Rule will require a number of supporting arrangements and mechanisms, including: 1. Strengthened budget preparation 2. An independent Fiscal Council or Parliamentary Budget Office to provide independent assessment and monitoring of the budget

39 3. Legislative changes, including enactment of a Fiscal Responsibility Law to give legal backing to the rule binding 4 Escape clauses to ensure flexibility in dealing with unanticipated shocks

40 The Final Message of the Paper Discretionary fiscal policy has failed us. The incessant resort to IMF bailouts is a reminder of this failure. Adopting a fiscal policy rule embedded in legislation will help to entrench much-needed fiscal discipline in Ghana

41 THANK YOU

Fiscal Rule for Albania. Jiri Jonas. Albania Opportunities and Challenges in the Move Towards Emerging Market Status. Tirana, May 14, 2008

Fiscal Rule for Albania. Jiri Jonas. Albania Opportunities and Challenges in the Move Towards Emerging Market Status. Tirana, May 14, 2008 Fiscal Rule for Albania Jiri Jonas Albania Opportunities and Challenges in the Move Towards Emerging Market Status. Tirana, May 14, 2008 Outline What are fiscal policy rules (FPR)? Brief history. Major