IFS endorses capping of earmarked funds but…

Fiscal policy think-tank, the Institute for Fiscal Studies (IFS), has backed government’s decision to cap revenue allocations to statutory funds at 25 per cent of tax revenue, but fears gains from that “bold step” would be neutralised by counter-moves to commence the implementation of expenditure-laden campaign promises this year.

Ahead of the government’s budget reading in March, the IFS had advocated for urgent measures to address the excessive rigidity associated with Ghana’s public budget. The proposal was accepted, resulting in the passage of the Earmarked Funds Capping and Realignment Act in March.

While the capping will help create some fiscal space for the government to manoeuvre its way around the current situation, a Senior Research Fellow with the institute, Dr Said Boakye, said that space could be eaten up by the coming onboard of new policies such as the Free SHS policy.

Given that these policies require a consistent flow of substantial revenue to implement, the researcher and economist explained in a media interview that the government would have been better off if it had delayed them until fiscal flexibility measures such as the capping of the earmarked funds had led to a much-improved fiscal position.

“We are happy that the government has seen the problem and, even more importantly, it has done something to solve it.

“That makes it good for everybody because the fiscal fundamentals were so bad that, like we said before, it was only mimicking the pre-HIPC (highly indebted poor countries) era,” he said, citing the surging debt levels, weak growth, dampened investor and business sentiments and strong inflation that characterised the last three years.

“Having been able to take such a bold step to cap it for some flexibility to come to the centre, I think it is a good step and we are excited about it,” he added.

Policy recommendations 

In a position paper presented ahead of the 2017 Budget, the institute revealed that revenue earmarking to statutory funds—which include District Assemblies Common Fund (DACF), Ghana Education Trust Fund (GETFund), Road Fund, among others—had combined with two other rigid expenditures – salaries and wages for public sector workers and debt servicing costs – to dwarf the country’s total revenue and grants.

“Thus, without having even begun to consider discretionary expenditure, the government has to resort to borrowing in order to be able to cover its total rigid expenditure,” Dr Boakye said at the institute’s pre-budget forum in February, this year.

As a result, the paper proposed that no new earmarked funds be established and existing statutory funds be reviewed with the aim to cutting the amount earmarked for them or closing down “nonessential funds.”

The excess funds from the capping, the paper said, should be returned to the central budget to help fund discretionary expenditures. 

Utilising savings

Consequently, the 2017 budget proposed to review existing legislation to break the cycle of rigidities in the budget. The budget proposal was recently legalised through the passage of the Earmarked Funds Capping and Realignment Act, the first in the country’s history. The Act caps budgetary allocation to 14 identified earmarked funds at 25 percent of the year’s tax revenue.

The paper learnt that the action could save the country about 15 percent of previous allocations to the funds per anum, while the Finance Minister, Ken Ofori-Atta, has said the capping translates into more than GH¢4 billion of freed fiscal space.

This is a bold initiative that deserves commendation, Dr Boakye said.

“But the concern we have is that you are getting this flexibility, you are getting some more money into the centre to help you, yet you have made so many campaign promises that are bringing on board so many new expenditures.

“So, if you are not careful, the flexibility may not be so useful because of the additional expenditure you are bringing,” he said.

While insisting that the fiscal situation would be better off if some of the expenditure-laden campaign promises were shifted into the second and third years of the government, the Senior Research fellow at the IFS said the situation would have been worse if the capping was not done.

He thus repeated the institute’s position that the Free SHS should have been postponed until the fiscal situation stabilises.

“We thought that the government had to take this year, in particular, to fix the fiscal situation before the additional expenditures are brought on board, but the government is not doing that,” he said.