Don’t cap fiscal deficit

The Institute of Chartered Economists of Ghana (ICEG) has urged the government to reconsider its decision to cap the level at which the government can overspend its budget, otherwise known as fiscal deficit, between three and five per cent of Gross Domestic Product (GDP).

The economists said it was not advisable for an economy that was performing below its potential to cap its fiscal deficit, since the overspending (deficits) served as a driver of economic growth.

“In an economy like ours, although fiscal consolidation is recommended for macroeconomic stability, fiscal capping is unnecessary because there is the need for real growth and development, so fiscal regime requires vigilance but not serendipity," the Chief Executive Officer (CEO) of ICEG, Mr Gideon Amissah, stated.

He made those observations in an interview with the Daily Graphic in Accra.

No capping

Mr Amissah said even though it was true that fiscal deficit served as a recipe for accumulation of public debt and higher taxes, Ghana's case appeared to be overstated.

"Our public debt portfolio was dominated by the external component until 2013. The situation resulted largely from the depreciation of the cedi to the dollar," he added.

He further disagreed with the position by some people that government’s borrowing from the financial markets was crippling the private sector investments as untenable.

"The Bank of Ghana's Banking Sector Report (May, 2017) showed that the private sector share of total credit from the commercial banks is 86. 3 per cent, while the public sector constituted 13.7 per cent. This trend is not a current one so the concept of crowding out private sector investments as a result of government fiscal deficit appears to be baseless," he said.

Recommendation

ICEG, therefore, recommended that the government ought to go beyond re-profiling domestic debts to consider doing same for external debts in terms of cost and maturity.

The institute further urged the government to take steps to check the depreciation of the cedi against the dollar through prudent application of gross international reserves.

"The Parliamentary Select Committee on finance ought to ask for an accountability mechanism for breachers of the Fiscal Responsibility Act because even though capping is expected to boost confidence, lack of accountability with clear guidelines will make it inefficient," Mr Amissah said.

Background  

The position of ICEG comes against the backdrop of the Vice-President, Dr Mahamudu Bawumia’s, recent hint that the government would consider capping the country's fiscal deficit to between three and five per cent.

The revelation followed Cabinet's approval for the submission of the appropriate legislation to Parliament to amend the relevant law.

The proposed amendment to the Public Financial Management Act is expected to limit the fiscal deficit to the domain of three per cent and five per cent of Gross

Domestic Product (GDP) from the year 2018, to ensure greater fiscal discipline.