29th January 2019
The Honourable Minister
Ministry of Finance
RE: CONCERNS AND QUESTIONS ABOUT GHANA’S FISCAL RESPONSIBILITY ACT
OccupyGhana® is delighted that Ghana has passed a fiscal responsibility act. It’s a step in the right direction.
But we at OccupyGhana® are still grappling with the basic question: “will the Act actually control excessive government expenditure now and in the future?”
For instance, according to the law, “… the overall fiscal balance on cash basis for a particular year shall not exceed a deficit of five percent of the Gross Domestic Product for that year; and an annual positive primary balance shall be maintained.”
We note that:
Overall budget balance = (Primary balance) + (Government Interest Payments).
From this, the following questions and concerns arise:
- If the primary balance must be positive, why doesn’t the Act specify how big it must be (say as a proportion of GDP)?
- Is it not the case that without specifying the size, arguably, any small positive amount (even GHC 100) would satisfy the law?
- Wouldn’t a cynically pro-spending government have the incentive to choose a primary balance approximately equal to zero?
- Then given that the primary balance is approximately equal to zero, we get: Overall budget balance = interest payments. That would be legal, but wouldn’t that defeat the aims of the law?
- We note that the law caps the budget deficit-GDP ratio at a maximum of 5%. Doesn’t this imply that a government could always borrow to pay interest payments such that annual interest payments are equal to 5% of GDP?
- Would it then not be the case that Parliament cannot reject it because it is the law and also that with the primary balance at almost zero, only borrowing can finance interest payments?
- How does the law prevent a government from rolling over the debt perpetually by borrowing to service its debt?
- In each year, the government sells additional bonds (debt) to pay the interest on the debt and to pay off holders of maturing government debt. However, if the annual interest payments on the debt (before the law became effective) exceed 5% of GDP, would this not imply that the primary balance must have a sufficiently big and positive value?
- How do we ensure that a self-interested government cannot game this law?
- Section 3 states the circumstances under which the fiscal responsibility rules may be suspended. These include occurrences such as natural disaster, public health epidemic, drought, an unanticipated severe economic shock including commodity price shocks; and periods where the Gross Domestic Product growth rate is one per cent or less. Although this provision appears necessary for fiscal flexibility, aren’t there any chances that it could weaken the law?
- What if a minister of finance claims that because tax revenue fell unexpectedly, pushing the primary balance to be negative, the overall budget had to exceed 5% of GDP? Technically this might not be a violation of the law. In fact, the minister would have considerable discretionary power because the law provides that the “… unforeseen economic circumstances referred to … shall be such that as a result of the occurrence of the circumstances specified, the Minister is of the OPINION that the implementation of any of the fiscal responsibility rules would be unduly harmful to the fiscal, macroeconomic, or financial stability of the country.”
- Perverse fiscal incentives may not arise if the circumstances that warrant the suspension of the fiscal rules are outside the control of politicians. Commodity price shocks in global markets and natural disasters are examples of events that are outside the control of politicians. But a GDP growth rate of one per cent or less or a low tax revenue need not be events that are outside the control of politicians. They could be the result of mismanagement by politicians and bureaucrats. Why then does the law not define “severe” in “unanticipated severe economic shock”?
- If a shock is severe but anticipated or should have been anticipated, does this scenario fall under section 3?
- Further, doesn’t a positive primary balance imply that all non-interest expenditure must be financed from revenue, not borrowing?
- Is it consistent with this government or any government’s big plans (e.g., infrastructural plans)? For instance in September 2018, President Akufo-Addo said that his government may issue a 100-year $50 billion bond for infrastructural and industrial development.
We note that India enacted a Fiscal Responsibility and Budget Management (FRBM) law in August 2003. However, the impact of the 2008 global financial crisis disrupted the fiscal consolidation process, leading to a progressive loosening of fiscal targets and eventually an amendment of the FRBM Act in 2012.
We ask these questions and raise these concerns because historically, although the Bank of Ghana (BoG) Act places a limit on advances from the BoG to government, this has been violated by nearly all governments. And, parliament has really never provided effective fiscal oversight of the executive.
Thus while this law is a step in the right direction, we must admit that no law is perfect and laws tend to have technical loopholes. It would appear to us that this law needs “a few good men and women” for it to work.
However, that is a quality that we cannot guarantee and that is why we wish to raise these questions and concerns, aimed at exploring ways in which the law could be further tightened to prevent future abuse.
Yours in the service of God and Country,