NRGI proposes fiscal responsibility rules for Ghana
Legislating fiscal rules is an important step towards achieving sustainability of Ghana’s public finances, it said, adding that at least 96 countries have fiscal responsibility rules.
The brief identifies five characteristics of a good fiscal rule based on international experience, and provides recommendations on how to effectively tailor them for Ghana.
Acknowledging the upcoming fiscal responsibility law, it said that presents a unique opportunity to reform Ghana’s public financial management and put measures in place to make the national budget more credible and ensure fiscal discipline.
“An all-encompassing, realistic, achievable fiscal rule will go a long way to instill investor confidence in the Ghanaian economy and set the scene for accelerated economic growth,” it said.
The NRGI indicates that based on this paper’s analysis of Ghana’s policy priorities, historic performance and international experience, it presents the following recommendations to government and lawmakers to improve the effectiveness of Ghana’s fiscal rule:
- A review whether it is realistic to reach a 3–5 per cent deficit target by next year without cutting into pro-poor or developmental spending.
- Avoid a pro-cyclical approach by setting a 4 percent structural deficit target, one that would allow a larger deficit in bad years while ensuring strict compliance with the rule in good years. Chile and Norway are using similar structural balanced budget rules.
- Dutybearers must set an additional rule that caps the growth rate of recurrent expenditures. This would ensure that the government uses revenue windfalls for investment rather than increasing consumption and wages. Peru and Tanzania are using similar recurrent expenditure caps.
- Government must make it difficult to circumvent the deficit target by setting limits to arrear accumulation and off-budget borrowing by various public entities. Most importantly, this should cover loans that state-owned companies take on for non-commercial activities. In Mexico, for example, a budget balance rule ensures limited borrowing by the national petroleum company.
- Should include an escape clause for major shocks.
It further suggested that temporary suspension of the fiscal rule should be conditional upon a limited range of well-defined events. The escape clause should also include specifications for publishing deviations from the rule and a public plan on measures for putting the economy back on the path to recovery.
Urges government to make a two-thirds majority vote in parliament necessary for invoking the escape clause. This will allow for consensus around the invocation of the clause, as well ensuring that the government follows recovery provisions after invoking the clause, it said.
It made the following additional recommendations:
Make a two-thirds majority vote in parliament necessary to enact the fiscal rule, in order to build legitimacy and consensus. In addition, leaders of all political parties in Ghana should in principle agree with the kind of rule adopted and commit to its successful implementation in their various different capacities. This will increase the likelihood of continued compliance with the rule and advocated for strengthening budget transparency based on recommendations from the 2015 Open Budget Survey. These include publishing all relevant budget information (for example a pre-budget statement and the enacted budget) in a comprehensive format that citizens can easily understand, providing more information on expenditure classifications over the past and current medium-term expenditure frameworks in the executive’s budget proposal, and publishing detailed annual budget performance reports with information on macroeconomic projections versus actual budget turnouts.
And called for punitive measures for non-compliance and arbitrary departures from the fiscal rule in any given financial year. Provisions for sanctions in the 2016 Public Financial Management Act present a good starting point for instituting punitive measures. The government must, however, enforce these punitive measures. In addition, any minister of finance who supervises such arbitrary departures should face hearings with the Finance and Public Accounts Committees of Parliament.
The recommendation further urges the setting up of an independent body with reviewing compliance with the fiscal rules. This body should carry out its own analysis to evaluate risks and credibility of government plans for fiscal consolidation. This does not need to be a new institution: The Scrutiny Office that the Parliamentary Service Act recently established is mandated to provide objective and independent analysis on all policy initiatives and proposals that are brought to parliament for approval.
and proposed that the selection of the head of the independent body tasked with producing independent forecasts is apolitical and based on the candidate’s technical expertise, qualifications and work experience. The head of the independent body should have a guaranteed tenure of office and should not be subject to arbitrary removal.
By Maxwell Awumah