Just like most individuals make new year resolutions at the beginning of every year, most central governments also set targets to guide them to achieve certain macroeconomic goals.
The central government of Ghana sets revenue and expenditure, growth as well as fiscal deficit targets every year which are sometimes revised to reflect prevailing macro-economic conditions.
However, it has become a norm for the government of Ghana to miss its targets every fiscal year. Growth, as well as Revenue and expenditure targets, have often been missed which resulted in the government running consistent budget deficits.
This raises questions on how realistic these targets are. This often undermines the credibility of the government institutions responsible for setting fiscal targets in the country.
For instance, total Revenue and Grants from January to June 2020 amounted to GH¢22,007 million, compared with the program target of GH¢29,759 million, resulting in a shortfall of 26.0 percent or a performance rate of 74.0 percent. The provisional outturn constitutes 32.8 percent of the annual target compared to the programmed expectation of 44.4 percent of the annual projection.
Also, total Expenditures, including arrears clearance, for the period amounted to GH¢46,352 million compared to a program target of GH¢41,554 million.
Capital Expenditure amounted to GH¢4,812 million compared with a program target of GH¢4,497 million, lower-than-programmed Domestic Financed Capital Expenditure targets. Interest Payment was below the target for the period by 0.9 percent, amounting to GH¢11,639 million against the program target of GH¢11,742 million.
Once government misses its revenue and expenditure targets for the period, deficits will be affected. This resulted in a cash basis deficit of GH¢24,345 million, or 6.3 percent of GDP, compared to the program target of GH¢11,794 million, or 3.1 percent of GDP for January to June 2020 cumulatively.
Revenue from upstream Oil and Gas activities amounted to GH¢1,993 million, 55.4 percent lower than the program target of GH¢4,468 million. Government has, however, done well to keep inflation within bounds even though at 10.4% as of December 2020, it falls outside the medium-term target of 8±2%.
Whilst it is clear that the government missed most of its fiscal target in 2020, it cannot take all the blame because the impact of COVID-19 on the economy during that period was huge.
Nevertheless, even in pre-COVID periods, for instance, from 2006 to 2018, 11 out of the 13 years recorded lower revenue outcomes than budgeted. And between 2011 and 2018, initial budget projections for tax revenue exceeded outturns by an average of 11 percent and 8 percent in the case of domestic revenue.
According to the Finance Ministry, the period recorded an average forecast error of -10 percent, with a forecast accuracy of 90 percent, implying that about 90 percent of forecasted tax revenue is likely to be collected.
“The implementation of the government’s economic programs over the years has been impacted by some fiscal risks, often resulting in macroeconomic outcomes deviating markedly from targets. The realization of fiscal risks may affect the achievement of key fiscal targets, reduce the accuracy of fiscal forecasts, weaken the credibility of the budget, and consequently, contribute to macroeconomic instability” .
Ken Ofori-Atta, Minister for Finance
Even though the impact of shocks on macro-economic targets cannot be underestimated, budgetary discipline requires that governments maintain fiscal positions that foster macroeconomic stability and sustainable growth.
The effectiveness of fiscal councils’ hinges on several factors, including having full autonomy within the scope of their mandates, active and unfettered dissemination of their analysis, and their credibility.
Experience and empirical evidence suggest that delegating macroeconomic forecasting to an independent fiscal council can indeed reduce forecasting bias. There is some empirical evidence that independent fiscal institutions can buttress a government’s capacity to comply with a numerical rule. Should government then delegate the role of forecasting or target setting to an independent institution?
There is an urgent need for deliberations on whether forecasts thoroughly reflect macro-economic situations in the economy or they are just mere formalities that can be described as overly ambitious. Such activities undermine the credibility of the institutions in charge.
