Dr. Mahamudu Bawumia, Vice President and the flagbearer of the New Patriotic Party (NPP), has unveiled a comprehensive strategy to curb government spending, which centers on amending the existing fiscal rule.
This proposal comes in response to the perceived inadequacies of the current fiscal deficit requirement, especially in the wake of the COVID-19 pandemic.
The fiscal rule in question mandates that the annual budget deficit should not exceed 5% of the Gross Domestic Product (GDP). This rule was temporarily suspended during the pandemic, allowing the government to effectively manage the crisis. However, Dr. Bawumia argues that the existing rule is insufficient for regulating government expenditure in a sustainable manner.
During a meeting with the Trades Union Congress in Accra, Dr. Bawumia proposed a significant amendment to the fiscal rule. He suggested that instead of capping the budget deficit at 5% of GDP, government spending should be limited to 105% of the previous year’s revenue.
“The fiscal discipline, the fiscal rule that we have before was to make sure that fiscal deficit was not above 5% of GDP. Of course, when COVID came it had to be suspended so that government could respond. I believe that the fiscal rule needs to come in an amended form, not just to look at the deficit, say 5% in a year. But let us make sure that government expenditure does not exceed 105% of the previous year’s tax revenue.”
Dr. Mahamudu Bawumia
Dr. Bawumia emphasized that this amendment would enforce greater fiscal discipline. He highlighted the risk of overly optimistic revenue forecasts leading to excessive spending. “This gives you more discipline because if you forecast a tax revenue for this year which is overly optimistic and you go and spend thinking you are going to do 5% of GDP, you will end up with more than 5% of GDP if those revenues don’t materialize,” he stated.
Establishing An Independent Fiscal Governance Council
In addition to the proposed fiscal rule amendment, Dr. Bawumia pledged to establish an independent fiscal governance council. This council would be tasked with scrutinizing the actions of the Ministry of Finance (MoF) and ensuring adherence to fiscal policies. He stressed the importance of this council’s independence to provide effective oversight.
“It should be given independence so that they have an independent oversight over the MoF. Because if you don’t have that independence in terms of oversight then who watches the MoF? We don’t have that independence and so we need an independent fiscal responsibility council. The current council as constituted in the Act is not independent, and we need to have that independence of the fiscal responsibility council.”
Dr. Mahamudu Bawumia
Dr. Bawumia’s proposals aim to foster a more disciplined approach to government spending, thereby promoting economic stability and growth. The amendment to the fiscal rule would not only cap government expenditure but also tie it to actual revenue performance, reducing the risk of budget deficits driven by unrealistic revenue projections.
The establishment of an independent fiscal governance council would further strengthen fiscal responsibility by providing a check on the Ministry of Finance. This council would ensure that fiscal policies are implemented effectively and that government spending remains within sustainable limits.
The COVID-19 pandemic underscored the need for flexible yet robust fiscal policies. While the suspension of the fiscal rule allowed the government to navigate the crisis, it also revealed the limitations of the current fiscal framework. Dr. Bawumia’s proposed amendments are designed to address these limitations and create a more resilient fiscal policy framework.
As the country continues to recover from the economic impact of the pandemic, these proposals could play a crucial role in shaping a more disciplined and accountable fiscal policy environment.
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