The Institute of Economic Affairs (IEA) has bemoaned the unbalanced nature of resource allocation in the country which does not create room for the economy to grow quickly to attain higher income status.
According to the IEA, the country uses a chunk of its resources on recurrent expenditure at the expense of capital expenditure (CAPEX), which the Economic and Policy Think Tank said should be consuming at least 10 to 15 percent of the country’s GDP. It described the distribution of expenditure as “clearly imprudent, injudicious and inefficient”.
“For Ghana, government expenditure is grossly skewed in favour of recurrent expenditure, popularly referred to as ‘consumption expenditure,’ and at the expense of capital expenditure (CAPEX), which is needed for growth. In the 2021 Budget, recurrent expenditure was projected at 20% of GDP, while CAPEX was projected at 4% of GDP. The ratio of CAPEX-to-GDP is unacceptably low.
“Indeed, as a developing country, we should be allocating 10-15% of our GDP to CAPEX. That is what will allow the economy to grow and move the country quickly up the development ladder”.IEA
In terms of tax revenue, the Economic and Policy Think Tank disclosed that compensation of employees and interest payments absorbed 58% and 56% of projected revenues for 2021 respectively. This means that, together, compensation and interest constituted 114% of tax revenue. The implication, according to the IEA, is that tax revenue could not even fund compensation and interest and as such, government has to borrow to top up in addition to funding all other government expenditure related to transfers, goods and services, and CAPEX.
“Certainly, serious expenditure rationalization and rebalancing is called for”, the IEA prescribed as a solution to the current trend of spending in the country in its expectations of the 2022 Budget and Economic Planning Policy Statement.
Debt service described as a major concern
Just as expected, the Economic and Policy Think Tank raised major concerns on the country’s public debt service burden.
The IEA highlighted that this year, it is projected that as much as 56% of tax revenue would be used to pay interest on the country’s debt. This level of debt service, the IEA said, poses risks for fiscal sustainability and the country’s sovereign rating.
The Policy Think Tank therefore, recommends measures such as debt ceiling and fiscal consolidation to deal with the debt risk on a more lasting basis. For debt engineering, the IEA stated that the debt could be restructured or refinanced, some of which is being already undertaken, to lengthen the maturity profile and replace more expensive debt.
Low revenue mobilization
The IEA blamed the government’s growing appetite for borrowing on the inability to raise enough revenues to fund its expenditure.
“Ghana has a serious challenge with domestic resource mobilization. Year after year, domestic revenue falls short of budget targets. Meanwhile, the revenue targets themselves are also not sufficiently ambitious vis-à-vis the country’s needs”.IEA
Consequently, the IEA charged government to take bold and innovative measures to mobilize resources and allocate them judiciously to support long-term sustainable growth. This, it believes, is capable of delivering sufficiently-high living standards to Ghanaians and move the country out of poverty within a generation.
The IEA called for the need to address illicit financial flows, review of tax exemptions, and eradication of tax fraud as some of the measures needed to scale up domestic resource mobilization.
Touching on overall economic transformation, the IEA called for a strong industrialization drive to transform the economy away from production of low value-added commodities into high value-added production to accelerate economic growth, improve living standards and to eradicate poverty.
“There is an urgent need to transform the economy into a modern, resilient, self-sufficient and ‘beyond-aid’ economy. While the need for economic transformation has long been recognized by our governments, the issue has largely been paid lip service, without concrete actions being taken to bring it to fruition”.IEA