In its view, 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.
Based on its analysis of Ghana’s policy priorities, historic performance and international experience, the Natural Resource Governance Institute has asked government and lawmakers to take bold measures to improve the effectiveness of Ghana’s fiscal rule, dubbed the Fiscal Responsibility Law
Mind how law affects pro-poor
The Institute wants government to ascertain whether the law is realistic to reach a 3–5 percent deficit target by next year without cutting into pro-poor or developmental spending.
Cabinet approved the submission of the appropriate legislation to Parliament to amend the Public Financial Management Act which is expected to limit the fiscal deficit to between 3 and 5per cent of GDP from the year 2018, to ensure greater fiscal discipline.
4% structural deficit target
Government must avoid a pro-cyclical approach by setting a 4 per cent 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.
Cap recurrent expenditure levels
NRGI recommends the setting up of an additional rule that will cap the growth rate of recurrent expenditures.
“This would ensure that government uses revenue windfalls for investment rather than increasing consumption and wages. Peru and Tanzania are using similar recurrent expenditure caps,” the Institute stated.
Limit accumulation of arrears
It is crucial to make it difficult to circumvent the deficit target by setting limits to arrear accumulation and off-budget borrowing by various public entities.
The Institute stressed that, 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.”
Make space for major shocks
Government must include an escape clause for major shocks. A 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.
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 as ensuring that government follows recovery provisions after invoking the clause.
It is important to have a two-thirds majority vote in parliament 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.
Strengthen budget transparency
Strengthen 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.
The Institute 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.
Parliament’s Scrutiny Office must insist on compliance
Furthermore, NRGI called for an independent body to be tasked with reviewing compliance with the fiscal rules. The body according to the Institute 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,” it added.
Head of Scrutiny Office must be politically neutral
Ensure 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.