The Institute for Fiscal Studies (IFS) has praised government’s boldness in capping transfers to some key statutory funds, following the think tank’s earlier calls for a review of Ghana’s earmarking arrangements, as a means of creating fiscal space for government to execute some of its programmes and policies.
The Institute has, however, cautioned government to tread cautiously on how it manages the newly created fiscal space.
The IFS, at its pre-budget forum held in February this year presented a paper urging government to review existing earmarking arrangements, as part of efforts to reduce the rigidities in the public budget in order to free up fiscal space and limit borrowing.
According to Dr. Saeed Boakye, a Senior Research Fellow at the economic policy think tank, the practice of revenue earmarking, which entails statutory allocation of funds to specified government programmes, has over the years increasingly constrained government’s ability to reprioritise or reduce spending, causing increasing resort to borrowing and large deficits.
Parliament last month passed the Earmarked Funds Capping and Realignment Act that provides that the earmarked funds for each financial year should be equivalent to 25 percent of tax revenue, from a previous situation where more than 40 percent of tax revenue went to earmarked funds.
“Revenue earmarking is a huge underlying problem that previous budgets failed to tackle. So we are excited that a new government saw the problem and, even more importantly, did something to solve the problem, which is good for everybody.”
Because the way the fiscals were, the fundamentals were so bad that it was only mimicking the pre-HIPC era. But having been able to take such a bold step to cap it [revenue earmarking] to get some flexibility at the centre, I believe it’s a good approach,” Dr. Boakye said.
The Finance Minister, Ken Ofori-Atta, after the passage of the Earmarked Funds Capping and Realignment Act by Parliament, said the move begins a transformation exercise of ensuring that government can have its policies implemented in a more effective way and without the rigidities that are created by structural issues such as earmarked funds, wages and salaries.
He told the B&FT, “This [Act] is a key pillar towards freeing fiscal space to enable us to more effectively realign resources.”
But the IFS’ Senior Research Fellow argued that much as government deserves commendation for the bold move, it is also appropriate to caution government to utilise this newly-found flexibility well so as to maximise the effectiveness of the budget.
According to Dr. Boakye, the gains that will be made from the flexibility created by the cap put on the earmark funds have the potential of being eroded if government does not plan its expenditure well.
“The concern we have is that although we are getting more monies via this flexibility, the government made a lot of campaign promises which need more expenditure to fulfill. So if you are not careful, the flexibility will not be too useful because of the additional expenditure,” he said.
The IFS Senior Research Fellow said there are numerous campaign promises that government must exercise restraint in executing, as this would have the tendency of putting the same stress on the budget that was previously caused by the old revenue earmarking process.
He mentioned that although a policy like the provision of free Senior High School education is a laudable one, the think tank would have wished that the policy was deferred to a later year due to the amount of fiscal space that policy alone would consume.
Nevertheless, Dr. Boakye said, the policy think tank is hopeful that despite the new expenditures, the decision to put a cap on revenue earmarking will prove a very good one that will benefit the country.
Source: B&FT Online