Feature:The obligation to account for public finances

Business News of Thursday, 18 April 2013

Source: Dr. Joe Amoako-Tuffour

Article 24 of the 1992 Ghana Constitution seeks to provide, with good intent, some economic rights of citizens in terms of the right to work, to safe and adequate work conditions, to equal pay, and the right to join a union. The framers of the Constitution must have thought of these as essential for people to work and live in dignity. What the Constitution fails to provide explicitly is the obligation for prudent management of the common wealth and the right of citizens to live in a well-managed economy. These two are important for a simple reason. Bad economic management often benefits a few to the detriment of the many. It also creates severe inter-generational inequities. Good economic management is to the public good. It yields shared benefits for the many, especially for future generations.

Since there is no constitutional provision to these ends, Ghana needs legislation to ensure the overall fair, prudent, accountable and transparent management of public finances. Australia’s Charter of Budget Honesty, and the UK’s Code for Fiscal Stability are examples of such legislation intended to secure good management of national resources and related matters for the collective good. For Ghana, the search for better institutional arrangements to these ends must begin now. Gradualism is not the answer. A Fiscal Responsibility Law is a step in the right direction. Some may recoil at such an idea. Well-informed citizens should leap at it. And here are the reasons.

The Public Finance Problem

While many experts predicted in 2008 a welcome turnaround in public finances with the coming of petroleum revenues, barely five years on, the outlook seems rather dim. Having arrived here through another election year, the sharp deterioration in the government revenue-spending gap, the shrill rise in the public debt in peacetime, the costly downgrade of Ghana’s sovereign rating from B+ to B-, the high cost of borrowed funds against the background of single digit inflation, and the ever-deteriorating trade and current account deficits are not the kinds of indicators any keen Minister of Finance wants to see for an emerging middle income country. The combination of these macroeconomic indicators, especially the debt buildup, the high interest rates, and the rising cost of government, could imperil any chance of progress from a low to medium middle income economy. Worse, they reduce the ability of the economy to withstand any type of adversity, including an unexpected drop in resource revenues.

Except for brief periods in the early 2000s, the track record of public financial management has been sobering. Like the budget of 2007, the budget of 2013 missed the opportunity to signal the commitment to tackle Ghana’s unpleasant fiscal arithmetic. The fiscal outcome of 2012 suggests that the management of public finances may be taking an ominous turn. In 2007 the deficit reached 9 percent of GDP, above the budget target of 4.5 percent. In 2012, the deficit increased sharply to 12 percent, well above the target of 6 percent even with the good fortune of oil revenues. On both occasions, the reasons given for the budget deficit overruns were not beyond the realm of good public financial management. However plausible the reasons given, the root explanations lie in poor planning, the systemic and inefficient budgetary processes, weak fiscal discipline, and weaknesses in revenue mobilization. The new Minister of Finance has inherited a fragile fiscal environment of which he is well aware. He faces two sets of problems: a consistently weak budgetary framework and loose spending practices. He has the chance to make a difference.

From the budget statement, it appears the Minister has pinned his hopes on an extensive list of revenue mobilization measures, many of which unfortunately may not have the immediate desired revenue effects. Not clear in the budget, however, are the measures to curtail the growth of government spending. The measures spelt out in the budget are not nearly as bold as might be expected, largely because of the reluctance to tackle the structural rigidities in spending – from the ever-rising cost of government, to the uncontrollable and inefficient social expenditures in education and health, and worse, to the seemingly uncontrollable public sector payroll. Short of cutting spending, the commitment to ensure that spending is kept within budgetary limits is at least a small step in the right direction. Better still would have been a commitment to ensure that the rate of growth of spending stays in line with the growth of non-oil revenues as a prudent medium term measure of spending control.

The 2013 budget also has limited fiscal cushions against adverse commodity price shocks. This makes the entire fiscal position of the budget vulnerable and does not help to diminish the “negative expectations” that government, try as it would, may fail to meet its 9 percent deficit target. If that happens, the risk of more government borrowing could increase interest rates even further and stifle growth of the non-resource sector of the economy where jobs for the many are created. The inflationary consequences of any necessarily accommodating monetary policy will be hard to avoid.

Electoral cycles since 2000 must have taught Ghanaians a hard lesson; that is, the need to have governments account for how they use public money during their term of office. Such an obligation should prohibit, to the extent possible, the tendency of governments to spend and not pay for their spending, but rather build up arrears. Arrears circumvent spending limits. They hide from view the true size of public spending, and worse, pre-commit succeeding regimes in paying for the hidden bills left behind. The Minister’s commitment in the 2013 budget to avoid new arrears is re-assuring. But he needs to do more if he is to deliver a good fiscal system in the medium term.

Fiscal Prudence Measures

Articles 174-180 of the Constitution outline the broad procedures that government must follow in the design and implementation of fiscal policy – from raising revenue to budgeting and implementation of the budget. Lacking are the transparent mechanisms by which citizens can judge and hold government accountable in the conduct of the fiscal affairs of the State. There exist at the moment a number of instruments that in principle provide for prudent and accountable management of public finances.

The Financial Administrative Act, Bank of Ghana Act, Internal Audit Agency Act, and the Procurement Act have all sought to improve transparency and comprehensiveness of budgetary processes and government spending. However, the experience over the past decade also shows that the existence of these pieces of legislation and the administrative procedures are not sufficient to ensure compliance. Compliance is only made possible when first, there are clear procedural rules; second, where there are formal or informal numerical rules; and third, when these rules are enacted into legislations and placed firmly within the institutional framework of an independent Auditor-General, the Public Accounts Committee of Parliament, and ultimately disseminated to the public through publications and access to information.

Non-compliance with the rules in the management of the country’s public finances begins with weak budgetary processes. It ends with poor and compromising audits, with the cursory treatment of Auditor-General reports and with the systemic weakening of the ability of the Public Accounts Committee to carry out its mandate. It is bad fiscal practice when the spending budget is determined independently of the revenue budget, and rather the revenue budget is adjusted to meet expected spending and not vice versa. It is just as bad when the Auditor-General’s Reports (if and when published) are misunderstood and debated as political documents, not as instruments of public accountability in the management of our common wealth. Moreover, the work of the Public Accounts Committee of Parliament is weakened by the lack of resources and technical support in carrying out its responsibilities. All these together make those entrusted with managing the common wealth of this country only weakly accountable, if accountable at all, and often insist on doing so on their own terms.

To echo the conclusions of an International Monetary Fund report prepared for Ghana in 2008, it is becoming increasingly necessary for Ghana to enact a Fiscal Responsibility Law (FRL). It is even more urgent with oil revenues added into the mix. The Petroleum Revenue Management Law, Act 815 made efforts to set out some numerical fiscal rules but these were only with respect to the management of petroleum revenues. Ghana needs to go a step further in order to avoid tinkering needlessly with the Petroleum Revenue Management Law. For inspiration on how to do this, look at Botswana.

Lessons

One of the most diamond rich countries in the world, Botswana has become renowned for its ability to manage its common wealth effectively. Since independence in 1966, it has transformed itself from a poor country to one of an upper middle-income country. Botswana has not blinked in the collective goal to become a prosperous, productive, innovative, compassionate, just and caring nation. According to Samuel Asfaha of the World Bank, what is impressive about Botswana is not only its discipline to national development planning, but also its creation of sustainable fiscal policy.

To create this policy, Botswana first delinked public spending from the volatile resource revenues – not a small feat for a country that derives nearly 75 percent of revenues from diamonds. Botswana resisted the pressures to spend all the revenue that came into the national treasury. Second, it avoided debt accumulation beyond its capacity to service it. Third, it avoided the weakening of institutions and transparency.

Aware that its diamond wealth will not last forever, Botswana also created both formal and informal fiscal rules to prevent excessive spending and ensure fiscal sustainability. Among other formal rules, Botswana created the Sustainable Budget Index. This is the ratio of all its recurrent spending (except recurrent spending on health and education) to total non-mining revenue. A ratio less than one means that the country’s conventional tax revenues are enough to pay for the country’s non-investment spending. Arrears are not a known feature of Botswana’s public finance accounting. It further set its domestic debt from exceeding 20 percent of GDP. According to the African Development Bank, although Botswana has not always followed its rules to the letter, overall it has run a prudent fiscal policy allowing it to avoid many of the pitfalls common in resource-rich countries.

Indeed, many countries have adopted different formal and informal rules; Argentina, Brazil, Columbia, Ecuador, Peru and Sri Lanka, to name a few. Fiscal responsibilities are coded in national laws. The laws often contain clear procedural rules in budgeting plus explicit numerical rules on at least one of the following: operating budget balance limits, overall spending limits, and debt accumulation limits. Rather than numerical rules, advanced economies have tended to rely on procedural rules that aim to enhance transparency and accountability and fiscal management. Australia’s Charter of Budget Honesty, New Zealand’s Public Finance law, and UK’s Code of Fiscal Stability are examples.

At a recent meeting in Liberia, the story was told about the strength and stability of the German economy. Germans collectively have developed a political tripod to ensure their economic stability. First, is the existence of procedural rules to protect the management of the economy. Second, is to embed the rules in robust institutions where discretion of decision-makers are kept to a minimum and must always be justified. Third, is the critical mass of informed citizens who are watchful of the functioning of institutions and ready to hold decision-makers accountable for ensuring sustainability.

Financial Responsibility Law (FRL)

The budget of 2008 announced the intention to introduce a fiscal responsibility law building on the Financial Administration Act of 2003. The Bank of Ghana in its policy brief of February 2008 proposed to put in place the necessary institutional arrangements to support the implementation of such a law. The goal was to underscore Ghana’s commitment to fiscal discipline and to enhance prudence in the management of the common wealth. The goals of an FRL are:

  • To require high standards of financial disclosure on all the sources and usage of public funds
  • To require governments to be very transparent about their short-term and long-term fiscal intentions
  • To require government to disclose the fiscal risks associated with all fiscal medium to long-term decisions, especially with regard to borrowing; and
  • To ensure maximum public accountability in the management of the common wealth

The broad design of FRLs often requires some firm choices. For example, should Ghana adopt numerical rules or just ‘prudent’ fiscal management procedures? If the choice is for numerical rules, should such rules be based on recurrent spending, on overall budget balance, on non-oil revenues, on spending limits, or on debt rules? Should there be an oversight body (such as a Budget Office of Parliament, or Fiscal Council as in some countries) to advise, monitor and/or enforce the execution of the law? And should the FRL cover all segments of central government operations, including state enterprises, local government and districts? These are worthy of public debate to enrich understanding and to maximize consensus.

With respect to the indebtedness of the State, the FRL should also require that the budget each year report: (a) the total principal and the sources of loans and debts contracted in the financial year, (b) the intended use of the loan and a tracking of the flow of funds, (c) the accumulated interest on each loan and debt, (d) the provision made for servicing or repayment of each loan and debt, and (e) the use and performance of each loan, or debt, including the achievements of the object targets of each loan. And finally, at the end of each political regime, the cumulative record of public finance stewardship must be a public document published jointly by the transition team.

Listening to the pundits on the airwaves, I’m inclined to believe that a political approach to looking at Ghana’s fiscal picture is only a good way of misunderstanding the magnitude of the challenges and of the need for sensible pathways to tackling the challenges. What is needed is a clear-headed understanding of the consequences of sustained fiscal indiscipline, of the importance of having a clear and transparent budget process and adhering to its execution, and of the importance of strengthening the roles and efficiency of institutions of accountability and transparency – the Audit Agency, the Auditor General and the Public Accounts Committee of Parliament.

It is hard to imagine good economic governance (consisting of prudent, fair and equitable management of the common wealth) that does not disadvantage future generations, without governments submitting to the basic precepts of clear and simple rules that bind budgetary processes and fiscal management, and without robust institutions to ensure accountability and transparency. Worldwide, the freedom of governments to spend beyond their means is no longer available. Not only because governments by their past behavior have taken that freedom away, but because citizens are now more informed about the detrimental consequences of doing so on their socio-economic opportunities.

Dr. Joe Amoako-Tuffour Senior Advisor at African Centre for Economic Transformation (ACET) [email protected]

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