If we want to comment on the state of our public finances, a cursory look at the budget balance as presented by the Ministry of Finance (MOF) is not enough. We need to go deeper. First of all, we need to consolidate the figures; the off budget funds-the Special Funds- will have to be integrated to the budget to generate adjusted comprehensive fiscal aggregates.
You will recall that that these Special Funds were created as a result of the underspending on the capital side. Rather than allowing this underspending to be reflected in smaller budget deficits, the MOF transferred these surplus funds to a set of off budget Special Funds . Adjusting the Budget figures for these funds will thus ensure greater transparency , reduce budgetary fragmentation and result in stronger expenditure controls in our public finances.
Next, a decomposition of the fiscal aggregates will reveal some of efforts that have carried out at fiscal consolidation in addition to the priorities and challenges ahead. It also helps to provide an illustration of the pressures on future public spending and revenues that government will need to manage. (The annual government budget for all public spending is broken down into several hundred items for approval by the National Assembly. The presentation and debate on the budget usually focuses on expenditure programs as a whole. But the Programme budgets still have capital and current components, usually with only limited freedom to vire between. Capital (Capital spending) and current expenditure (Expense) are also somewhat distinguished in the accounts of spending units and in reporting expenditure.)
The evolution of the budget deficit between 07/08 and 2013 show an increase of 1.6% of GDP accounted by a 1.3% hike in expense and 1.2% in capital expenditure moderated by a 0.8% of GDP growth in revenue . The ratio of the structural primary balance to GDP deteriorated from a surplus of 2.6 to a deficit of 0.2. If we exclude the fortuitous factors like a 1.1% reduction in interest charges and yearly EU grants equivalent to 0.5 to 1% of GDP, the consolidated budget deficit adjusted for Special Funds would have amounted to some 5% of GDP in 2013. Potentially concerning is the low growth in tax receipts, the high growth in the government wage bill and the continuing upward trend on welfare benefits. Grants and the wage bill were kept in check for some years but the latter exploded with the recent PRB awards to more than 6.0 % of GDP. Fiscal revenue (without grants) as a proportion of GDP has stagnated at around 20% of GDP despite the breast-thumping during the early years of the tax reform when fiscal revenue was being strengthened. The other major observation is the heavy reliance on indirect taxation, which is now affecting the growth of consumption demand since consumer debt has increased to unsustainable levels. The tax effort is below its potential, as compared with other Middle income countries. Tax revenue is too low at 18% of GDP.
And In the recent IMF Art IV 2013, the IMF had recommended revenue raising measures to better balance the budget and be on the safe side. It had proposed that “Increases in the revenue-to-GDP ratio could be achieved through growth-friendly and environmentally-sustainable taxes (including excises, VAT, and real estate taxation). The tax system should also be reviewed with the objective of eliminating remaining exemptions (including several of the VAT exemptions introduced in the 2013 budget) and improving the design and administration of the major taxes. There is potential to introduce a true carbon tax, and also to raise taxation of fuel products, both serving environmental and external balance objectives.”
The main criticism about the evolution of the fiscal accounts over the past six years is insufficient capital spending, which is now beginning to hurt the current growth potential - water, power, energy and transport sectors. The MOF has consistentlyfailed to address theunderlying causes of implementation delays especially in physical infrastructure with the exception of road construction. It is very important to increase public investment to reduce the infrastructure deficit and support domestic demand and thus boost growth given that private investment is projected to remain subdued in 2013.
it is not only the level of expenditure that matters, but the quality and composition of expenditure also matter because quality and composition of expenditure ensure its effectiveness at the end of the chain. Government should rebalance and prioritize its expenditures to improving health, education, technical training, innovation and infrastructure facilities which in turn will encourage private investors. Finally, the welfare state is becoming a synonym for massive inefficiency and waste, with the continuous deterioration in public services, particularly education and health. Private spending in education and health is high and substituting for ineffective public spending. The quality and delivery of public health services are increasing out of line with the fast changing needs of an ageing society (putting direct pressure on the public finances through impacts on age-related expenditure, such as state pensions or health care) and cannot cope with new and more expensive health requirements, e.g. for cancer treatment. Education and health reform are a priority. The government should generate more fiscal space to meet these priorities which will generate future productivity growth.
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