UNIT 4 SECTION 6 BUDGETS AND BUDGETARY PROCESS IN GHANA
MACROECONOMICS Unit 4, section 6: Budget and budgetary process in Ghana
Dear student, welcome to the last section of unit 4. We are going to discuss how Ghana prepares its budget and look at the trend in some key variables. As far as Ghana is concerned, there we can talk about two main budgets: one is prepared by the central government and the other prepared at the local government level. This means that at the local government level, there are sources of revenue and expenditure items that are put together in a budget on annual budget. Ghana has moved to another phase of its decentralization policy and currently mandates local governments to prepare the composite budget. We will look at what it is and how it is prepared in practice.
By the end of this section, you should be able to:
describe how national budget is prepared and implemented in Ghana; describe the proportions of various components the budget, expenditures and revenue alike; describe the composite budget prepared by the local government and how it is done; identify revenue sources available to the local government and types of expenses they make.
Preparation and Implementation of National Budget in Ghana
The national budget of the Republic of Ghana is prepared by the Minister of Finance and Economic Planning on the authority of the President and presented to the Parliament for approval. This is in accordance with Article 179 of the 1992 Constitution (Section One) which requires of the President to ‘cause to be prepared and laid before Parliament at least one month before the end of the financial year, estimates of the revenues and expenditure of the Government of Ghana for the following year’. The estimates of revenues and expenditures of the Government of Ghana (also known as the budget) are put together by the Budget Division of the Ministry of Finance and Economic Planning (MOFEP). The national budget is a collation of budget estimates from key Ministries, Department and Agencies (MDAs) of the government, including those of the Parliament and Judiciary. Currently, 35 of these MDAs directly submit their budgets to the MOFEP to be included in the national budget. All other departments and agencies submit their budgets to relevant ministries. For example the Minerals Commission and Lands Commission submit their budgets to the Ministry of Lands and Natural Resources.
Most of the budgets submitted by the MDAs (now 35 of them), if not all, are in deficits. This is because only a few of them generate revenues from the functions they perform through the collection of charges, fees and fines. Some are also eligible to receive gifts from individuals and businesses. The Ghana Revenue Authority (GRA) is responsible for the generation of government revenues, mainly through taxes, relevant fines and penalties. All the revenues generated by the GRA, designated as public funds, are paid into the Consolidated Fund in accordance with Article 176 of the
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Constitution. Other sources of revenues available to the government such as
dividends from state enterprises, financial aid or grants from donors, and loans are mobilized by relevant divisions of MOFEP, such as the External Economic Relations and Debt Management Divisions. Information about all revenues that are expected to be generated in the coming financial year is also submitted to the Budget Division of MOFEP as part of budget preparation. All budgets and estimates of revenues used in preparing national budget are usually broken down into quarters. Consequently the national budget (though usually drawn for a year) can be broken down into quarters.
The Consolidated Fund, out of which most government expenditures are
paid for is held by the Bank of Ghana. Apart from the Consolidated Fund, there are other funds such the Contingency Fund, District Assemblies Common Fund, Ghana Education Trust Fund and other public funds as may be established by or under the authority of an Act of Parliament. Revenues paid into these funds are sanctioned by the Parliament and all payments out of such funds are also sanctioned by the Parliament. All MDAs have their principal accounts held by the Bank of Ghana, in accordance with the Constitutional requirement of the Bank of Ghana to be the sole custodian of state funds and serve as banker to the government. Funds are therefore transferred from the Consolidated Fund (and others) to accounts of MDAs at the Bank of Ghana for the purposes of financing expenditures contained in their budgets submitted to MOFEP and presented to the Parliament by the Minister for Finance. The transfer of funds out of the Consolidated Fund (and indeed any other payments out of the Consolidated Fund) is undertaken in accordance with the Appropriation Act which is usually passed after a budget has been presented and discussed by the parliament.
When national budget is being prepared, information on outturn or
provisional actual figures for the current and previous years is also included. This makes it possible to compare performance of the government and also check where there have been shortfalls. The budget also sometimes provides time series of certain key variables to enable the Parliament assess performance of the government.
A look at the 2010 National Budget
I hope you appreciate how Ghana’s national budget is prepared. Technically, the process is the same in several other countries. Now let us take the budget of 2010 and look at the various types of estimated revenues to be generated and expenditures planned to be incurred. There is also information on actual (provisional outturn) for the first three quarters of the year. This provisional outturn is compared with targeted revenues and expenditures for the first three quarters for purposes of comparison. Finally there is also information on projected outturn for the year 2010 (this is more or less what is expected to be the actual for 2010) and is compared with 2010 budget figures. We begin with the revenue component of the budget
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and follow with expenditures. How the difference between the revenues and expenditures is financed is also presented. For a very long time now, Ghana’s national budgets have been in deficits. These deficits are usually financed through borrowings that add to the national or total public debt (discussed below).
Summary of Revenue and Grants for 2010 (Figures are in Millions of
Ghana Cedis) Item 2010 Target Provisional Projected Percentage Budget for Jan Outturn for Outturn Change over Estimate - Sep Jan - Sep for 2010 Budget 2010 2010 Estimate Total Revenue and 9,628.5 5,895 5,999.8 8,828.4 -8.3 Grants Total Revenue 8,264 4,818.3 5,158.5 7,656.7 -7.3 Tax Revenue 6,072.2 4,090.5 4,413.4 6,102.6 0.5 Direct Taxes 2,235.4 1,553.6 1,654.6 2,380.2 6.5 Indirect Taxes 2,119.7 1,411.2 1,448.7 1,974.1 -6.9 International Taxes 1,141.4 736.6 822 1,102.7 -3.4
Non-Tax Revenue 1,916.4 523.3 610 1,381.7 -27.9
Grants 1,364.5 1,076.7 841.3 1,171.7 -14.1 Source: Ministry of Finance and Economic Planning
Summary of Expenditures for 2010 (Figures are in Millions of Ghana
Cedis) Item 2010 Target Provisional Projected Percentage Budget for Jan Outturn for Outturn Change over Est. - Sep Jan - Sep for 2010 Budget Est. 2010 2010 Total Expenditure (incl. arrears 11,573.6 7,863.6 8,494 11,342.7 -2 clearance and tax refunds) Recurrent Expenditure 7,625 5,621.2 5,872.3 7,846.2 2.9 Wages and Salaries 3,113 2,582 2,268.9 3,283 5.5 Goods and Services 635.1 367.8 725.6 780 22.8 Transfers 1,972.6 1,521.9 1,480.1 2,103.9 6.7 Interest Payments 1,346.2 905.1 1,046.9 1,310.9 -2.6 Other Recurrent Expenditure 558.3 244.5 350.8 368.3 -34 Capital Expenditure 2,839.5 1,857 2,083 2,904.8 2.3 Domestic-Financed 1,311.1 745.2 791 1,154.8 -11.9 Foreign-Financed 1,528.4 1,111.7 1,292 1,750 14.5 HIPC and MDRI Financed 313.1 170.7 260.1 288.9 -7.7 Arrears Clearance and Tax Refunds 795.9 214.7 278.6 302.8 -62 Source: Ministry of Finance and Economic Planning
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A careful look at the figures in the tables above reveals that expenditures exceeded revenues. This is the case for both budgeted and actual revenues and expenditures. The budgeted deficit for the year 2010 was almost GHC2 billion but the actual deficit exceeded this. The actual deficit for January to September alone was almost GHC2.3 billion. This means that there was a deficit (both planned and actual). Let us now see how the deficit was financed. Nearly all the deficit was financed through borrowing, from foreign and domestic sources.
Summary of Financing of 2010 Fiscal Deficit (Figures are in Millions of
Ghana Cedis) Item 2010 Target for Prov. Projected Percentage Budget Jan - Sep Outturn for Outturn for Change over Est. 2010 Jan - Sep 2010 Budget Est. 2010 Total Financing 1,945.1 1,968.6 2,294.3 2,514.3 29.3 Foreign 683.3 747.6 942.2 1,340.8 96.2 Loans 1,110.9 1,057.3 1,182.7 1,678.9 51.1 Amortisation -557.7 390.1 279.8 -459.8 -17.6 Exceptional 130 80.5 39.3 121.7 -6.5 Financing Domestic 1,261.8 1,660.9 1,797 1,618.5 28.3 Source: Ministry of Finance and Economic Planning
Ghana’s Public Debt
Ghana’s total public debt is an issue that raise a lot of concern to every economic agent in Ghana. It has been growing consistently (both in absolute terms and as a percentage of Gross Domestic Product). As at the end of August 2013, the total public debt stock stood at US$22.737 billion. Out of this, total external debt amounted to US$10.167 billion, which is about 45 per cent of the debt stock and domestic debt was US$12.57 billion, representing 55 per cent of the total debt stock. As a percentage of GDP, the debt stock stood at 49.44 per cent at the end of August 2013.
Budget Preparation by Local Governments in Ghana
As earlier mentioned, the other type of government budget in Ghana is the one prepared by the local government. There are currently Metropolitan, Municipal and District Assemblies (MMDAs) in Ghana. Each of these MMDAs has the mandate to mobilize revenues from taxes, fees, fines and other sources to finance development activities at the local level. The MMDAs provide some services that normally compliment what the central government provides. Some of these areas include waste management, education, health, and agricultural services. They also provide some infrastructure such as schools, hospitals, markets, bungalows and roads. The MMDAs, like the central government, also have budget units that are in charge of budget preparation. There is also a separate revenue generation
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units at the various MMDAs in charge of revenue mobilization. There are
two main sources of revenue for the MMDAs: internal and external. The external sources usually dominate revenues of the MMDAs. They include grants from the central government for development as well as revenues from foreign sources. On the part of the central government, there are certain dedicated funds established by the Parliament to provide revenues for development in MMDAs. Key among these funds are the District Assemblies Common Fund (DACF) and District Development Fund (DDF). One of the main sources of internally generated revenues for the MMDAs is the collection of tolls from various economic agents (especially traders and transport operators) who operate within the geographical jurisdiction of the assembly.
The budgets of the MMDAs are usually supposed to be balanced because
they do not have the mandate the central government has to borrow. However, they are able to buy goods and services on credit and this often lead to their expenditures exceeding their revenues.
The Composite Budget
The composite budget is aimed at integrating budgets of the MMDAs with other decentralized departments. The Composite Budgeting System is expected to achieve the following objectives: Ensure that public funds follow functions to give meaning to the transfer of staff transfer from the Civil Service to the Local Government Service; Establish an effective integrated budgeting system which supports intended goals, expectation and performance of government at the local level; Deepen the uniform approach to planning, budgeting, financial reporting and auditing; and Facilitate harmonized development and introduce fiscal prudence in the management of public funds at the MMDA level.
In 2011, the Government of Ghana directed all MMDAs to prepare the
composite budget which integrates identified decentralized departments. This policy initiative was aimed at attaining full implementation of fiscal decentralization and to ensure that the utilization of all public resources at the local level takes place in an efficient, effective, transparent and accountable manner for improved service delivery.
In this concluding section of unit four, we have looked at preparation and
implementation of national budgets in Ghana. The Budget Division of MOFEP collates budgets of various MDAs into the national budget. The budget is then presented to Parliament for discussion, after which an Appropriation Act is passed to authorize all expenditures by the government. We also looked at the 2010 national budget: estimates of revenues and expenditures and provisional actuals for the first three quarters
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(January to September). There was a deficit which was financed largely
through borrowing (from both domestic and foreign sources). The national debt of Ghana was also looked, absolute level and as a ratio of GDP as at August 2013. We ended with a discussion of budget preparation by the local government: sources of revenues and areas of expenditures. The Composite Budget, a new system that integrates budgets of identified departments was also briefly discussed.
Review Questions 1. Which institution in Ghana prepares the national budget? Briefly describe how the budget is prepared? 2. What was the level of Ghana’s total debt stock as at August 2013? 3. What are some of the sources of revenues available to local government for purposes of development? 4. Has Ghana had a budget surplus over the last ten years?
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