Reducing Fiscal Deficits: Way to go, Prez Mills

In his first State of the Nation address yesterday, H.E. President Mills pointed out that our fiscal deficit hit 15% of GDP in 2008. Of course, a lot more, he mentioned.

To start with, in Macroeconomic Literature, fiscal deficit simply refers to excess government expenditure/spending over government revenues, and these revenues do not include donor funds or monies the government borrows. Closely related to, but fairly different from, fiscal deficit is national debt. One simple way to look at national debt is to accumulate your yearly fiscal deficits. Alternatively, the national debt is how much the government owes creditors (local and foreign).

That said, fiscal deficits or national debts are not bad per se. What is bad, however, is "too much" of it. Apparently, the definition of "too much" appears to be vague. Whereas some countries can carry fiscal deficits of over 50% of their GDP and still be credit worthy and strong, we (Ghanaians) may prefer to see "too much" as NOT "cutting our coat according to our cloth".

If we spend our scarce revenues, mainly from taxes and/or from sale of national assets, productively, such as on infrastructure, then there is no cause for alarm. This is because we know that even if we don't reap the benefits in the immediate short-run, the pay-offs will arrive in the medium to long term. But if we choose to expend such resources on ex-gratia, for instance, then you will agree with me we are misplacing our priorities. So the quantum of the deficit or debt is no so important; how we use our resources is what we should bother about.

The world's most powerful country, USA, has a protracted history of fiscal deficits, and is believed to be the world's largest borrower (Thanks to China, their main creditors). Yet, her (USA's) credit crunch has affected the entire globe: people are loosing jobs everywhere, regrettably. It took the USA over a year to formally declare the economy in recession, but if it walks like a duck, squawks like a duck, it must be a duck! And Japan did not hesitate to follow suit. China experienced a record-high plummet in exports in several years. All these lend credence to the assertion that "when America sneezes, the rest of the world catches cold". And as the President noted, we are not unaffected.

So yes, we have to deal with the problems of the economy, especially the deficit. And I personally believe President Mills has identified the right path to tread. We have to cut government spending, especially on ventures that don't grow the economy. As he said, there are many things we cannot afford in our present circumstances, and these things don't end at only presidential jet(s). Downsizing the government was an excellent way to go, and we need to check unnecessary spending. We need some form of fiscal austerity, certainly not what the Bretton Woods imposed on us in the early and mid-1980s under the Structural Adjustments/Economic Recovery Programmes.

Whilst lauding these attempts, however, a huge caveat is that the government does this in concert with the appropriate changes in monetary policy by the Bank of Ghana. In fact, this is the so-called "policy-mix". What the central bank should do is to increase the money supply enough so that the reduction in government expenditure will not affect aggregate demand. In this way, we can avoid lower output. Actually, this was exactly what the Fed did in the USA in the 1990s when the Clinton administration embarked on fiscal deficit reductions.

Perhaps, more importantly, the government has to ensure that the revenue collection agencies (IRS, VAT and CEPS) work diligently and tirelessly in order to raise the sufficient revenues we are so in dire need of. Leakages have to be minimized as far as we can. They must exhibit high sense of transparency, accountability, and probity.