![IFS flags spike in domestic capital investment](http://ghheadlines.com/images/default.png)
- warns against pre-election fiscal populism
The Institute for Fiscal Studies (IFS) has raised concerns over government’s budget plans for 2024 – an election year.
With a nearly 100 percent year-on-year increase in domestically financed capital expenditure, the Institute warned that pre-election fiscal populism could further impact the economy negatively.
“If the move is politically motivated, then some of the expenditure is likely to be inefficient; since certain projects would be selected based on political rather than economic considerations, as has happened over the years. In that case, it would be much better to save some of this expenditure to help cut the deficit and reduce associated debt service payments,” Dr. Said Boakye, Senior Fellow at IFS, cautioned during a budget review in Accra.
While generally supportive of increased capital spending, IFS warned that the 2024 budget’s outsized increase raises red flags, given the country’s history of pre-election overspending and the current fragile economic conditions which require fiscal prudence.
Domestically financed capital expenditure is set to nearly double from GH¢9.39billion in 2023 to GH¢18.24billion in 2024. This comes following two years of virtually unchanged capital spending; meanwhile, rising interest costs are poised to eat up much of Ghana’s debt relief gains from 2023.
“The debt restructuring exercise’s positive effect is only temporary and should not be counted on to deliver long-term improvement in the country’s public finances,” explained Dr. Boakye. “Interest payments sharply declined from 47.3 percent of revenue in 2022 to 26.0 percent in 2023, but are expected to rise again to 31.7 percent in 2024.”
The overall budget deficit is also projected as increasing to 5.9 percent of GDP in 2024 – after dropping to 5.3 percent in 2023 thanks to debt restructuring. Boakye argued that revenue projections underpinning the 2024 budget are likely overestimated, given current economic conditions.
According to IFS data, the Fourth Republic has seen frequent fiscal and monetary crises triggered by heightened pre-election deficits and uncontrolled election-year spending. The resulting austerity measures and instability then constrain GDP growth in subsequent years. The 2023 debt restructuring and IMF bailout have provided temporary relief, but Ghana’s economy remains fragile.
“The sharp increase in domestically financed capital expenditure ahead of the 2024 elections is a clear sign of fiscal populism,” Dr. Boakye asserted. “Government must resist the temptation to overspend for electoral gains, or risk prolonging economic hardship beyond the elections.”
With compensation and services expenditures relatively contained in 2024 budget plans, capital spending is set to rise to 16.3 percent of revenue from 13.9 percent in 2023. The outsized increase despite Ghana’s current fiscal challenges raises questions about expenditure efficiency and project selection criteria in the coming election cycle.
While acknowledging the need for public infrastructure investments, IFS advised government to exercise spending discipline, make funding decisions based on careful cost-benefit analyses rather than political considerations, and avoid deficit financing where possible.
“Large budget deficits and overruns in election years have often led to fiscal and macroeconomic crises that stifled real GDP growth in Ghana,” Dr. Boakye warned. “Government must refrain from fiscal populism in 2024 or risk worsening conditions.”
With the economy still recovering, IFS emphasised the need for fiscal consolidation to improve macroeconomic stability going forward. While higher capital expenditures may score political points, unrestrained pre-election spending risks prolonging Ghana’s economic troubles.
The post IFS flags spike in domestic capital investment appeared first on The Business & Financial Times.
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