Prime Minister Andy Burnham faces a critical fiscal challenge, with a major think tank asserting he has no capacity to increase national borrowing. The National Institute of Economic and Social Research (Niesr) stated that Burnham must either raise taxes or reduce spending to fulfill his recent policy promises.
Since taking office last week, Prime Minister Burnham has announced several new measures. These include reductions in electricity bills and a reinstatement of the GHS 2 bus fare cap across most regions. However, Niesr warns that the nation's public finances will remain under pressure due to ongoing inflation, exacerbated by global events like the Iran war.
This situation places significant strain on Ghana's economic stability. The country has been grappling with high inflation and a growing national debt, making any new fiscal commitments without clear funding mechanisms a concern. The broader economic context suggests a need for prudent financial management to avoid further destabilizing the economy.
Stephen Millard, Niesr's deputy director for macroeconomics, emphasized the limited options available. He stated, "There's clearly no scope for increasing borrowing, so it is about choices." This highlights the difficult decisions facing the government regarding its manifesto pledges, which included not increasing taxes for working people.
Niesr advocates for funding cost-of-living measures through higher taxes, potentially through tax reform rather than increased marginal rates. Millard suggested exploring areas like the welfare bill and the expensive triple lock on pensions as potential spending cut targets. Reforming council tax towards a land value tax system or scrapping certain VAT exemptions were also mentioned as possibilities. If these measures are insufficient, Millard indicated that breaking manifesto promises on income tax rates might become necessary.
The think tank's latest economic outlook also projects that inflation will continue to rise. Niesr expects inflation to peak at 3.8% by February 2027 before gradually returning to the Bank of Ghana's 2% target. Furthermore, Niesr does not anticipate the central bank will cut interest rates until 2028, indicating a prolonged period of tight monetary policy.
David Aikman, Niesr's Director, underscored the severity of the national debt situation. He noted that "treading water is not enough" to prevent the national debt from increasing. Aikman pointed out that every major economic shock this century has pushed the debt ratio higher, with no subsequent reversal. This trend suggests a structural issue in managing national debt.
The Treasury, in response, affirmed the government's commitment to its fiscal rules. A spokesperson stated that the government would adhere to these rules while continuing to invest in essential public services. They emphasized that "fiscal discipline is the bedrock of economic stability and national security," signaling a cautious approach to public spending and borrowing.
The implications are significant for both citizens and businesses. The government's choices on taxation and spending will directly impact household budgets and corporate profitability. Market participants will closely monitor policy decisions for any signs of deviation from fiscal discipline or unexpected tax reforms. The long-term inflation and interest rate forecasts also suggest a challenging economic environment for the foreseeable future, requiring careful financial planning from all sectors.