Ghana: Fiscal Policy Responsiveness, Persistence and Discretion

Abstract

Fiscal policy involves the use of government spending and taxation to influence the level and direction of economic activity in an economy. Fiscal policy affects aggregate demand, the distribution of wealth, and the economy’s capacity to produce goods and services. The objective of the paper is to assess how fiscal policy is influenced by output conditions, past fiscal policy measures and the discretion of fiscal authorities. We therefore employ Two Stage Least Squares (2SLS) to decompose fiscal policy in the context of both revenue and spending into its principal components – responsiveness, persistence and discretion. The results show that while government revenue is more responsive to output conditions than government spending, government expenditure is more persistent than government revenue. We also found that fiscal authorities in Ghana have generally low discretion. We think that while an upward adjustment in rates, fees and user charges that raises nontax revenue above 20 percent of domestic revenue would help reduce the responsiveness of government revenue to output conditions, a downward revision of some statutory payments especially the District Assemblies Common Fund (DACF) and a thorough review of others such as GETFund and NHIL could help in introducing some dynamism in fiscal policy setting with the possibility of reducing the existence of fiscal deterioration in the long term