Ghana’s public spending has excessively soared in recent years to the detriment of capital expenditure. The cost of a significant number of budget line items in recent years has skyrocketed increasing government expenditure beyond budget. A recent World Bank report on Ghana’s Public Finance Review confirms this trend. Unfortunately, this significant rise in public spending is not in areas that benefit the long-term development and improvement of the lives of citizens. The excessive spending is mainly driven by loan servicing, rigid expenses, and uncontrolled fiscal deficits.
As a result, an important area of spending taking a major hit is capital expenditure. This piece seeks to demonstrate how spending on capital expenditure has suffered immensely and continues to suffer due to fiscal recklessness and how it impacts the lives of citizens.
Public Spending – Trend and Focal Areas
The recently published World Bank report on Ghana’s fiscal developments confirms that the country’s total spending has increased astronomically. This, the World Bank attributes to a “lack of budget discipline.” The irony is that government expenditure between 2010 and 2023 even grew faster than the rate of GDP growth.
The big question is which areas? Three main areas consume nearly 70% of the entire government spending. These areas are compensation of public sector workers, interest payments, and earmarked payments to statutory funds. Spending in just these three areas is equivalent to 15.8% of GDP. That is not even the main shocker. Wait for it. The expenditure on these areas consumes almost 100% of the domestic revenues mobilized.
With this information if you are thinking about why your road is poor, no school in your neighborhood, and why the clinic is in a very bad state among others; you can appreciate why. Where is the money to undertake those projects?
The high-interest payment taking a chunk of the government’s total expenditure is partly attributed to the conundrum of overspending during election years. This creates huge budget deficits that are financed by high-cost loans increasing the country’s debt obligations. The existing legacy debt coupled with the high COVID-19 expenditure together with non-discretionary spending has limited the fiscal space of the government.
Capital Expenditure – It’s Worth
Capital Expenditure (CapEx) is the long-term expenditure or investments undertaken by the government to acquire, upgrade, or maintain physical assets such as infrastructure, machinery, buildings, and technology. In the case of Ghana, it refers to spending on roads, schools, factories, hospitals, interchanges, etc. The bottom line is CapEx is intended to generate future economic benefits.
The importance of consistency and increase in capital expenditure cannot be underestimated in an economy. It plays a critical role in driving economic growth by funding long-term investments in infrastructure, technology, and essential public services.
Investments in roads, energy, healthcare, and education enhance productivity, attract businesses, and create employment opportunities, ultimately boosting income levels and improving living standards. CapEx also supports technological advancements by fostering research, innovation, and industrial development, making a country more competitive in the global market.
For citizens, CapEx translates into tangible improvements in daily life through better infrastructure, access to quality healthcare, education, and efficient transportation systems. A well-developed infrastructure fosters business growth, creating more job opportunities and improving economic mobility. Increased government investment in public services enhances overall well-being, raising living standards and ensuring social stability.
The Current State of CapEx in Ghana
As a result of the huge spending in the three main areas indicated above, capital expenditure has been crowded out dwarfing its growth. This means that after the government settles interest payments, compensation of workers, and statutory payments, there is virtually nothing left to undertake capital investments.
The World Bank observes that, for instance, due to the enormity of the wage bill, it has become the constant source for loans leading to an increase in interest payment leaving no space for capital expenditure.
The spending on the government between 2010 and 2023 almost doubled as interest payments surged due to high-cost borrowing.
“A growing interest burden started crowding out capital expenditures. As a result, public investment in infrastructure has been insufficient, especially since capital spending often undershoots budgeted levels, revealing systemic issues around public investment management (PIM),” the World Bank report indicated.
The Bretton Woods Institution further indicated that “key infrastructure bottlenecks have emerged, including depreciated power distribution and transmission assets and limited road connectivity in the northern regions of the country.”
The shrinking fiscal space has made capital expenditure the biggest casualty. Like wages and debt payments, keep increasing capital investments have been on a steady decline. This trend threatens long-term economic growth, as inadequate infrastructure and underfunded public services stunt national progress.
What Next?
To reverse this damaging trend, Ghana must prioritize capital investment over excessive recurrent spending by implementing key measures. Enhancing revenue mobilization through a broader tax base and reduced exemptions can boost development funds. Cutting fiscal waste by eliminating unnecessary government expenditures will free resources for critical infrastructure. Better negotiations and reduced borrowing can ease the interest burden, creating room for increased capital spending.
The new government has so far set an agenda for fiscal consolidation by reducing waste. This has been seen in the number of ministers appointed relative to the numbers of the previous administration. This sets the tone for a fiscal discipline which has been the bane for capital expenditure. It is anticipated, as it has been started, that it continues and does not become “a nine-day wonder.”
Should the measures put in place be followed through to the letter, fiscal space can be created to undertake the most important developmental needs of the citizens.
