IEA offers antidote to high fiscal deficit; Says increase in VAT rates unwarranted
Economic think tank, the Institute of Economic Affairs (IEA), wants the government to beef up its efforts at raising more revenue from taxes without necessarily increasing the existing tax rates in the country.
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The IEA said the low levels of revenue the government raises from taxes were, among other things, the result of the narrow tax net, adding that the effort also falls below standards when compared to other middle-income countries, even though tax rates in Ghana are high.
“Ghana’s tax effort is low by middle-income country standards, which means that more effort is required to beef it up. But this does not mean that tax rates are low. In fact, the few Ghanaian taxpayers are overburdened,” Economist and Senior Fellow at the IEA, Dr J. K. Kwakye, told a section of the media in Accra.
Dr Kwakye, who said this when he articulated the IEA’s position on the 2014 Budget Statement and Economic Policy of the government, described the budget as one that gave some hope, provided the initiatives were implemented to the letter.
He said the rate at which the government wanted to reduce the fiscal deficit, which would still be at around six per cent in the medium term, was not fast enough, therefore unambitious.
“End-year inflation of 9.0 per cent, plus or minus two per cent, was also not ambitious enough, considering that peers in the West African sub-region have lower inflation rates” he said.
The Minister of Finance, Mr Seth Terkper, presented the government’s budget to Parliament on November 18.
Budget highlight
The budget, besides undertaking the traditional sector programmes, also proposed the setting up of the Ghana Infrastructure Fund (GIF) to finance infrastructure, relying on allocations by Parliament, such as the new Value Added Tax increase as well as its own sources.
In all, the Finance Minister is asking to spend a total of GH¢34.96 billion, including arrears and outstanding commitments, 17.7 per cent higher than the 2013 estimate of GH¢29.71 billion. However, as a percentage of Gross Domestic Product (GDP) – the total value of goods and services produced within the country – the 2013 expenditures were equivalent to 34.1 per cent of GDP, while the 2014 figure represents 33.1 per cent of GDP.
Expenditure break-down
Out of the expenditure envelop, GH¢10.60 billion, equivalent to 10 per cent of GDP and 52.1 per cent of tax revenue, would be channeled to recurrent expenditure, essentially into wages and salaries, while a total of GH¢6.18 billion, equivalent to 5.9 per cent of GDP and 19 per cent of total expenditure, would be spent on interest payments on loans.
Interestingly, this compares unfavourably with the GH¢1.53 billion, representing 1.4 per cent of GDP, to be spent on goods and services and GH¢5.97 billion, about 5.7 per cent of GDP, earmarked for capital expenditure.
The government intends to finance the expenditures by raising GH¢25.98 billion from total revenues and grants, equivalent to 24.6 per cent of GDP. The revenues include GH¢24.27 billion from non-oil sources and GH¢1.71 billion expected from oil.
The excess expenditure over revenues, otherwise referred to as budget deficit which is expected to be GH¢8.97 billion or 8.5 per cent of GDP would be financed with GH¢4.12 billion from domestic sources and GH¢4.92 billion from foreign sources.
But the IEA said the low proceeds from taxes were due to the narrow tax base and the high level of exemptions, evasion and corruption.
Dr Kwakye said raising tax efforts from 17.3 per cent in 2013 to 19.3 per cent was unambitious and easily attainable and urged the government to widen the tax net to rope in the informal sector to enable it to raise more funds to finance projects.
“We welcome measures to reduce tax exemptions, reduce tax corruption and strengthen efficiency of the revenue agencies. We have long argued that these are the critical areas to focus on in trying to increase Ghana’s tax efforts to international standards,” the senior economist said.
Some tax measures
The government proposed a number of tax measures, including reviews of exemptions. This is because tax exemptions cost the country a whopping 13.1 per cent of tax revenues, equivalent to 2.1 per cent of GDP.
The 2014 budget, therefore, proposes that “all existing exemptions resulting from the clearance of goods on permit will be reduced to the minimum.”
In addition, goods supplied to the local market coming from free zone sources would be liable to the same tax rate as those from non-free zone companies.
Also, capital gains tax will apply to petroleum operations, petroleum excise duty now moved from specific to ad valorem, while road fund levy on petroleum product would be increased marginally.
Dr Kwakye was, however, utterly against the introduction of additional 2.5 per cent Value Added Tax which the government said would be channeled into the proposed Ghana Infrastructure Fund to finance critical infrastructure.
Broaden tax net
The IEA Senior Fellow said the recent VAT rate increase was unwarranted and would increase the tax burden of the Ghanaian, saying “we should look elsewhere not to VAT because of its relative ease to manage”.
The senior economist said the country should look to property tax, rent income taxes as well as fully implementing the review of tax exemptions while esnuring stricter control on the spending of ministries, departments and agencies (MDAs).
Other economists also propose that the Ghana Revenue Authority (GRA) should quickly modernise its operations to enable electronic filing of tax returns and payments to reduce abuse, evasion and cost of collection.