Tax cuts and revenue leakages; Some pointers Ofori-Atta must watch
On January 10, this year, President Akufo-Addo nominated for the consideration of Parliament, one of the country’s finest investment bankers, Mr Ken Ofori-Atta, as his Minister of Finance.
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A co-Founder of Databank Financial Services Limited, Mr Ofori-Atta served as its Executive Chairman from 1990 to February 14, 2012. He also worked with Salomon Brothers and Morgan Stanley on debt and equity issues and financing for a variety of industries. He is also a co-Founder of the African Leadership Initiative of the Aspen Global Leadership Network.
The soft-spoken Finance Minister-designate served as the Chairman of the Trust Bank (The Gambia) Ltd.
His contribution to the financial system and commitment to excellence have earned him a nomination as the only black African to be listed in the world’s top 50 financial managers for the 21st century and also Marketing Man of the Year for 1996 by the Chartered Institute of Marketing, Ghana.
Credentials
The credentials of Mr Ofori-Atta undoubtedly make him one of the most suitable personalities to occupy a ministry whose success is paramount to turning the fortunes of the people in the country around.
Many finance people -- bankers and economists -- in the country have hailed his nomination and are looking forward to a successful tenure.
What’s ahead
Mr Ofori-Atta comes at a time when the economy is going through some challenges; where most of the targets set for last year are likely to be missed because of the difficult environment.
In the mid-year budget review, the previous minister said the government’s macroeconomic programme for 2016 was aimed at attaining and sustaining macroeconomic stability and strong economic growth while creating decent jobs and protecting social spending. Based on the medium-term macroeconomic framework, the specific macroeconomic targets set for 2016 in the 2016 Budget were as follows: Overall real Gross Domestic Product (GDP) (including oil) growth of 5.4 per cent; non-oil real GDP growth of 5.2 per cent; an end-year inflation target of 13.5 per cent; overall budget deficit equivalent to 5.3 per cent of GDP; and gross international reserves of not less than three months of import cover of goods and services.
At least, for now, it is clear from the latest Consumer Price Index (CPI) released by the Ghana Statistical Service (GSS) that inflation closed the year at 15.4 per cent, meaning the target set had been missed.
It is most certain that the government will miss the overall budget target of 5.3 per cent for 2016, with a deficit of about 7.0 per cent.
Of all the revenues to accrue to the government this year, it is estimated that more than 99 per cent of it will be used to pay interests on debts accrued, emoluments of public sector workers as well as settle statutory payments. This will leave the government, which has promised to deliver many projects and programmes for the people, with virtually nothing to depend on.
Tax cuts
According to the 2016 mid-year budget review, total revenue and grants amounted to GH¢32,040.4 million (22.9 per cent of GDP) in 2015 against a target of GH¢30,526.2 million (22.8 per cent of GDP). In nominal terms, the provisional out-turn was 29.5 per cent higher than the out-turn for the same period in 2014.
The performance in total revenue and grants for the period was driven mainly by taxes on goods and services resulting from the implementation of new tax measures, particularly the imposition of Special Petroleum Tax of 17.5 per cent, as well as the implementation of the Value Added Tax (VAT) on fee-based financial services and the five per cent flat rate on real estate, among others.
As a result, total tax revenue amounted to GH¢24,140.9 million, 4.4 per cent higher than the revised budget target of GH¢23,127.9 million.
From this scenario, it is clear that taxes slapped in many areas such as 17.5 per cent VAT on financial services, among others helped the past government to exceed its revenue target. But to the new administration, the VAT on financial services will be scrapped, while the five per cent VAT on real estates will also be dropped. Again, the government intends to reduce corporate tax from 25 per cent to 20 per cent, all in a bid to stimulate the private sector.
But according to the Head of Economics Department of the University of Ghana, Legon, Professor Peter Quartey, there is still the need for the Finance Minister to be careful which areas to reduce taxes. “Tax reduction must not be holistic because it is a promise made to the people during the electioneering campaign season,” he told the Daily Graphic in an interview.
According to him, there is the need to ensure that areas where taxes will be cut would benefit the private sector players, who will, in turn produce more and create jobs for the people. He believes that once the private sector makes money, taxes paid will be enough to cover the cuts at the initial stages.
Also paramount is for the Finance Minister designate to focus on how to rope in the informal sector players into the tax net. There must be a clear distinction between widening the tax net and increasing taxes.
One of the major challenges that has faced many Finance Ministers in the country is how to broaden the tax net. Instead of widening to rope in more people outside the net, they rather focus on increasing taxes, a move which ends up suffocating the very few already in the tax net.
Many have argued that there is the need for the government to ensure that before the end of the year, the national identification system, which has remained on the drawing board since 2003, is actualised. This will enable easy identification of the people qualified to pay taxes and for them to honour their civic duty.
Revenue leakages
One of the major challenges with governments in the past has to do with the massive revenue leakages in the country’s financial system. There are reports which indicate that the leakages at the ports, for instance, far exceed what is recorded as the real figure for the year.
Much as the revenue collection agencies sometimes meet and exceed their targets, there is the belief that what is not accounted for is equal to what is recorded, if not more.
Against this background, there is the need for Mr Ofori-Atta to ensure that he works with his team to block the leakages. The new Senior Minister designate, Mr Yaw Osafo Marfo, told the media soon after he was announced that there would be a relentless fight to block all leakages in the system.
This is a comment heard many times from various governments, but of which nothing much has been done.
To make a difference, the new Finance Minister-designate must prove a point, another point Prof. Quartey shares in.
According to him, it would make no sense to work to raise more revenue only for it to leak.
Some of the major leakages will also come from government expenditure on vehicles for its officials, state protocol, among others. It may also come from the amount of money spent on fuel for the ministers and deputies and other appointees. Leakages will come from over pricing of government projects.
Conclusion
The economy must work again and the clock is ticking. Ghanaians have undeservedly suffered too long under very unstable macroeconomy.
The real sectors of the economy; manufacturing, agric, among other things are not performing as expected although there are signs of some marginal increases in their growth.
It was the services sector that increased its share of GDP from 51.9 per cent in 2014 to 54.1 per cent in 2015. However, this was at the expense of both industry and agriculture. Over the period (2015), the share of industry, as per the mid-year review, declined from 26.6 per cent to 25.3 per cent, while that of agriculture declined from 21.5 per cent to 20.3 per cent.
Mr Ofori-Atta needs not fail. The confidence reposed in him by the President and the many Ghanaians who have hailed his appointment is a testament to the hope the country has in him.
Considering his pedigree and the fact that he will hopefully be supported by Vice-President Bawumia and Mr Osafo-Maafo and the yet to be appointed deputies to the Finance Ministry, Ken wil have no excuse to fail the people.