Of liberal tax cuts and a humongous public debt
Theoretically, Social democratic governments believe in taxes, as a means of delivering on public goods and social expenditure, and the out-gone National Democratic Congress government did not slacken at all in serving up a good dose of this belief to the Ghanaian public even in the face of the debilitating power crisis.
In opposition, the New Patriotic Party, which has just hopped onto the saddle, knew exactly where to hit the government, and hit hard it did; it hauled the NDC government over the coals for what it considered to be an “insensitive” array of “nuance taxes,” promising to reduce or remove a number of them once it is voted into power.
But ours is an economy with an accumulation of fiscal deficits – around 70percent of GDP – judged by the Bretton woods folk to be “unsustainable,” and they expect us, through our 3-year Extended Credit Facility Programme with them, to continuously work at restoring debt sustainability and macroeconomic stability.
So how exactly does the New Patriotic Party (NPP) government carry out the extensive tax cuts it promised without further worsening the public debt situation; and will the IMF programme, which, in the first place, is responsible for some of the taxes, like the Energy Sector Levies, allow such widespread tax cuts? Or would the tax cuts have to wait till the programme runs out next year?
As a reminder, the NPP promised to reduce the corporate tax rate from 25% to 20%, and remove import duties on raw materials and machinery for production within the context of the ECOWAS Common External Tariff (CET) Protocol.
As outlined by Vice President Bawumia, in a September 2016 lecture, the party also intends to eliminate the Special Import Levy (1-2percent of cost, insurance and freight), abolish the 17.5% VAT on a number of things, like imported medicines, financial services, real estate sales, domestic air tickets, and reduce VAT for SMEs from the current 17.5% to a 3% flat rate.
The glut of taxes, Dr Bawumia said, “has increased the burden on the private sector and is a disincentive for production.”
Many of the taxes that have been imposed are “nuisance taxes” whose yield is quite low but whose burden on businesses and individuals is high, he added.
Dr Ebo Turkson, an Economics lecturer at the University of Ghana, takes the view that reducing taxes does not necessarily result in revenue shortfalls since high taxes could reduce compliance.
“There is a point at which when the tax rates are too high you actually collect less revenue so it is possible for the government to reduce taxes just for producers to have that incentive to produce more; they get more profit and you get more out of the profit in terms of the quantum and not the rate,” he said.
An economist with a local think tank, who pleaded anonymity, however, believes whilst the tax cuts would be necessary to lessen the burden on industry and stimulate private sector growth, they would have to be staggered and not undertaken in one swoop, in view of the huge public debt.
Whilst a government that embarks on tax cuts could use other means to make up for losses that may arise, and the NPP has indeed outlined such measures, the tax cuts need be staggered because the corrective measures may not yield the substitute revenues immediately, the economist said.
“If you reduce taxes and lose say GH¢1billion, whatever measures you introduce to make up for the shortfall may not yield GH¢1billion immediately,” the economist said. “As much as they want to stimulate the private sector, they would have to implement a balancing act of fulfilling their campaign promise of tax cuts as well as keeping the public purse in shape.”
Indeed, the Financial Times of UK reported President Akufo-Addo last week, as saying the humongous public debt situation is the country’s biggest challenge. At the same time, the president reiterated at his inauguration that “We will reduce taxes to recover the momentum of our economy.”
The NPP is taking over at a time when the country’s debt stands at GH¢112 billion as at September 2016, with interest payments running in the millions. In 2016 alone, interest payment is estimated at GH¢10.5 billion, up from GH¢6.3 billion in 2014.
Tried as the out-gone government did, meeting its budget deficit target of 5.1 percent proved an uphill task as the final figures for 2016 could show up to 7percent deficit, and whilst the cedi has been relatively stable last year, it has not fared particularly well in the last quarter, leaving the macro economic environment, generally, in a giddy state.
The economist who pleaded anonymity reckons the new government would immediately have to hem in price inflation, stabilise the exchange rate situation and find ways to reduce production costs for businesses, particularly so far as water and electricity are concerned.
In backing up its resolve to reduce taxes, the NPP argues that between 2001 and 2008, when it slashed corporate taxes from 32% to 25%, tax revenue actually increased.
On the other hand, “notwithstanding (or because of) the high level of taxes, there is a revenue shortfall of GH¢700 million for the first half of 2016.”
To make up for whatever shortfalls that may arise out of tax cuts, the new government has a number of measures lined up, including broadening of the tax base by formalising the economy, increasing tax compliance and reducing government expenditure as a result of increased
collaboration with the private sector.
The new government also expects reductions in interest rates paid on the debt stock, increased revenues from the TEN and SANKOFA fields, and the elimination of corruption especially in procurement of goods and services which is estimated at some 1.5% of GDP annually.
But as the economist cautioned, how quickly can these measures rake in revenues and forestall compounding of the debt crisis if the government decides wholesale prosecution of its tax reduction agenda?