Subject to articles 179 and 180 of the 1992 Constitution and in accordance with the Appropriation Act, 2019 (Act 1008), the Minister for Finance and Economic, on behalf of the President of Ghana, presented to parliament the 2021 mid-year budget on Thursday, July 29, 2021.
In March 12, 2021, per the budget statement for the 2021 financial year, government introduced six new taxes and revised existing ones upward. This, according to government, is to generate more revenue to take care of the high expenditure arising out of impacts from the coronavirus pandemic on the economy.
Perhaps, many expected the Finance Minister to espouse the impact the taxes have had on the on the economy in the first quarter or half of the year – in view of the prevailing saddle economic situation – but it did not happen.
Fiscal policy refers to changes to government revenue and expenditure behaviour in an effort to influence the economy by adjusting its level of tax revenue. Tax can affect economic outcomes by either increasing or decreasing economic activities.
For example, when government runs a budget deficit, it is said to be engaging in fiscal stimulus which demands the increasing government spending and decreasing tax revenue or combination of both to spur economic activities. But when government runs a budget surplus, it is said to be engaging in a fiscal contraction which demands decreasing government spending and increasing tax revenue.
How do taxes affect the economy in the short run?
Primarily through their impact on demand. Tax cuts boost demand by increasing disposable income and by encouraging businesses to hire and invest more. Tax increases do the reverse. These demand effects can be substantial when the economy is weak but smaller when it is operating near capacity.
An example is the National Fiscal Stabilization Levy (NFSL) with the Financial Sector Recovery Levy (FSRL) or what is known as the financial sector clean-up levy which was introduced in this year’s budget. The concern by some stakeholders in the financial sector is that the 5% NFSL and the 5% FSRL will reduce the demand for jobs.
The NFSL applies to specified companies and institutions to raise revenue for fiscal stabilization of the economy. The NFSL is 5% on the profit (accounting profit) before tax on specified companies. The specified companies and institutions include:
- Banks (excluding rural and community banks)
- Non-bank financial institutions
- Insurance companies
- Telecommunications companies liable to collect and pay the communications service tax (CST) under the CST Act, 2008 (Act 754)
- Inspection and valuation companies
- Companies providing mining support services
- Shipping lines, maritime and airport terminals
The levy apply to the aforementioned industries irrespective of any existing exemption granted to an entity under any other laws in Ghana. The tax payable shall not be a deductible expense in arriving at the Corporate Income Tax (CIT) liability of an entity, and the Commissioner General of the Ghana Revenue Service shall issue an assessment to an entity for the amount of tax payable for the period. Both NFSL and FSRL are expected to expire in 2024.
Nonetheless, according to government, with the FSRL, the financial sector clean-up and the refund of monies to depositors have resulted in a huge cost of over GH¢21.0 billion to government; therefore, it introduced a financial sector clean-up levy of 5 per cent on profit-before-tax of banks to help defray outstanding commitments in the sector – in addition to that, banks are already liable to pay corporate tax and 5 per cent National Fiscal Stabilization Levy (NFSL) on the profit-before-tax (CIT).
Despite the fact that government would be able mobilize additional revenue for use for introducing this new tax, the downside is that cost of borrowing will go up which will have a lot of pass through effects on the final consumer.
Furthermore, some banks could actually cut down on staff in order to be efficient yielding to the loss of jobs crisis caused by the financial sector clean-up. This intricacy would affect investment, especially Foreign Direct Investment (FDI), if the ordination of the FDI has not tax exemption incentives from government.
How do taxes affect the economy in the long run?
Primarily through the supply side. High marginal tax rates can discourage work, saving, investment, and innovation, while specific tax preferences can affect the allocation of economic resources. But tax cuts can also slow long-run economic growth by increasing deficits. The long-run effects of tax policies thus depend not only on their incentive effects but also their deficit effects.
Economic activity reflects a balance between what people, businesses, and governments want to buy and what they want to sell. In the short run, demand factors loom large. In the long run, though, supply plays the primary role in determining economic potential. The productive capacity in the long run depends also on government intervention through tax incentives and budget allocations.
- Tax Incentives
By influencing incentives, taxes can affect both supply and demand factors. Reducing marginal tax rates on wages and salaries, for example, can induce people to work more. Expanding the earned income tax credit can bring more low-skilled workers into the labor force. Lower marginal tax rates on the returns to assets (such as interest, dividends, and capital gains) can encourage saving. Reducing marginal tax rates on business income can cause some companies to invest domestically rather than abroad. Tax breaks for research can encourage the creation of new ideas that spill over to help the broader economy. And so on.
Note, however, that tax reductions can also have negative supply effects. If a cut increases workers’ after-tax income, some may choose to work less and take more leisure. This “income effect” pushes against the “substitution effect,” in which lower tax rates at the margin increase the financial reward of working.
Although government did not ask for tax incentive in the mid-year budget, that notwithstanding, the country has lost ₵10 billion in tax exemption incentives in the last two years. Corollary to the problem of high expenditure and astronomic debt (both external and domestic) is the firm need of government to mobilize more funds through Domestic Revenue Mobilization (DRM) by increasing existing taxes and creating new ones in this year’s budget.
- Budget Effects
Tax cuts can also slow long-run economic growth by increasing budget deficits. When the economy is operating near potential, government borrowing is financed by diverting some capital that would have gone into private investment or by borrowing from foreign investors. Government borrowing thus either crowds out private investment, reducing future productive capacity relative to what it could have been, or reduces how much of the future income from that investment goes to Ghanaian residents. Either way, deficits can reduce future well-being.
The long-run effects of tax policies thus depend not only on their incentive effects but also on their budgetary effects. If parliament reduces marginal tax rates on individual incomes, for example, the long-run effects could be either positive or negative depending on whether the resulting impacts on saving and investment outweigh the potential drag from increased deficits.
Prudent expenditure and broadening tax base
Ghana’s public debt situation has been unsustainable for a long time. Data issued by the Bank of Ghana Monday July 26, 2021 shows that the country’s public debt has increased to GH¢332.4 billion, which is 76.6 per cent of GDP in five months at the end of May 2021 compared with GH¢291.6 billion, which is 76.1 per cent of GDP at the end of December 2020.
According to Bank of Ghana, Ghana’s public debt stock shot up by GH¢27.8 billion between April 2021 and May 2021. This is due to the US$3 billion Eurobond raised in March 2021 as well as the huge borrowing on the domestic market. Meanwhile, revenue mobilization in first-half of the year fell short of its target by 31.7 percent, resulting mainly from shortfalls in non-oil tax revenues.
For this reason, it is necessary that government must take measures which include prudent spending, digitalizing the tax system to loop in the informal sector (the biggest evaders of tax in Ghana) not just passing legislations to impose taxes. Broadening the tax base can build up fiscal space by raising government revenues.
Digitalizing of tax system
The insertion of digital tools into public administration and informal sector may help expand the set of taxpayers, reduce costs, and improve tax performance. Governments can better identify taxpayers by issuing Intrusion Detective System (IDS).
An IDS is a system that monitors network operating systems to detect suspicious activity and alerts when such activity is discovered or breached. Rather than relying the manual anomaly of detecting and reporting tax evaders, an IDS in the network payment systems in the public – and especially the informal private sectors – will monitor, detect and report infringes in the network payment system.
Government can also establish online platforms for e-filing and e-payments of taxes and import duties. Digital technologies help strengthen tax administration by lowering transaction costs and allowing innovation in tax policy. Digital tax administration may reduce tax evasion and fraud. Although it may not necessarily make all taxpayers pay the right amount of tax, but it will increase the taxpayer base.
As the Finance Minister stated in the budget statement the GRA has to implement a transformation agenda to block the huge leakages in key sectors of the economy especially the informal sector. This transformation agenda should not just be about mobilizing more revenue, it is equally about mobilizing efficiently through technology and integrated data systems.
>>>The writer is a tax analyst and can be reached on [email protected]