DEVELOPMENT DISCOURSE WITH AMOS SAFO: Taxation and COVID-19 economic recovery

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Innovative domestic revenue mobilisation

Economic costs from the COVID 19 pandemic have hit many economies, including Ghana’s; but most of the burden is being borne by the vulnerable and marginalised populations. In view of these economic hardships, governments across the world are taking prudent steps to resuscitate their economies. Urgent investments are needed in healthcare, education and other basic public services. But these social services will come at a huge cost and against the backdrop of low economic activity and low revenue. The economic difficulties and mounting public debt call for innovative approaches to raise revenue for meeting public expenditure.

One way out is to step up revenue mobilisation from corporations and individuals who can best afford to pay. This revenue will help meet the extraordinary financing needs arising from the pandemic, while also promoting social cohesion in these difficult times.  While in other countries citizen are changing their attitudes toward taxation, Ghanaians are increasingly becoming tax averse – of course propped up by an opposition that offers very little policy options, but screams at every government policy aimed at resuscitating the economy.

Fiscal consolidation

When the Finance Minister, Mr. Ken Ofori-Atta, presented the 2022 Budget Statement, he noted that the budget’s key focus is fiscal consolidation and prudent debt management to spur the COVID-era economic revitalisation and transformation.  According to the Finance Minister, COVID-era recovery   makes a compelling reason for government to enhance revenue and expenditure rationalisation measures in this budget.

These measures will lead to significant fiscal adjustment from a projected fiscal deficit (including Energy IPP Payments and Finsec Clean-up cost) of 12.1% of GDP in 2021 to 7.4% in 2022, representing an adjustment of 4.7 percentage points in just one year. With these measures, the economy should post a primary surplus of 0.1% of GDP in 2022 from a negative primary balance of 4.7% in 2021.

In my view, it would be imprudent for Ghana to continue relying on loans and foreign donations to offset its budget deficit. A country that is pursuing a ‘Ghana Beyond Aid’ development paradigm must become innovative at developing home-grown solutions to its problems. This means improving revenue collections by widening the tax net and playing a commanding role in the management of our natural resources.

Revenue performance

Year on year, Ghana’s revenue collection continues to fall short of targets; and with consistent trade deficits, it means our public expenditure continues to outstrip internal revenue generation. Small wonder that we continue to overly rely on foreign loans at killer interest rates to finance our budgets. This explains why debt servicing has become a major burden on the budget since independence. Because of increasing borrowing to finance budget deficits, interest payments have grown to unsustainable levels. In 2019, interest payments amounted to 4.9% of GDP and consumed about 46% of tax revenue. Given this background, I wonder why Ghanaians should be complaining about our debt levels when we hate paying taxes – while expecting government to provide social interventions.

According to Mr. Ofori-Atta, foreign grants fell short of the period target by 29.0 percent, while Domestic Revenue underperformed by about 7.4 percent. Also, Non-Oil Tax Revenue – comprising taxes on Income and Property, Domestic Goods and Services, and International Trade – amounted to GH¢34,889million (7.9% of GDP) against the revised target of GH¢37,856million (8.6% of GDP), representing a shortfall of 7.8 percent. The shortfall in Non-Oil Tax Revenue is attributable mainly to the lower than anticipated performance in Corporate Income Tax, Personal Income Tax, Mineral Royalties, Domestic Excise Duty and Communications Services Tax occasioned largely by economic scarring from the COVID-19 Pandemic.

I was not surprised when Mr. Ofori-Atta announced that foreign grants had dropped. The fact is that donors are facing the same COVID-19 challenges Ghana is facing, and are compelled to solve their domestic problems with the taxes they collect rather than spoon-feeding Ghanaians, who do not want to pay taxes.  It is estimated that only 2.3 percent of a population of 30.8 million Ghanaians pay direct taxes, which means more than 28 million Ghanaians do pay any form of tax.

As revenue declines, public expenditure – largely driven by public sector wages and expenses, provision of social amenities like health and education – continues to rise. In fact, amid COVID-19 disruptions there are more demands on government to provide roads than in normal times.  Mr. Ofori-Atta reminded Ghanaians that economic and social fallouts from the pandemic have been severe across the world, impacting lives and livelihoods through job-losses, inflationary pressures, revenue loss to government, and rising government expenditures to improve health systems along with virus containment measures among others.

 e-transaction levy

As indicated earlier, no government worth any salt would throw its hands in air and fail to respond to the exigencies of a crisis. Quite expectedly, government’s response was to introduce COVID-19 recovery initiatives in the 2022 budget to raise the resources needed for an inclusive recovery. A key component of government policy is a proposed introduction of an Electronic Transaction Levy (e-transaction levy) of 1.75 percent on the value of digital transactions through money transfer.

The proposed tax, however, exempts daily transactions of a cumulative value of GH¢100 or less per person. My basic understanding of this tax is that it is a regressive tax, targets individuals with high incomes or businesses with extraordinary profits to make a bigger contribution to public revenue generation and economic development.

Government is expected to raise GH¢6.5billion annually to support public expenditure. According to Mr. Ofori-Atta, up to 0.25 percentage points of the 1.5 percent e-transaction levy (i.e. 16.7% of the yield from the levy) annually will be used to support road infrastructure development and 10 percent of the 0.25 percentage points (i.e. 1.67% of the yield from the levy) will be used for improvement in public transportation including purchase of buses. Additionally, a chunk of the funds is expected to finance youth enterprise development.

The global digital economy is forecast to grow from US$11.5trillion in 2016 to over US$23trillion by 2025 (UNECA). Perhaps this justifies why Mr. Ofori-Atta is focusing on the e-transaction levy as a new revenue stream. In fact, it is time for Ghana to benefit from our national frequency resources, on which the telecoms and other digital platforms operate. For years, the telecoms companies have made fortunes from taxing money transfer transactions with little going to government.

Ghanaians did not complain about foreign companies making such huge profits on our backs, yet we are brazenly opposing the e-transaction levy before it takes effect. The kind of divisive and undiscerning politics we do in Ghana will continue to pull the economy backward. Should the opposition always reject any policy government develops even if it will ultimately benefit the economy, including opposition constituencies?

What I have noticed is that Ghanaians tend to hail foreign companies and individuals who progress in Ghana – and often gang-up against indigenous companies or home-grown solutions to solve our economic problems. Ghanaians, especially the current crop of opposition politicians, must begin to become a bit more ingenious if we are to wean ourselves from foreign aid and control. In one breath we are complaining about excessive government borrowing, while in another breath we are complaining about a new tax regime that is expected to broaden the tax net and, for once, enable our economy to benefit from our national frequency resource. Which path should the economy chart?

Low revenue mobilisation

However, revenue mobilisation remains Ghana’s biggest economic challenge. In one of its policy discussion papers, the Institute of Economic Affairs (IEA) was worried about incessant tax evasion and tax holidays in the country.  According to the IEA, while tax evasion is difficult to quantify, the tax revenue losses associated with it are believed to be substantial.  In most cases, evasion results from connivance between taxpayers and tax officials. Ironically, while companies were evading taxes past governments imposed taxes on condoms and cutlasses. Moving forward, Ghana needs a strict surveillance system backed by a strong sanctions regime to deter and minimise the incidence of tax evasion and its associated losses.

Over the years, there have been growing concerns about our inability to draw the informal sector into the tax net. The sector involves relatively small-scale activities yet accounts for 27% of total national income (GSS 2019). Therefore, if the sector is effectively taxed, tax revenue will increase to some extent.

Furthermore, there is a high rate of tax exemptions in Ghana, according to the IEA. Tax holidays are granted to many companies, NGOs, diplomatic missions, government officials and individuals. The system has however been abused over the years, with considerable lobbying for preferential treatment.

It is estimated that annual tax revenue losses through exemptions are more than GH¢5billion (or nearly US$1billion). Though our authorities recognise the problem’s magnitude and have placed a bill before Parliament to address it, the political will needed to pass the bill has has been lacking. This appears to be due to entrenched interests of the political class – many of whom are beneficiaries of the exemptions.

Moreover, illicit financial flows are known to be pervasive in Ghana. These include trade mis-invoicing, transfer pricing and various forms of money laundering. These underground dealings cost the nation huge amounts in tax losses. Studies by Ghana’s development partners estimate revenue losses from illicit financial flows at about US$3-4billion annually. To reverse this trend Ghana needs a strong, investigative/surveillance system to detect and curb these practices. A strong sanctions regime is also needed to punish and deter culprits. The policy paper points out that while mobilising adequate revenue is critical for Covid-era recovery, the revenue’s utilisation is equally important.

Controlling our natural resources

One strategic area Ghana has lost control of is the management of our natural resources. Ghana has untapped natural resources in the form of oil, gas, gold, manganese, bauxite and iron ore among other resources, estimated to be worth over US$12trillion. Unfortunately, while we have such riches underground there is equivalent poverty above ground. This situation result’s from our failure to play a commanding role in the management of our natural resource and transform the economy through industrialisation.

For decades, our minerals have been mined by foreign companies that have been offered generous concessions – including a disproportionate share of the minerals, tax holidays, liberal tax rates and export retention rights. The result of these liberal concessions has denied our economy the revenue needed for economic development. In fact, more than a hundred years after gold exploration/mining started in Ghana, we have had very little to compensate for the destruction of our environment.  Besides, when we discovered oil in 2007 and started commercial production in 2010, it was thought that we would learn from the mistakes of defective mineral fiscal regimes.

Unfortunately, we have been repeating the same mistakes by signing concession contracts whereby investors are given ownership of oil blocks while Ghana barely benefits from meagre royalties, taxes and carried and participatory interest. Since the onset of oil production, Ghana’s share of the total output is estimated at 15% and valued around U$5billion. This means that foreign oil companies have pocketed 85% or nearly US$30billion of the total proceeds. How can this be justified amid worsening poverty in the mining communities? Concession contracts only serve the interests of foreign investors – and their few Ghanaian cohorts.

I have been wondering why a country endowed with abundant natural and human resources has been struggling since independence. Two reasons account for our sluggish economic performance: First is bad governance and poor leadership over the years. Second is our collective unwillingness to embrace home-grown solutions to our economic ills. Honestly, we cannot transform our economy by solely being overly-dependent on foreign handouts. Beyond the e-transaction levy, government must keep an eye on natural resource management. We are giving too much away in the name of attracting foreign direct investments.

References

Gaspar, V,   Keen, M,   Klemm, A & Mauro, P. 2021.  A COVID-19 Recovery Contribution. IMFblog

Kwakye, JK. 2020. Key Policy initiatives for Ghana’s post-covid recovery. IEA Discussion Papers.

 

 

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