By Prince OWUSU-ANSAH, Emmanuel KUNDO & Frederick AMOAKO AWUAH
Ghana’s economic challenges has been characterised by a complex interplay of high debt, inflation, and stagnating growth which have created a tense environment for fiscal policy. The introduction of revenue generating measures, such as the Electronic Transactions Levy (E-levy) and the COVID levy, was a direct response to rising fiscal deficits. However, these measures have come at a significant cost to public sentiment as well as economic vitality, especially affecting small businesses and burdened households by the rising cost of living.
In the Mahama’s First 120 Days Social Contract, the president proposes the immediate scrapping of some taxes, including the E-levy, COVID levy, levy on bet winnings, and pollution and sanitation levy, reflects a decisive pivot toward tax relief as an economic strategy. Complemented by a review of import duties on industrial and agricultural equipment, these measures aim to stimulate economic activity, alleviate public hardship, and create a more conducive environment for businesses to thrive.
While the approach has broad appeal, especially among groups heavily burdened by the existing tax regime, it introduces critical uncertainties about Ghana’s ability to maintain fiscal balance. The nation’s economic recovery is precarious, with public debt soaring to over 72% of GDP by the end of 2023 and a fiscal deficit reaching 7.7% of GDP. These issues necessitated an IMF bailout, underscoring the urgent need for sustainable fiscal policies.
Adding to these pressures, Ghana’s inflation exceeded 50% in 2022, severely eroding household purchasing power and business margins. Simultaneously, the Ghanaian cedi has weakened against major currencies, driving up the cost of imports and further exacerbating economic hardship. These conditions have created a fraught fiscal environment, where the elimination of revenue-generating measures raises pressing questions about economic sustainability.
Fiscal pressures and revenue-generation challenges
Efforts to stabilize Ghana’s economy have included the implementation of controversial tax policies. The E-levy, introduced to tax electronic financial transactions, was projected to raise GH₵6.9 billion annually, though actual collections fell short due to compliance challenges and public resistance (World Bank, 2023). Similarly, sector-specific taxes such as the COVID levy were designed to address extraordinary expenses but have drawn criticism for disproportionately affecting lower-income groups.
Despite these measures, Ghana’s revenue-to-GDP ratio remains one of the lowest among middle-income economies, at approximately 12.5% in 2023 (IMF Country Report, 2023). Against this backdrop, Mahama’s proposed tax cuts could exacerbate revenue shortfalls, jeopardizing the government’s ability to fund essential services, pay down debt, and meet obligations under its IMF bailout terms. These concerns highlight the delicate trade-offs involved in prioritizing tax relief over revenue stability.
Economic implications of proposed tax cuts
Tax relief has the potential to provide short-term economic stimulation by increasing disposable income and reducing business costs. For instance, removing the levy on bet winnings could support consumer spending, while the reduction of import duties on industrial and agricultural equipment may incentivize investment in key sectors. However, without adequate compensatory measures, these cuts risk widening the fiscal deficit and could affect revenue mobilisation which could have an impact on economic stability and growth.
Countries that have implemented similar tax policies, such as Nigeria’s recent attempts to roll back consumption taxes, provides cautionary examples. In those cases, revenue shortfalls led to cuts in public investment and a decline in service delivery (Adegbite & Oguntola, 2021). Ghana may face similar challenges unless the government identifies alternative revenue streams or significantly reduces expenditure—a challenging task given the country’s current fiscal constraints.
Ghana’s fiscal landscape demands innovative and carefully calibrated policy responses. While Mahama’s proposed tax cuts resonate with the public’s desire for relief, they come with significant risks. This article will delve deeper into these economic implications, examining whether this bold plan can deliver on its promise to balance relief with revenue mobilisation, or whether it will exacerbate the nation’s fiscal woes.
The proposed tax measures and their justification
The tax measures proposed in Mahama’s 120-day social contract signal a bold attempt to shift Ghana’s fiscal policy towards greater inclusivity and economic stimulation. However, these measures present complex trade-offs between immediate economic relief and the long-term fiscal stability of the country. The potential revenue losses and broader implications of these measures deserve a critical look.
Scrapping the Electronic Transactions Levy (E-Levy)
The E-Levy was introduced in 2022 with the aim of tapping into Ghana’s growing digital economy. Despite projected annual revenues of GHS 6.9 billion, it generated only GHS 1 billion in its first year due to behavioral shifts, as many users reverted to cash transactions to avoid the levy (World Bank, 2023).
The regressive nature of the E-Levy disproportionately affected low-income households and small to medium-sized enterprises (SMEs), who rely heavily on mobile money services for transactions. Removing the levy could stimulate Digital Inclusion by eliminating the additional cost burden, more people may adopt digital payment platforms, fostering innovation in the fintech space. It may also ease Financial Strains on SMEs by reducing transaction costs which could improve cash flow and encourage business expansion.
However, replacing the revenue shortfall poses a significant challenge. Ghana’s reliance on the E-Levy for alternative income highlights the need for a robust framework to sustain revenue generation without undermining digital inclusion. Other nations, such as Kenya, have successfully boosted digital transactions through tax exemptions, offering a potential model for Ghana (IMF Country Report, 2023).
Eliminating the COVID-19 levy
Introduced during the pandemic, the COVID levy served as a critical funding source for emergency health responses and public welfare programs. Despite the receding pandemic, the levy has remained in place, drawing criticism for inflating prices in a high-inflation environment. Eliminating the COVID levy would reduce VAT charges, alleviating cost pressures on households and businesses struggling with inflation. Lower input costs could enhance output, encouraging businesses to expand and hire more workers.
The levy provided revenue source for critical health and social programs during the era of the pandemic. Its removal would require government to find alternative funding sources to sustain post-pandemic recovery initiatives, if any, as other proponents have argued that the side effects of the pandemic still linger on and that maintaining such a revenue source could be useful in its management.
Abolition of the 10% tax on betting profits
Betting has become a prominent activity among Ghanaians, contributing significantly to government revenue through the current 10% tax on winnings. However, calls for the abolition of this tax have sparked concerns about the potential loss of a critical revenue stream, particularly at a time when the government is seeking innovative ways to expand its tax base.
The 10% tax on betting winnings may serve as a consistent source of income for the government, generating millions of cedis annually. Eliminating this tax could create a substantial revenue gap that might need to be filled through alternative means, such as imposing higher taxes on other sectors or borrowing, both of which come with their own economic implications.
Scrapping the pollution and sanitation levy
The Pollution and Sanitation Levy was introduced to reduce pollution from vehicles and industries, aligning with Ghana’s environmental commitments. Beyond its revenue impact, the levy holds symbolic importance in advancing sustainability efforts. While removing the tax could lower compliance costs for businesses, particularly those in the transportation and manufacturing sectors, it would significantly hinder Ghana’s environmental sustainability goals.
Eliminating this levy risks undermining Ghana’s climate agenda, especially as global pressure intensifies for the adoption of sustainable policies.
Review of import duties on industrial and agricultural equipment
High import duties on machinery have long been a barrier to productivity in agriculture and industry. Lowering these duties is expected to enhance competitiveness and support economic transformation.
Easier access to equipment could reduce production costs, improve food security, and create jobs in rural areas. Reduced machinery costs could enable local manufacturers, particularly SMEs, to scale operations and compete internationally.
Import duties are a significant revenue source. Reducing these could widen fiscal gaps unless offset by improved compliance and efficiency in customs processes. Digitizing customs operations and plugging leakages can mitigate revenue losses (World Trade Organization, 2023).
The revenue trade-off: Quantifying the fiscal impact
President Mahama’s proposal to abolish several controversial taxes raises critical questions about Ghana’s fiscal sustainability. These measures, while aimed at economic stimulation and alleviating financial burdens, present significant revenue trade-offs for a country already grappling with constrained fiscal space. With a tax-to-GDP ratio of just 13%—well below the African average of 18%—the implications of these tax cuts are profound. This section explores the fiscal challenges and opportunities associated with these proposed changes.
The projected revenue loss
The proposed tax cuts include eliminating the E-Levy, COVID levy, pollution and sanitation levy, and smaller levies such as those on betting profits, cumulatively accounting for an estimated GHS 6–10 billion in annual revenue. This shortfall represents a substantial portion of Ghana’s already modest revenue base, exacerbating a fiscal deficit that stood at 7.7% of GDP in 2023.
- E-Levy’s underperformance: The E-Levy, initially expected to generate GHS 6.9 billion annually, yielded only GHS 1 billion in its first year due to behavioral shifts by consumers who reverted to cash transactions (World Bank, 2023). While its repeal addresses its inefficiency and regressive impact, replacing this revenue stream is critical.
- COVID levy and others: Together, the COVID levy and other minor taxes contributed GHS 2–3 billion annually. Their removal will provide immediate relief to consumers and businesses but will further constrain fiscal capacity.
The rationale behind these tax cuts lies in their potential to stimulate economic activity. By easing the financial burden on households and businesses, proponents argue that these measures could spur consumption, investment, and innovation which could broaden the tax base.
Lower taxes may enhance disposable income, particularly for lower-income groups. SMEs, disproportionately affected by these taxes, may benefit from reduced costs, enabling expansion and job creation.
However, the extent to which economic growth can compensate for revenue losses depends on the broader economic context. Ghana’s high inflation (50% in 2022), currency depreciation, and structural economic challenges may limit the effectiveness of these measures in driving sustained growth (IMF Country Report, 2023).
Bridging the revenue gap
The potential revenue losses demand alternative strategies to stabilize Ghana’s fiscal position.
Ghana’s tax system has long been plagued by inefficiencies, with substantial revenue lost to tax evasion and leakages. Although significant progress has been made in this area, there is still a lot to be done. Addressing these issues could significantly mitigate the impact of tax cuts. Implementing advanced digital systems to track transactions and link tax payments with digital platforms could reduce evasion. For instance, Rwanda successfully expanded its tax base by digitizing tax collection, providing a potential model for Ghana (UNDP, 2021). With a substantial part of Ghana’s economy operating informally, bringing these businesses into the tax net through incentives and simplified compliance measures is critical.
Public spending inefficiencies and corruption have long strained Ghana’s fiscal resources. By adopting stricter expenditure controls, the government can optimize resource allocation without resorting to further borrowing. Institutional reforms to enhance transparency in public financial management can build trust and reduce waste. Cutting non-essential spending while protecting critical services such as health, education, and infrastructure will be crucial.
To offset lost revenue, Ghana could explore new avenues for raising funds such as Green Bond and Public-Private Partnerships (PPPs). Issuing bonds tied to environmental projects could attract international investors while supporting sustainability goals. Collaborating with the private sector to fund infrastructure projects can alleviate fiscal pressure.
Ghana’s public debt, exceeding 72% of GDP as of 2023, severely limits its ability to absorb further fiscal shocks. The IMF bailout underscores the precariousness of the country’s finances, and the proposed tax cuts may increase reliance on external borrowing if not accompanied by robust fiscal measures.
Navigating the economic impact: Short-Term Relief vs. Long-Term gains
Mahama’s 120-day agenda proposes bold tax reforms that aim to deliver immediate relief while spurring long-term economic growth. However, these proposals place Ghana at a crossroads, where balancing short-term benefits with long-term fiscal stability will determine their success. Below is an expanded analysis of the potential benefits, risks, and policy recommendations.
Benefits of the proposed measures
- Immediate financial relief and economic stimulation
The proposed removal of taxes such as the E-levy and COVID levy offers significant relief to households and businesses. Lower taxes mean reduced financial strain for small and medium enterprises (SMEs), which constitute the backbone of Ghana’s economy. This could enhance cash flow for businesses, allowing for investments in growth, job creation, and increased productivity. For households, lower taxes directly increase disposable income, which could boost consumer spending and contribute to economic recovery.
- Promoting digital financial inclusion
Scrapping the E-levy is expected to increase participation in digital financial services, which had been dampened by the tax. Wider digital adoption could, encourage innovation in Ghana’s fintech sector, foster inclusion for low-income earners and SMEs who rely heavily on digital transactions and accelerate the shift towards a digital economy, a critical driver of modern economic growth. - Enhancing competitiveness in productive sectors
A reduction in import duties on industrial and agricultural equipment will likely improve the competitiveness of Ghanaian farmers and manufacturers. This could increase agricultural productivity, reducing reliance on food imports and improving food security as well as empower local manufacturers to scale operations and compete globally, fostering industrial growth.
The risks and challenges to fiscal sustainability
- Revenue shortfalls
The removal of key taxes such as the E-levy and COVID levy could create a revenue gap of GHS 6–10 billion annually, worsening Ghana’s already precarious fiscal position. With a fiscal deficit of 7.7% of GDP and public debt surpassing 72% of GDP, the government may struggle to fund essential services, infrastructure, and debt servicing.
- Pressure on public services
Tax revenues are vital for financing education, healthcare, and public infrastructure. The absence of clear alternative revenue sources could lead to cutbacks in these critical areas, disproportionately affecting vulnerable populations who rely on government support.
- Risks to IMF compliance and investor confidence
The IMF program, essential for stabilizing Ghana’s economy, demands fiscal discipline. The proposed tax cuts could jeopardize compliance with these conditions, undermining investor confidence and potentially triggering credit rating downgrades. Such outcomes would limit Ghana’s access to international financing, exacerbating fiscal constraints.
Policy recommendations: A balanced approach
A balanced and strategic approach will be crucial to mitigate these risks and enjoy the rewards of the proposed tax reforms.
Expand the tax base
One needs to increase the tax base by enhancing compliance, immortalizing the informal sector. Ghana’s informal economy constitutes a large part of its GDP, but it is largely untaxed. Introducing incentives to formalization and leveraging technology to track economic activity can help bring them into the tax net, which can offset revenue losses.
Leverage digital tools
To reduce the inefficiencies in the tax system and reduce leakages from the tax system, investment in digital systems for tax collection can be made by building upon the already existing digital systems. Incorporating digital payment systems with tax systems, for instance, could improve compliance, like real-time monitoring of transactions. Through these tools, strained revenue collection could be improved without putting more pressure on businesses or individuals. Learn from successful models, such as Rwanda’s digitized tax collection system, which significantly improved revenue mobilization (UNDP, 2021).
Improve public expenditure efficiency
An essential component of where fiscal deficit management must be better targeting the quality of public expenditure. The government should trim wasteful expenditure, weed out corruption and align budgets with national priorities. Transparent spending tracking and accountability mechanisms can restore public confidence and release financial resources in vital sectors.
Target growth-oriented investments
Channel fiscal incentives into high-growth sectors like agriculture, manufacturing, and digital technology. Support agricultural mechanization and industrial innovation to reduce import dependency and improve productivity. Build partnerships with private sector players to fund infrastructure projects, leveraging public-private partnerships (PPPs).
Maintain the pollution and sanitation levy and explore green financing alternatives
While scrapping the pollution and sanitation levy may reduce costs for businesses, it could significantly undermine Ghana’s environmental sustainability objectives. Instead of removing the levy, the government should ensure that the revenue generated is transparently and effectively utilized for its intended purpose—promoting a clean and sustainable environment. By demonstrating tangible environmental improvements funded by the levy, the government can build public trust and reduce resistance to its continuation, as citizens will see the positive impact on their surroundings.
Additionally, scrapping the levy could signal a diminished commitment to environmental sustainability, which is critical for Ghana’s long-term development goals. Maintaining the levy reinforces the government’s dedication to addressing pollution and sanitation challenges while driving progress toward a greener future.
To further enhance environmental efforts, the government should explore green financing alternatives for projects with substantial environmental sustainability components. Issuing green bonds or accessing international green finance options can provide funding at lower interest rates compared to conventional sources, reducing the financial burden while supporting eco-friendly initiatives. These measures will enable the government to balance fiscal responsibility with its environmental goals, ensuring a cleaner and more sustainable Ghana.
Pursue the amendment of other specific tax laws
The government should reconsider certain tax policies to alleviate the burden on businesses while maintaining revenue generation. Key measures could include extending the period for carrying forward tax losses, re-standardizing VAT to include all the levies so that the levies will qualify for the input-output deductibility, standardizing VAT across all retailers, raising the withholding tax threshold, and increasing the capital allowance deduction cap for road vehicles (excluding commercial vehicles). These changes would support business growth and sustainability that would foster a more robust economic environment.
Repositioning the COVID-19 Levy as a Free SHS or Pre-tertiary Education Levy
According to the former government, since its introduction in 2017, the Free Senior High School (SHS) policy has benefitted over 5.7 million young Ghanaians. However, this program has cost the country GHC 9.9 billion and continues to face significant funding challenges despite these substantial investments.
On the other hand, the COVID-19 Levy has generated an annual revenue of about GHC 2 billion, which could sufficiently fund the Free SHS program if allocated for this purpose. Instead of scrapping the COVID-19 Levy, the government could reposition it as a Free SHS Levy or a Pre-tertiary Education Levy. This would not only cover the cost of the Free SHS policy but could also potentially provide more funding for free basic education, ensuring that Ghanaians enjoy free and quality education at all pre-tertiary levels.
Maintain and repositioning of the 10% tax on betting profits
The betting industry in Ghana boasts a significant number of participants, making it a valuable contributor to government revenue. Taxing betting winnings not only creates an additional revenue stream but also aligns with the principle of equity in taxation. Since wages, business profits, and investment income are taxed, it is fair to subject gambling winnings—a form of income—to taxation as well.
Instead of eliminating the 10% tax on winnings, we propose repositioning it by adapting a progressive tax system. Under such a system, higher winnings would attract higher tax rates, while smaller winnings would either be taxed at lower rates. This approach ensures fairness and reduces the regressive nature of the current flat tax rate, which disproportionately impacts low-income participants.
Furthermore, the government could introduce a threshold system where winnings below a certain amount are not subject to tax. This reform would protect low-earning participants, ensuring that the tax system does not discourage recreational betting while still capturing significant revenues from larger wins.
By maintaining the tax with these adjustments, the government can balance revenue generation with social equity, all while fostering public support for the policy. Additionally, part of the revenue collected can be reinvested into responsible gambling programs, financial literacy campaigns, and social development projects, ensuring the betting industry contributes positively to society beyond taxation.
Conclusion
The proposed tax reforms under Mahama’s 120-day agenda offer a promising pathway to economic relief and recovery, aiming to enhance business competitiveness, promote financial inclusivity, and provide consumer relief. However, their success depends on the government’s ability to mitigate revenue shortfalls while maintaining critical public services.
Balancing immediate relief with fiscal sustainability requires a multipronged approach, including broadening the tax base, enhancing compliance, rationalizing public expenditures, and exploring innovative financing mechanisms such as green bonds. These complementary measures will be critical to achieving fiscal stability without undermining economic growth.
While the reforms could stimulate economic activity and ease public discontent, they also pose risks of worsening fiscal imbalances if not carefully managed. The government must navigate these trade-offs to ensure that short-term benefits do not jeopardize long-term economic resilience.
The success of these tax reforms would ultimately hinge on the government’s ability to prioritize growth sectors, strengthen revenue collection systems, and maintain credibility with international partners. By adopting a balanced and inclusive approach rooted in fiscal prudence, Ghana would not only address its immediate challenges but also lay a solid foundation for sustained growth and resilience in the years to come.
Authors
The authors are the founders of the African Policy Foundation, a think tank dedicated to advancing sound fiscal, monetary, and public policy solutions across the African continent.
Prince Owusu-Ansah
Monetary and Public Sector Economist | Policy Analyst | Tax Practitioner
Emmanuel Kundo
Tax Practitioner | Business Strategist | Policy Analyst
Frederick Amoako Awuah
Economist | Financial Risk Analyst
