Inadequate revenue measures threaten economic stability

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Government intends to use its revenue and expenditure measures in the 2018 budget to continue to stabilise the economy, offer reliefs to make the private sector competitive and create more employment.

But without the needed revenues, these objectives will not be realised. Funding for most of government’s developmental projects is heavily reliant on donor support and borrowing.

These funding sources have their limits. Hence, Ghana’s main challenge in the coming years will be how to deal with the mismatch between revenue and government operations amidst growing infrastructure needs.

Measures to increase domestic revenue insufficient

Government announced some measures to increase domestic revenue through widening the tax net. These include revision of the suspense regimes, special audits, use of fiscal electronic devices, implementation of the excise tax stamps, the implementation of common reporting standards for exchange of information and strengthening the design and administration of property taxes.

Most of these measures have been in almost all government budgets in the past decade and there is little to distinguish these measures from what was contained in the previous budget. Hence, it is unclear why these measures should successfully increase revenue levels substantially unlike in the pass.

Though these measures are not enough, government is hopeful they will help increase revenue from the projected GH¢43 billion in 2017 to GH¢ 51billion in 2018, representing a growth rate of 18.4%.

Expenditure for 2018 is projected to be GH¢ 62 billion (21.1% of GDP) against the projected revenue of GH¢ 51 billion (25.7% of GDP). Analysis of expenditure allocations shows that 68% of the total revenue (86.5% of tax revenue) will go into funding of two items: expenditures on employees’ compensation and interest payments, leaving only 32% (13.5% of tax revenue) for all others including capital expenditure. This situation poses risks to medium to long term economic growth.

Government efforts at reducing the wage bill is yielding no or little results.

Compensation of employees for 2018 is estimated to be about GH¢ 19.6 billion, representing 38.4% of total revenue and 49% of tax revenue. In 2016, government spent GH¢14.2 billion (42% of total revenue 55% of tax revenue) on employee compensation. This year government projected to spend about GH¢ 16 billion (representing 37% of total revenue and 48% of tax revenue) on employees’ compensation. Provisional figures show that as at the end of the third quarter, GH¢12.5 billion (44% of total revenue and 56.5% of tax revenue) of the allocated amount has been spent.

Employees compensation for the social services sector (which includes education and health) got the highest increase from GH¢ 8.8 billion to nearly GH¢10 billion. This represents about 55% of compensation expenditure as against 50.8% for 2017. Compensation within the public safety category has also increased from GH¢2.7 billion in 2017 to GH¢3.7 billion in 2018, thereby increasing its share from 16.8% in 2017 to 19% in 2018.

However, allocation for the infrastructure category (Ministries of Water Resources and Sanitation, Works and Housing, Roads and Highways, Communications, Railways Development, Aviation, and Transport) has declined from GH¢113 million to GH¢91.5 million and decreasing its share from 0.71% to 0.47%. These allocations give an idea about government priority sectors.

Rate of borrowing continues to increase

Ghana’s debt as at June 2017 was GH¢138.6 billion, representing 68.6 percent GDP as against 73% at the end of December 2016. This means that the total public debt increased by about GH¢16 billion between January 2017 and June 2017. This is about double the amount within the same period last year. Between January 2016 and June 2016, the total public debt increased from GH¢ 100.2 billion to GH¢ 108.6 billion. This implies that the debt stock increased by an average of 2.1% per month in the first half of 2017 relative to 1.4% per month in the first half of 2016.  Government intend to borrow about GH¢10.9 billion in 2018 as against GH¢ 9 billion for 2017. This should obviously have consequences for private sector credit and government interest payment obligations.

Interest payments to consume 48% of tax revenue in 2018

By restructuring the public debt, government is extending the maturity periods while reducing interest rate on bonds and amounts borrowed. However, the interest payment has become a problem since it takes a large proportion of government revenue. Interest payment has increased significantly in the last five years due to increased borrowing.

In 2012, 2013 and 2014 it increased by 51.2%, 80.5% and 61% respectively. Between 2012 and 2016, interest payment increased by 342%, thereby increasing its share of expenditure from 15% to 21% over the same period.

It amounted to GH¢ 9.7 billion as at September 2017 compared to GH¢ 7.8 billion the same period in 2016. The rate of increase in interest payment should be looked at critically by government. The rate of debt accumulation should be reduced and borrowing should be at low rate.

It is a misnomer for a country with pressing infrastructure needs, especially in the education, health and transport sectors, to spend 68% of its total revenue or 86.5% of its tax revenue on wages and interest payment. Therefore, if Ghana is to maintain her economic stability in 2018 and beyond, government must prepare a more robust strategy to grow domestic revenue.