In effect, financial connoisseurs postulate that increase in taxes tend to boost the revenue base of countries; however, it reduces demand for products, reduces disposable incomes and spending rates, increases price of goods thereby reducing consumer spending, and worsens standard of living. It also causes rigidities in the private sector
To reduce and ease rigidities in the private sector, it is no doubt that for the first time in the last decade, a government’s fiscal policy did not increase or introduce new taxes, but reviewed the existing tax policies by abolishing and reducing taxes. Below are some of the relevant tax reliefs provided by the government in the 2017 budget:
Abolition of 17.5 per cent financial tax
Abolishment of one per cent special levy on imports
Replacement of 17.5 per cent VAT with three per cent flat rate for retail traders
Abolishment of 17.5 VAT/NHIL on domestic airlines
Removal of import duties on imported spare parts
Removal of five per cent VAT/NHIL on real estate sales
Tax incentives to companies that hire graduates
It is refreshing to note that these reliefs are intended to stimulate a weak economy in the short run and may encourage individuals to work, save and invest. However, if the tax cuts are not financed by immediate spending cuts, they will likely also result in an increased budget deficit, which in the long term will reduce national saving and raise interest rates. In their study, Gale and Samwick observed that reducing income tax can influence economic growth; however, there is no guarantee that tax rate cuts or tax reform will raise the long-term economic growth rate in an economy. To them, the four key aspects of tax policy that can boost long-term growth are:
Large positive tax incentives (substitution) effects that encourage work, saving and investment;
Careful targeting of tax cuts toward new economic activity, rather than providing windfall gains for previous activities;
Levelling the playing field across economic sectors and across different types of income and types of consumption; and
Minimal increases in the budget deficit.
To this end, the common question to ask is whether we have a system to collect taxes in spite of the numerous tax cuts. Already, depreciation of the cedi against major trading currencies since January 2017 will erode future economic gains.
For instance, given the utmost dependence of spare parts dealers on the dollar and the euro, gains from the removal of import duties on these products will evidently be eroded by the associated depreciation of the cedi.
On the flip side of this discourse, it is certain that this government has no alternative than to be efficient in their dealings in connection with expenditure to achieve the various targets. However, their posture after increasing the number of ministerial positions by 23 (87 – 110) and the cost of running the Presidency could easily throw the budget into further deficit. Realistically, the government will have to acquire 23 new land cruisers, pay salaries, rent, and in some cases, put up structures to house the additional ministers. On the average, this decision will increase the budget deficit of not less than GH¢10.4 million per annum.
Confronting financial market
Another area of interest to confront is the financial market. In fact, the banking sector has experienced consistent deterioration in asset quality over the past three years. In their 2017 report, the Bank of Ghana reported increases in the stock of non-performing-loans (NPL) from GH¢4.4 billion in December 2015 to GH¢6.2 billion in December 2016.
The deterioration was partly explained by the slowdown in growth of loans and advances, general slowdown in the economy, and high cost of production, especially from high utility tariffs. Within this period, the private sector accounted for the highest NPL while credit to households also experienced considerable reduction. In 2016 alone, the private sector accounted for 78.9 per cent of NPL in the banking sector. This was mainly attributed to high cost of production and credit. It is from this backdrop that this government ought to do everything possible to reduce cost of credit to the private sector.
For the special projects such as one district-one factory, one village-one-dam and other investment projects, the government must use creative means of finance to achieve these targets. As a virtue of fact, one of the prudent measures available to successive governments to narrow the wide infrastructural deficit in Ghana is to resort to project financing. As long as successive governments continue to develop the infrastructural deficit in this country, they will continue to borrow, thereby making it difficult to sustain a single digit in inflation rate and interest rates.
In light of the high expenditure required to meet the budget expectation, this government has no other prudent option than to capitalise on project financing to narrow the infrastructural deficits and at the same time create an enabling environment for the private sector. In view of this discourse, my next article will explore the possibility and benefits of employing project financing to develop non-investment and investment projects in Ghana. — GB
Author: Dr. John Kwaku Mensah Mawutor is the Dean, School of Graduate Studies of the University of Professional Studies, Accra (UPSA)