Three years ago, Finance Minister Ken Ofori-Atta delivered the very first budget of the Akufo-Addo administration amidst a sense of optimism that was so high that the government could afford to abolish some taxes.
The refrain from the government was to shift the focus of the economy from taxation to production ie pursuing a number of policies that should spur on the private sector and ultimately fetch government more taxes.
The tax cuts proved popular rather than pragmatic given that the government has since been struggling to raise enough domestic tax revenue. Throughout the term of this administration, not once has the government met its revenue target.
As of July 2019, the government has missed its domestic revenue target by as much as GH¢5 billion. The revenue underperformance predates the current administration and if anything at all begs the question of whether the tax cuts were prudent or mere political gimmicks.
Attempts to shore up revenue has led to experimentation with certain unpopular tax policies like levying users of vehicles with engine capacities in excess of 3.0L; 35 percent tax on persons earning more than GH¢10,000 etc,
There were almost immediate u-turns to these taxes in the subsequent budget.
Rather than its efforts spurring the private sector, some of these taxes have rather proven counterproductive according to the World Bank. The Bretton Woods institution’s latest Ease of Doing Business report saw Ghana dropped two places in the overall ranking and the main reason cited was the conversion of GETFund and NHIL levies into straight taxes.
The report stated that the conversion made the cost of doing business even more complicated.
Getting the money
In all these past three years that the country did not collect enough domestic revenue, the Finance Minister had to reduce the government planned expenditure in mainly area of infrastructure development.
Cutting capital expenditure is often the go-to because the other items the country spends its money on is often literally non-negotiable; they have to be paid nearly at all cost.
These things will typically include wages and salaries of public sector workers, the interest paid on the government’s loans etc. A default in interest payment would not be good news for Ghana likewise workers’ salaries.
Since 2012, the country’s capital expenditure ie money for infrastructure development such as hospitals, roads, schools etc is is on a decline compared to interest payment on loans etc.
As a percentage of GDP, capital expenditure has dropped from about 7 percent in 2012 to approximately 2 percent in 2018.
The irony is that between that period, the country’s total public debt has grown from GHS46.1 billion to GHS173.1 billion; admittedly this sharp increase could partly be blamed on some exchange rate weaknesses but there’s truth in the fact that a huge chunk of Ghana’s borrowings does not reflect in capital expenditure.
An election budget
Heading into an election year, Akufo-Addo government is faced with the dilemma of breaking the bank to provide some social goods or risk losing the election.
In the last elections, the Mahama government albeit under an IMF programme, missed its deficit target of 4.5 percent, ending up with 9.3 percent. They still lost the elections. There are further cursory tales from 2000 and 2008 where overspending plus other political gimmicks did not win the ruling government the elections.
Going in 2020, Ofori-Atta knows that for the huge chunk of the money it needs to spend, it must be prepared to generate it. Borrowing it, though an option, is one approach that is already suffocating Ghanaians.
Indeed, nearly 43 pesewas of every 1 cedi government collect as tax goes into paying interest on loans. Thus, it was not surprising that the IMF after its routine assessment of the economy asked Ofori-Atta to keep a ‘tight budget’ for 2020.
The Akufo-Addo government has persistently indicated their commitment to not overspending in the coming election year. Per the Fiscal Responsibility Act, a result of the IMF programme, the government cannot exceed a budget deficit of 5 percent of GDP.
And Mr. Ofori-Atta is well aware of this threshold and will not attempt breaking it. Investors currently hold a significant amount of Ghana’s debt and ae looking on with keen interest. And history has shown us that they will react at the least sense of mismanagement and this could lead to an exchange rate crisis.
The biggest setback to Akufo-Addo’s government has been its ambitions to deliver on its numerous expensive campaign promises just as said by ISSER in their recent economic report. These policies ie Free SHS, 1D1F, etc are crucial but their successful implementation will always be hampered by the government’s inability to generate more revenue domestically.
Increasing taxes in an election year is a non-starter. Borrowing too much has its dire implications. And the refrain of Ghana Beyond Aid means a sustainable means of revenue is the surest way to development.
Perhaps the only viable option left for Ofori-Atta is to prioritise its spending. The government will pursue spending in areas that will be most visible for the electorate while denying other areas.
Whatever budget the Finance Minister presents today, he knows there is an election to be won and this can only be done cleanly.