Thursday’s Mid-Year Budget Review should be a humbling lesson on how to finance campaign promises that are (more or less) revenue black holes while staying true to the favoured mantra, “from taxation to production.â€
Already, there are indications Finance Minister, Ken Ofori-Atta, may not follow through with his leniency on taxation as was the case for budget statements for 2017 and 2018. Rife speculations suggest the Mid-Year Budget Review could increase Value Added Taxes (VAT) by some 4% to fund the free Senior High School (SHS) policy, a failing National Health Insurance Scheme (NHIS) among other revenue-demanding policies.
Government will spend GH¢453 million ($103m) to fund the free SHS programme in 2018. The amount is more than twice the figure it spent on the programme last year, some GHS¢198 million ($45m). The NHIS owes some GH¢1.2 billion to partner clinics and health facilities, a reflection of a heavily under-funded health scheme. Some GH¢560 million will be invested in the famous Planting for Food and Jobs – just to mention a few of the insatiable programmes whose value-for-money analyses remain vague.
Some economists have advised against a 4% tax increase, warning it could prove detrimental. But the Minister can’t be faulted if it insists on increasing tax by a significant figure. Revenue figures have not been encouraging. Total revenue and grants from January 1 to May 31 2018, stands at a little over GH¢17 billion, 7% below target.
It gets more interesting. The severe revenue adequacy is worsened by the fact that the total revenue stream is consumed by only three main budgetary lines: wages and salaries, interest payments and amortisation and statutory payments. According to official figures, these three alone consume about 99.6% of all revenue collected. We can’t save, we hardly invest.
To keep the country running or to fund budget deficits, the Minister has been borrowing a bit too much, according to some economists. Ghana’s total debt stock hit GH¢154 billion or 63.7% of GDP in May this year, according to provisional figures from the Bank of Ghana.
On Thursday, the Finance Minister is expected to reveal a smart blend of expenditure-lowering measures and revenue-boosting strategies in a way that will not derail growth targets and keep budget deficit at 4.5% of GDP. But that will not be enough, says Head of the Economics Department at the University of Ghana, Prof Peter Quartey.
Critical to ending the vicious cycle of yearly revenue shortfalls and borrowing to fund budget deficits is to invest in streamlining the tax collection system to make it efficient and block points of fiscal haemorrhage.
“What we are supposed to collect as taxes we are not collecting enough. There are a lot of leakages and loopholes in the tax system we need block,†he said, and a recent report by the Auditor General confirms severe leakages in the tax system. It gets even worse. A chunk of what reaches state coffers is stolen by severe irregularities at public institutions – Ministries, Department and Agencies. An audit of public institutions for 2017 revealed that the overall financial impact of weaknesses and irregularities at public institutions amounted to over GH¢892 million (or $223 million).
Tax evasion continues to cripple revenue targets. Think tank, African Centre for Energy Policy (ACEP) believes Ghana loses $2.1 billion annually through tax evasion. Prof Quartey, whose academic specialisation is the areas of Monetary and Financial Sector Development, Project Monitoring and Evaluation, Migration and Economic Development, among others, says he expects Mr Ofori-Atta to tell legislators during the presentation of the 2018 Budget Review how some of these drains on the much-needed revenues will be blocked.
Prof Quartey has more advice for the Finance Minister ahead of the Mid-Year Budget Review.
“The informal sector is another big problem. We have not managed to rope them in as much we should,†he said, admitting that that suggestion is becoming monotonous.
“But it is a large economy,†he said, a reason the suggestion to rope them into the tax net will keep surfacing. He expects the Minister to give a convincing update about how ongoing initiatives like the Tax Identification Number (TIN), the Ghana Post GPS and the National ID Card, have succeeded in capturing the huge but elusive informal sector into the tax net.
Prof Quartey says until gov't invests substantially in roping in the informal sector, revenue inadequacy will persist
“There is a whole night business in Accra but when we sleep [tax collectors] also sleep when we wake [tax collectors] wake. It cannot be business as usual,†he counsels.
Politically unwise, economically prudent
There is, however, a more radical suggestion by Dr Lord Mensah, Senior Lecturer at the Finance Department of the University of Ghana Business School, on how the Finance Minister can navigate the choppy waters of leaky revenue streams while playing at tax leniency.
According to Dr Mensah, as it stands now the Minister has only one option in the short term to deal with revenue shortfalls and preempt tax hikes: head to the money lenders and borrow. He admits, however, that because Ghana's public debt is ballooning to dangerous levels, that option presents an obvious challenge.
"The only way to to do this is cut down expenditure," he said, convinced some of the revenue-intensive and politically-motivated policies must be reviewed. That will mean reviewing the free SHS policy in a way that takes cognisance, for instance, of parents who are willing and able to pay for their wards' fees at the senior high level. Reduce the number of districts targeted for the One-District-One-Factory policy, cut down expenditure targets for the Planting for Food and Jobs programme etc.
Dr Lord Mensah wants Finance Minister to take the bull by the horn
"Government must revisit all of its ambitious programmes. It may not be politically wise, but it will be good to do so," he stressed.
In less than 48 hours the Finance Minister will head to Parliament to tell Ghanaians his analysis of the total revenue, expenditure and financing performance for the first six months of the financial year. Mr Ofori-Atta will also present a revised budget outlook for the medium-term fiscal expenditure framework, and amid the cacophonous banter from the Minority Parliamentarians, he will present his master plan for the better economy his boss promised while gunning to be President in 2016.
While we speculate what the Mid-Year Review will look like, Dr Mensah of the University of Ghana Business School has a word of advice: "It is time to take the bull by the horn…if you promised ten factories cut down to four!"