Generally, 2017 was a challenging year for Ghana’s accountants. In February Ken Ofori-Atta, the minister of finance, announced that over three years of off-the-books spending by the previous government had opened a GHS7bn ($1.7bn) hole in the budget, revealing the next day that the figures could be even higher.
Reducing the fiscal deficit is one of the primary goals of the government’s mandate and a condition of the IMF’s credit extension. According to the 2017 and 2018 budget statements released by the Bank of Ghana (BoG), policy will focus on a progressive reduction in the fiscal deficit over the medium term, from 8.7% of GDP in 2016, to 6.5% in 2017 and 4.5% in 2018.
To achieve this task, the government has planned significant changes to the ways taxes are collected and spent in 2017 and 2018. “There was significant slippage in the 2016 budget originating from weaker-than-expected economic performance,” Alhassan Iddrisu, director of the Economic Research and Forecasting Division at the Ministry of Finance, told OBG. “We have put fiscal measures in place to ensure we reduce the deficit to 6.5% in 2017. On the revenue side, we are putting in place measures to improve compliance, efficiency and tax administration, while on the expenditure side we are reducing budget rigidities.”
Incoming
The 2017 budget projected government revenues would increase by one-third over the course of the year to GHS44.5bn ($10.8bn), compared to GHS33.7bn ($8.1bn) in 2016. Almost four-fifths of this revenue was expected to come from taxation, with income and property tax forecast to increase from GHS11.4bn ($2.7bn) to GHS13.5bn ($3.2bn), and taxes on domestic goods and services predicted to grow from GHS12.1bn ($2.9bn) to GHS13.9bn ($3.3bn). Meanwhile, trade taxes were expected to increase from GHS5.5bn ($1.3bn) to GHS7.1bn ($1.7bn).
In order to bring about this boost in tax collection, the government is relying on increased growth. Most of the key taxes remain unchanged, with corporate income tax remaining at 25%. The healthy 9% economic growth experienced in the second quarter of 2017 has given some credence to the strategy, although there have been concerns, such as from local think tank IMANI, over whether that will translate into higher tax revenues. According to authorities, the improved business environment will contribute to an anticipated 17.6% growth in the industrial sector, spurred by the government’s One District, One Factory programme.
One of the biggest increases is expected to come from the country’s major commodity: oil. In 2016 government receipts from oil operations registered GHS711.1m ($170.2m), just over half of the budgeted GHS1.4bn ($335.2m), mainly due to a halt in operations at the Jubilee oil field’s offshore projects and continued low global oil prices. However, the 2017 budget has predicted significant increases in revenues coming from the petroleum tax, and royalties and dividends from oil over the course of the year.
Compliance
In addition to relying on growth, the government is looking to boost compliance and close loopholes. “We’re streamlining the exemptions regime to reduce exemptions, as well as offloading holdings of state-owned enterprises on the Ghana Stock Exchange. We are also intervening to reduce leakages of Customs revenues,” Iddrisu told OBG.
According to Ofori-Atta, only about one-third of all employees are registered in the Ghana Revenue Authority’s (GRA) records, indicating that there is significant scope to expand the tax base in the country. The GRA is set to receive additional human resources and training capacity, and will assume more extensive powers to audit transfer pricing practices in the extractives sector and free trade zones.
The budget also proposed a pilot scheme for self-assessment by small taxpayers and, in the medium term, the expansion of the tax base through efforts to formalise the economy using the National Identification System and the Digital Address System (see analysis).
Formalisation of the economy will be crucial to building tax revenues, according to Newman Kwadwo Kusi, executive director of the Institute for Fiscal Studies, a local non-profit focused on providing policy guidance. “A major reason for the fiscal deficit is that previous governments didn’t make a serious effort to expand the tax base to the informal sector,” he told OBG. “At present, the country’s economic growth is outstripping revenue growth because too many companies are not contributing through taxation.”
Additionally, simple government solutions are continuing to improve compliance. For example, the paperless drive of the current administration could eventually allow tax and revenue collection simplification, while sending a tangible signal to investors in terms of the ease of doing business.
Incentives
The 2017 budget also introduced a number of incentives aimed at the private sector and capital markets. Firms are to be offered tax incentives for hiring young graduates, while industry will benefit from the waiver on certain import duties, and the elimination of the 1% special levy on spare parts.
In order to rekindle investor interest in the stock exchange, the budget is offering capital gains tax exemptions on the sale of securities, and a two-year exemption of the 0.5% stamp duty for the issuing of shares or secured debt. The value-added tax on fee-based financial transactions was also abolished.
Budget Outlay
In 2016 the previous government overshot its GHS44.1bn ($10.6bn) budget by GHS7bn ($1.7bn), with outlays totalling GHS51.1bn ($12.2bn). According to the budget statement, there were two major sources of government expenditure: employee compensation, which reached GHS14.2bn ($3.4bn) in 2016, and was set to hit GHS16bn ($3.8bn) in 2017 and GHS19.6bn ($4.7bn) in 2018; and interest payments, which reached GHS10.8bn ($2.6bn) in 2016 and GHS13.3bn ($3.2bn) in 2017. Interest payments were projected to increase further to GHS14.9bn ($3.6bn) in 2018, representing 6.2% of GDP.
The next-biggest item on the expenditure list is the GHS8.6bn ($2.1bn) in grants to other government units. These statutory funds include the District Assemblies Common Fund, the National Health Insurance Scheme and the Road Fund, with each receiving a predetermined proportion of the national budget.
“The Ghanaian tax system is characterised by very strong budget rigidities, with a significant proportion of revenue earmarked for statutory funds,” Iddrisu told OBG. “In recent years the proportion of the budget transferred to district assemblies has increased from 5% to 7.5%, while the education and health trusts each receive 2.5%. In total, transfers to statutory funds swallow up 36-40% of all state revenue. After salaries and interest payments are taken into account, there is very little leftover to fund additional government initiatives and programmes,” he added.
Expenditure
The government’s total capital expenditure for 2016 reached GHS7.7bn ($1.8bn), of which 72.7%, or GHS5.6bn ($1.3bn), came from foreign sources. In March 2017 the Earmarked Funds and Capping Realignment Bill was passed into law under a certificate of urgency by Parliament. The implementation of the new law puts a ceiling of 25% of total revenues on transfers to earmarked funds.
The BoG estimated total expenditure for 2017 at GHS55.9bn ($13.4bn), accounting for 27.7% of projected GDP, compared to 30% of GDP in 2016. In the 2018 budget the government set out to further reduce expenditure as a percentage of GDP, although the raw amount was set to rise: the BoG estimated this to be GHS62bn ($14.8bn), or 25.7% of GDP in 2018, representing 14.5% growth over 2017 expenditure levels. The largest share of expenditure will continue to go towards the compensation of employees.
Outcomes
Overall, 2017 was welcomed for its plan to improve business conditions, stimulate growth and encourage greater compliance to boost revenues, as opposed to focusing only on higher tax rates. During the first seven months of the year, however, revenue generation undershot original predictions. According to data released by the BoG, from January to July the Treasury received GHS20.8bn ($5bn) in revenues, compared to its targeted GHS24bn ($5.7bn).
The BoG highlighted lower-than-expected imports and the delay in implementing certain tax reforms as the main reason for the missed targets. Fortunately, expenditures also came in lower than anticipated, at GHS28.8bn ($6.9bn) instead of the targeted GHS32.3bn ($7.7bn), meaning that the budget deficit registered at 4.5% of GDP. The government is therefore well placed to meet its 6.5% goal by the end of 2017.
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