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Budget Review: Ofori-Atta’s revenue headache

As Ken Ofori-Atta presents the 2018 budget to Parliament in the coming days, his main priority would be to build on the economy’s performance of the past ten months whilst consolidating the fiscal gains made after a troubled 2016.

Between March 2, when Ofori-Atta presented his first budget, and now – about eight months after, a lot has happened that would give the government as much joy as pain. The government has largely been able to tame the deficit monster which has haunted many administrations. But revenue underperformance remains a headache.

The Ghana Statistical Service’s latest data shows a stronger overall real GDP growth of 9 percent in quarter two, driven by higher oil output, whereas non-oil GDP growth was depressed, same as it turned out in the first quarter.

So far, there has been improvement in macroeconomic stability in the first half of the year, with most key indicators, including inflation, the exchange rate, interest rates, the external accounts and international reserves, moving in the right direction.

Latest fiscal figures show that government’s fiscal deficit, as at July, 2017, is at 3.0 percent. The deficit target for the end of year is 6.3 percent and given the current performance, government is in line to meet that target.

The strong fiscal deficit performance was achieved despite poor revenue underperformance as government was pushed into cutting down its spending on the account of poor revenue flows.

Source: Ministry of Finance (July 2017)

As at July 31, when Mr. Ofori-Atta presented his Mid-Year Budget Review, total revenue (including grants) was short of the GH?20.5 billion target by GH?3.1 billion or 14.9%. As a percentage of GDP, the revenue collected was 8.6% against a target of 10.1% and, also, less than the outturn of 9.8% in the first half of 2016. The poor revenue performance is reflected in almost all the revenue lines.

In the Mid-Year Review, the revenue target was revised downwards by GH?1.9 billion to GH?43.1 billion, which is 28% more than was collected in 2016. Despite the revision, fiscal policy think tank, Institute for Fiscal Studies (IFS), maintains that the target remains ambitious.

Its reason is that, in the first half of the year, revenue growth was just 6.5% year-on-year, and to achieve the new target would require revenue to increase by 48.3% year-on-year in the second half of 2017.

Table: 2 Ghana: Domestic Revenue Performance

Source: IFS

In its review of the mid-year budget, IFS concluded that, “while we recognise the potential for higher revenue performance in the second half of the year, a jump of 48.3% year-on-year seems unrealistic.”

The poor revenue performance led to a reduction in expenditure of GH?4.6 billion or 16.7%, more than the revenue shortfall. Total expenditure was reduced from the target of GH?27.6 billion to GH?23.0 billion. The reduction in expenditure was spread across all the major components.

Thus, projected total expenditure for 2017 has been reduced from GH?58.1 billion to GH?55.9 billion, representing a cut of GH?2.2 billion or 3.8%, with a chunk of the cuts affecting, mainly, goods and services (GH?867 million); capital expenditure (GH?683 million); and transfers, including statutory and earmarked funds (GH?553 million).

Impact of poor revenue flows

The central bank has said the government’s inability to meet its projected revenue performance pose a considerable danger to fiscal consolidation efforts.

“The continued revenue underperformance could pose some challenges to the fiscal outlook. Revenue performance has been undermined by low import levels, slower pace of implementing specific tax measures, revision to tax assessments, and a sluggish non-oil real sector,” the BoG said.

The International Monetary Fund (IMF), with which Ghana has an ongoing US$918 million Extended Credit Facility, has not been enthused about the situation, describing as insufficient government’s efforts at boosting revenue collection.

With concerns of Ghana missing out on its 6.3 percent GDP for this year, the IMF has joined the chorus of analysts calling on government to strengthen its revenue administration as well as implement measures to broaden the tax base by streamlining its policies on tax expenditures, incentives, exemptions and holidays.

As the Finance Minister heads to Parliament to present the 2018 budget, measures to boost revenue mobilisation will be expected to feature high on the agenda. While it has been able to survive a poor revenue show this year, it is not likely that government can afford another poor show next year.

In its pre-2018 budget forum, the Institute for Fiscal Studies highlighted the importance of boosting government’s domestic revenue to GDP ratio which, it said, remains far below the level of its regional peers.
The country’s domestic revenue to GDP ratio averaged 20.4 percent between 2012 and 2015, compared to the sub-Saharan African countries’ average of 27.1 percent of GDP for the same period.

The low revenue/GDP ratio suggests that Ghana’s actual domestic revenue is far short of what its economic potential and institutional development should generate, the IFS’ head remarked.

Executive Director of IFS, Prof. Newman Kusi, stated that, “Indeed, if Ghana had performed like its regional comparators with an average domestic revenue/GDP ratio of 27.1 percent, the country could have generated a total of GH¢26.6billion extra domestic revenue between 2012 and 2015 — which could have paid off the total fiscal deficit (expenditure overruns) of GH¢22.3billion for the period, with an extra GH¢4.3billion to pay off some of its debt.”

The country, he said, “would not have recorded any fiscal deficit. Quite clearly, the low domestic revenue mobilisation is the cause of Ghana’s fiscal imbalances and the rising public debt.”

Whilst he acknowledged that the problem of low domestic resource mobilisation is associated with structural factors such as low-income, demographic factors, among others, that are difficult to influence in the short- to medium-term, he outlined measures that should help deal with the situation.

Zeroing in on revenue mobilisation reforms

One of the things expected of the Finance Minister as he bids to close the revenue gap is a strategy to reduce the widespread tax exemptions and evasion, broaden the tax base, strengthen revenue administration, improve tax compliance, and help combat abuses and corruption.

Such a strategy, according to the IFS, will require a critical look at the taxes paid by mining companies, operators from the free zones, state-owned enterprises, and informal sector businesses as well as managing the risks associated with oil revenues.

On increasing revenue from the mining sector, Prof. Kusi argued that Ken Ofori-Atta takes a second look at incentives accorded mining companies which have greatly limited the share of government revenue from the sector, and constrained the opportunities for government to mobilise adequate resources to fund social and development programmes.

“To ensure that the country benefits from the mining sector, in terms of growing its tax base, government has to undertake a complete review of the mining fiscal regime and its investment and stabilisation agreements. This will require a re-examination of the Minerals and Mining Act, 2006 (Act 703), and a review of mining contracts and agreements,” he said.

The way forward

Some of the avenues available to government include a major review of the concessions granted by the Free Zones Act to enable operators in the zone contribute to government revenue.

According to the IFS, exemptions and concessions granted to operators in the country’s free zones also work to undermine effective revenue mobilisation.
Another area the IFS Executive Director said could be exploited is state-owned enterprises. Government, he said, needs to review the country’s financial laws governing SOEs to enable the Ministry of Finance capture data on all of them.
He argued that the Ministry of Finance should be able to transparently and comprehensively capture, monitor and report on the financial situation of SOEs to Parliament during the budget presentation.

“This will enable the government to influence the investment decisions of these enterprises to make them more efficient and support implementation of government policies.

It will also enable the enterprises to undertake special revenue-generating activities that could bolster their financial positions and make them able to declare dividends to government in support of domestic revenue mobilisation,” he said.

Prof. Kusi said government must be innovative in widening the tax net to rope in the informal sector.

Given the recently launched paperless port initiative, e-business registration initiative and digital addressing system, it is clear government is trying to use superior technology to enhance revenue collection.

There is an even greater opportunity for use of technology to facilitate informal sector taxation. Of particular interest is the use of mobile banking to make tax payments. Such an approach, if adopted by the Minister, has the immediate benefit of reducing interaction between tax officials and taxpayers, and the consequent risks of harassment, collusion, and corruption.

source: thebftonline.com

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