The Bank of Ghana (BoG) has lauded the government’s commitment towards ensuring fiscal consolidation within the medium-term with a key focus on prudent expenditure management to meet its fiscal deficit target for the year.
BoG however, highlighted that there are some risk factors to the government’s commitment which warrants additional fiscal consolidation efforts in the remaining months of the year.
According to the BoG, debt sustainability concerns remain, as such, in addition to additional fiscal consolidation efforts, it has called for carefully balanced strategies that will ensure sustainable growth and efficient debt management.
“The latest data suggests that fiscal consolidation efforts appear to be on track, but with some inherent risks associated with wage settlements and energy sector payments, amid low revenue mobilization”.
Bank of Ghana
The Bank of Ghana in its recent review of developments in the Ghanaian economy, urged the government to streamline its revenue collection efforts in order to meet the 2021 fiscal deficit target.
“The expectation on fiscal policy implementation in the remaining months of the year will be shaped by revenue collection efforts and strict alignment of expenditures with revenue inflows to ensure attainment of the fiscal deficit target for the year”.
Bank of Ghana
Fiscal position after 7 months
In the first seven months of the year, the government missed its fiscal deficit target by a 0.4 percentage points, as provisional data on the budget execution for the period indicated an overall broad cash fiscal deficit of 6.1 percent of GDP against the target of 5.7 percent of GDP. The corresponding primary balance was a deficit of 1.9 percent of GDP compared to the target deficit of 1.3 percent of GDP.
The Bank of Ghana’s call for additional revenue mobilization efforts in the remaining months of the year, was because the government could not meet its deficit targets due to higher revenue shortfalls.
Over the period, the government missed its revenue targets by GH¢4.5 billion as total revenue and grants amounted to GH¢34.3 billion. The revenues mobilized was far below the projected GH¢38.8 billion for the period.
Additional taxes, not an option
The government has over the years resorted to taxes to mobilize its revenues. However, IMANI Center for Policy & Education in its recent briefing paper on taxation and post-COVID recovery, argued that it will be a “trap” for the government to assume it could tax its way out of the difficulties created by the pandemic.
Even though the Policy Think-Tank stated that Ghana has a persistent average 5% gap between revenue and expenditure, it noted that the fiscal losses emanating from the pandemic are not restricted to only the central government.
According to IMANI, the pandemic has impacted households and private sector business with job losses, furloughs, worsening inequality and business closures and downsizing. This means that the government, in its efforts to improve revenues, needs to explore other avenues.
“A comprehensive understanding of the pandemic’s immediate, medium and long-term impact should inform the country’s tax policy formulation and administration”.
IMANI
20% tax-to-GDP target possible
The Policy Think Tank further highlighted that there is no doubt that greater domestic revenue mobilization holds the key for resilient and inclusive economic recovery. However, it warned that “this must be carried out in a manner that does not burden the faithful few who contribute to the tax pot”.
At the same time, IMANI urged the government to demonstrate its commitment to reducing inequality through tax policy, given the inequality implications of the on-going pandemic.
Ghana’s current tax effort stands at 14.1 % of GDP, very much below that of her peers (18-20% of GDP) and as such, provides considerable room for scaling up domestic revenue mobilization. The government targets increasing its tax-to-GDP ratio from the current 14.1% to 20% over the medium-term. This, IMANI believes, is possible “with a deepening of government initiatives such as the digitalization drive”.
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