Overhaul domestic revenue mobilisation strategy - IFS

The Institute for Fiscal Studies (IFS) has said the over-GH¢2.7billion shortfall in government’s domestic revenue in the first half of this year must trigger an extensive strategy to boost government’s domestic revenue.

Executive Director of the policy think-tank, Prof. Newman Kusi – speaking at the institute’s 2018 pre-budget forum – said the shortfall in domestic revenue has been a common occurrence since 2013, and the gap has been widening since then.

According to Prof. Kusi, Ghana’s domestic revenue to GDP ratio 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.

“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 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,” Prof. Kusi added.

While 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.

Boosting domestic revenues

Prof. Kusi stated that to close the revenue mobilisation gap, a strategy is needed that seeks to reduce the widespread tax exemptions and evasion, broaden the tax base, strengthen revenue administration, improve tax compliance, and help combat abuses and corruption.

This, he said, 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 said incentives accorded mining companies 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

Also, Prof. Kusi called for a major review of the concessions granted by the Free Zones Act to enable operators in the zone contribute to government revenue, as according to him 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.

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

“This may also increase support among tax administrators, by not only reducing the cost of collection but also, perhaps, making the work of collection less unattractive and painstaking,” he said.

He urged government to also consider using the Driver Licencing and Vehicle Authority (DVLA) to bring scores of vehicle owners and commercial drivers in the informal sector into the tax net.

“A policy should be developed to make vehicle owners and commercial drivers present their income tax certificates as a requirement for registering their vehicles and renewing their driving licences. The idea here is to motivate and encourage vehicle owners and commercial drivers to pay income tax,” he suggested.

Commenting on managing risk associated with oil projection, Prof. Kusi said although Ghana has developed a sound oil revenue-management strategy, the oil revenue projections that underpin it have repeatedly been inaccurate.

“As the sector’s fiscal importance increases over the medium-term, the risk that an oil-revenue shortfall could destabilise the budget will rise with it. Effectively transforming oil revenues into productive investment and human capital development will require a well-designed investment strategy combined with improvements in expenditure efficiency,” he added.