Removal of subsidies will improve equity in income

A study on ‘Fiscal Policy, Inequality and Poverty: A Commitment to Equity (CEQ) Assessment on Ghana” has recommended the removal of subsidies on electricity and cocoa duties to ensure an equitable redistribution of income.

The study was conducted by the University of Ghana, CEQ Institute of Tulane University, and the World Bank with funding from the Bill and Melinda Gates Foundation.

Professor Stephen Younger of the Department of Economics, Ithaca College and an author of the report, said the study, which used data from the Ghana Living Standards Survey (GLSS-6), sought to answer three main questions.

The questions were: how much redistribution and poverty reduction is being accomplished through social spending, subsidies and taxes, how progressive are revenue collection, subsidies and governmental spending? And within the limits of fiscal prudence, what could be done to increase redistribution and poverty reduction through changes in taxation and spending.

The findings from the study showed, among other things that government spending and taxation marginally reduced inequality with most of the reduction coming from public spending on health and education, with more from education.

He noted however that the findings on poverty reduction were less encouraging, as government expenditure and taxation would have increased poverty in Ghana by about two points for the headcount index, if not for spending on health and education.

Professor Younger said while spending in education, especially at the primary level was pro-poor and progressive due to greater access to the poor, it tended to become pro-rich from the senior high school level and upwards, with most poor children dropping out after primary and sometimes Junior High School.

The study also found that while Ghana had some highly progressive taxes such as the Pay As You Earn (PAYE) or income taxes for people in the formal sector and the self-employed in the informal sector, as well as excise taxes on fuel, drinks, and communications; others on items such as tobacco products and ‘akpeteshie’ were regressive or poorly targeted.

This was because those products were mostly consumed by poor people, which meant they paid more indirect taxes on the products, thus reducing the consumable income.

While it had some moderately well-targeted expenditures, such as the Livelihood Empowerment Against poverty programme (LEAP), and the School Feeding Programme, some expenditures were poorly targeted, especially subsidies to electricity, which were substantial in 2013.

Professor Younger said policy makers could focus on expanding the LEAP programme but removing some of the poorly-targeted expenditures would help to address inequality and reduce poverty.

He said calculations done during the study in 2013 showed that removal of electricity subsidies which amounted to about GH?1 billion, would increase poverty only by 0.8 points on the FTT, and the amount that would have to be spent on the LEAP to reduce that poverty would be around GH?380 million.

The study also recommended to government to ensure proper funding of the School Feeding Programme as this was an initiative that directly benefitted the poor.

Professor Nora Lustig, Director of the Commitment to Equity Institute (CEQ) of the Tulane University, said while implementation of recommendation to remove subsidies on electricity and fuel would reduce inequality, it may at the same time increase poverty, thus the need to put in some compensatory measures to address the gap.

She cautioned that policy makers should therefore be careful about making policy decisions based only on inequality indicators without considering the implications for poverty reduction.