Revenue setting mechanisms are flawed - Prof Armah

A Senior Research Fellow at the Institute of Economic Affairs (IEA) on Wednesday decried the persistent gaps between forecasted revenue targets and what is achieved, saying current revenue setting mechanisms are flawed.

Professor Bartholomew Armah at a policy seminar in Accra said it is not because the method is necessarily poor but because the forecasting mechanism is poor. He was speaking on the subject: "Are Our Revenue Targets on Target?" It was to generate debate on ascertaining whether the nation's revenue agencies are actually collecting the correct amount of revenue or merely depending on targets they have set for themselves.

Prof. Armah said without an improvement in their ability to accurately forecast inflation and exchange rates and the rate of expansion in the tax base in particular, revenue targets would not provide realistic indications of the revenue generating potential of the economy.

He noted that it was interesting that the overall result is a perverse situation where the revenue agencies on the one hand complain about their inability to undertake their duties due to lack of resources, “yet on the other hand their successes in meeting their targets suggests otherwise”.

He congratulated the revenue collecting agencies for exceeding their targets for 2001 but noted that it was vital for the government and other relevant agencies to know the realistic targets that they can collect to enable the generation of accurate GDP figures.

Giving the trends in actual versus projected GDP and inflation targets, Prof. Armah said between 1999 and 2001, the actual real GDP growth rate was overstated by an average of one percentage point.

“In other words, the government's real GDP projections exceeded the actual by less than one percentage point. On the other hand, the projected inflation rate was approximately nine percentage points lower than the actual.”

In 2000, the government's projection was 28 percentage points lower than the actual figure. This, according to Prof Armah, implies that the nominal GDP was actually higher than predicted; hence, the revenue targets were based on a lower nominal GDP than what should have been used.

He said since inflation projections have persistently understated the actual, it also means that the revenue estimates have consistently being biased downwards. "The consistency in the downward bias of the estimates could have been addressed if the real GDP projections had been overstated by the same margin as the inflation estimates.

"However, this has not been the case. The margin of error in the real GDP rates has been consistently in the range of one to two percentage points; in general GDP growth is less volatile or tends to be more stable than inflationary trends."

Prof Armah said when this happens it means that projected inflation becomes more accurate and the revenue agencies will become hard pressed to meet their targets assuming targets are based on trends in the nominal GDP growth rate.

He said in 2002 for instance, the inflation rate prediction of 13 percent appears well within reach. But correspondingly, the revenue agencies by September were below target.

The Customs Excise and Preventive Service (CEPS) estimated to collect 2,739.9bn cedis but actually collected 2,950.5bn cedis. The Internal Revenue Service projected 1,813.5bn but realised 1,811.8bn cedis while the VAT Service projected 788.5bn cedis, but collected 696.3bn cedis.

Prof Armah called for the setting of real estimates to enable revenue agencies to do a good job and not set low targets, exceed them and then celebrate. He suggested that there should be close technical relationship between the revenue collecting agencies, Bank of Ghana, Ghana Statistical Service and the Ministry of Finance.