GCB bank took over the two banks in 2017 with the permission of the BoG because they were unable to increase the capital requirements needed for their operations.

The Minority in its letter made three demands including being furnished with the purchase and assumption transaction document to update themselves on the issues that warranted the takeover.

[contextly_sidebar id=”PdviNrOLd4AGZ4VijWdRLX202yySl0Ec”]Speaking to Citi News’ Parliamentary correspondent, Duke Mensah Opoku on Wednesday, the Minority Spokesperson on Finance, Cassiel Ato Forson, said the group is only seeking further clarity on the transaction.

“We are asking for clarity in the provision of certain information that we deemed outstanding, relating to the two banks that were liquidated of which the central bank signed and purchased an assumption transaction with GCB. As we speak, the public does not know anything about it. We have read from an IMF document that says that the government of Ghana represented by the Ministry of Finance is going to arrange some bond issuance, about one percent of GDP which is about 1.6 to 2 billion cedis to defray the cost relating to the collapse of the two banks.”

“The argument is that who is going to pay? Is it going to be a public debt? The bond is going to be serviced through the consolidated fund and I know that as we speak, plans are far advanced, they’ve completed the discussion on the debt and it has come to about GHc2 billion.”

Ato Forson complained that as representatives of the people of Ghana, “we don’t seem to have any information about it, and it is important that, at the minimum, that ought to have come to Parliament for approval and the people’s representatives get copies of the purchase and the assumption transaction that the central bank signed with the GCB bank.”

The other two technical issues the Minority members are demanding clarity on include the cutoff rules as enshrined in the public financial management act, and the financial administration regulation as well as clarity on a supposed 7 billion outstanding arrears which they said had been adjusted.

Unibank moves to control majority interest in adb

This comes on the back of a purported control of the Agricultural Development Bank (adb) by Unibank.

Belstar Capital, Starmount Development company, EDC as well as SIC Financial Services Limited, have all allegedly pledged their shares, proceeds, entitlement and voting rights to Unibank hence giving Unibank power over adb.

CEO of Unibank, Dr. Kwabena Duffour Jr. confirmed on the Citi Breakfast Show on Wednesday that per the deal “we have the power and control to change it from adb. Down the line we might decide to do a proper transfer where we will need the approval of the various regulatory bodies but for now we have the power and control over it.”

Meanwhile, adb has however been suspended by the Ghana Stock Exchange, and the Bank of Ghana has also described the supposed deal as “null and void.”

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By: Godwin Akweiteh Allotey/citifmonline.com/Ghana
Follow @AlloteyGodwin

The post Minority petitions BoG, wants details on UT, Capital Banks’ takeover appeared first on Citi 97.3 FM - Relevant Radio. Always.

The country incurred a $2.4 million loss after 30 ambulances were procured in 2014 by the Ministry of Health, but were later found to be faulty.

[contextly_sidebar id=”ddiDdqheNNg6xkKVK4Kr77ZjHKuTfebk”]With 200 ambulances originally supposed to be purchased, the government suspended the deal after the ones which had been delivered did not meet required specifications.

In a statement released on Tuesday, the Minority spokesperson on Finance stated that, the Finance Ministry at the time only “issued at sight letters of credit” on behalf of the Health Ministry after they had put in a request.

“The Ministry of Finance also instructed the Controller and Accountant General’s Department to pay for the bank charges accrued to the Bank of Ghana as a result of the issuance of letters of credit on behalf of the Ministry of Health,” the statement from Ato Forson said.

“It is important to note that letters of credit issued by the Bank of Ghana is only a guarantee for payment and not payment in itself.”

According to him,  the letter only guaranteed that payment would only be made once the supplier of the ambulances fulfilled their end of the agreement.

“In modern business practice, a letter of credit (LC) also known as a Documentary Credit, is a written commitment by a bank issued after a request by an importer (foreign buyer) that payment will be made to the beneficiary (exporter) provided that the terms and conditions stated in the LC been met, as evidenced by the presentation of specified documents,” the statement added.

” I, Cassiel Ato Forson acting as Deputy Minister of Finance then, never made payment to Big Seas for the supply of ambulances.

‘Unfit ambulances result of no inspection’

With fingers being pointed at several officials over the acquisition of the faulty ambulances, the Executive Director of the National Ambulance Service, Prof. Ahmed Zakariah, revealed that the vehicles were not inspected before the payment was made.

According to him, there should have been inspections at various levels of the production to ensure that the manufacturer was producing exactly what was required by the country when it was being procured in 2015 under the John Mahama government.

“Ordinarily, there should have been three inspection processes; one before the start of the production to enable the manufacturer to gather the specifications of government, and the second is in the course of production to ensure that the vehicles are being produced according to the given specifications, and the final one should have been after the vehicle had been produced, to confirm that all the specifications have been followed.”

Story So Far:

September 13 – EOCO to investigate purchase of 30 ambulances $2.4 million, under the Mahama administration

September 13 – Former Health Minister Alex Segbefia denies contract for ambulances was signed under his tenure

September 14 – Executive Director of the National Ambulance Service says ambulances weren’t inspected before purchase

September 18 – Cassiel Ato Forson denies sanctioning payment for faulty ambulances

Below is the full statement from Cassiel Ato Forson:

I have become aware of a series of media reportage indicating that I, Cassiel Ato Forson acting as the Deputy Finance Minister authorized payment of some defective ambulances ‘procured’ in 2014 by the ministry of health.

I want to put on record that the Ministry of Finance only acted upon an instruction from the Ministry of Health to issue at sight letters of credit on their behalf using MOH 2014 budgetary allocations.

The Ministry of Finance also instructed the Controller and Accountant General’s Department to pay for the bank charges accrued to the Bank of Ghana as a result of the issuance of letters of credit on behalf of the Ministry of Health.

It is important to note that letters of credit issued by the Bank of Ghana is only a guarantee for payment and not payment in itself.

It is only when the supplier fulfills their part of the obligation under the contract that payment will be made.

In modern business practice, a letter of credit (LC) also known as a Documentary Credit, is a written commitment by a bank issued after a request by an importer (foreign buyer) that payment will be made to the beneficiary (exporter) provided that the terms and conditions stated in the LC been met, as evidenced by the presentation of specified documents.

At Sight — A credit that the announcer bank immediately pays after inspecting the carriage documents from the seller.

Finally, I, Cassiel Ato Forson acting as Deputy Minister of Finance then NEVER made PAYMENT to BIG SEAS for the supply of ambulances.

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By: Edwin Kwakofi/citifmonline.com/Ghana

The post I didn’t sanction payment for ‘useless’ ambulances – Ato Forson appeared first on Citi 97.3 FM - Relevant Radio. Always.

According to the Minority, the scheme was not consistent with existing laws governing Value Added Taxes and as such, its implementation was illegal and should be halted.

[contextly_sidebar id=”KDYXNdXIha3ZqY7ayJNxw7eIRKu43Zmu”]The GRA commenced the implementation of the new flat rate scheme on July 1st, 2017.

Until now the scheme had been restricted to some categories of businesses in the retail sector but this new system means it has now has been extended to cover manufacturers and importers.

Some business associations had earlier met with the Vice President, Dr. Mahamudu Bawumia in a bid to get the policy scrapped, a move which proved unsuccessful

Speaking to the media on Thursday, the Minority Spokesperson on Finance, Cassiel Ato Forson said that the Scheme violates the VAT ACT 870 and could not be implemented.

“Any policy that seeks to impose a tax or that seeks to prevent the wholesalers, importers to deduct their import tax is illegal. Therefore we are urging the GRA and the Ministry of Fiance to stop perpetuating the illegality. It’s illegal and has no place in the law. It is not in sync with the spirit of Act 870, it’s Value Added Tax and you cannot in any way implement a tax that is not in sync with the reason why the VAT Act 870 was implemented.” he said.

“We wish to serve notice to GRA to immediately halt this illegality. Failure to do so will mean that we’ll go to court to compel them to stop this illegality.”

According to Ato Forson, who is also a former deputy Finance Minister, the Government, through the GRA and Minister of Finance were attempting to trick Ghanaians into thinking taxes were being scrapped, while introducing a new one “through the backdoor.”

“What they [GRA] are only seeking to do is impose a VAT through the backdoor. They are tricking Ghanaians that they are going to reduce taxes but apparently they are imposing taxes because they are preventing the importer from detaching input tax from the output tax. In the VAT Act 870, who constitutes an importer is straightforward, the law is clear on that,” he added.

“All of a sudden we have seen that the Ministry of Finance and GRA have decided to define a wholesaler to include an importer. There’s nowhere in this law that defines wholesalers to include importers. The importer is a standalone and import VAT is deducted as if it’s an import levy and it should be respected as such according to the law.”

Speaking to Citi News after meeting the Finance Committee in Parliament, Finance Minister, Ken Ofori Atta dismissed the Minority’s claims that the implementation of the policy might be contrary to the law.

“We don’t think there’s any illegality. We will look at it again but we’re sure we are operating within the law.”

He also pledged that government would work with stakeholders in the economy for a clearer understanding on how the VAT Flat Rate Scheme.

According to Mr. Ofori Atta, the rationale behind the policy is geared towards simplifying the tax system and does not impose double or cascading tax.

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By: Edwin Kwakofi/citifmonline.com/Ghana

The post Minority threatens to head to court over 3% VAT flat rate appeared first on Citi 97.3 FM - Relevant Radio. Always.

Minority Spokesperson on Finance, Cassiel Ato Forson, contended that the Customs Amendment Bill approved by Parliament is aimed at getting the necessary legislative backing to remove the import duties on spare parts, is only fulfilling partially what was promised in the budget.

Parliament on Tuesday approved the Bill which seeks to give legal backing to the tax cuts on import duties, pending approval by President Nana Addo Dankwa Akufo-Addo.

[contextly_sidebar id=”TIqCzH7DY3HyrYCPSEy0kOc8LMhTYUw4″]According to Ato Forson, the new Bill only removes a section of the import tax, but other equally important levies such as import VAT and import NHIL, will still be in force after the approval.

The abolition of import duties on spare parts is one of the several tax cuts captured by the 2017 budget, and hyped by the New Patriotic Party (NPP) government to alleviate the burden on spare parts importers and Ghanaians as a whole.

But speaking to Citi News on Tuesday, Cassiel Ato Forson insisted that, the new  Bill is contrary to what was promised Ghanaians.

“From the onset when the budget was read, I made a point that this budget is very deceptive and the intent that the budget had communicated, the implementation will be different. And I’ve been proven right. Government has brought an amendment to the customs act contrary to what the budget signaled that they intend to do. They said that they intended to abolish and they used the word abolish. They said the intent is to abolish import duties on spare parts. Now the spare parts have all of a sudden become selected…and contrary to what they [NPP] are saying, it’s only about 60 percent of the spare parts that they are removing the taxes on. “

“The taxes they are removing are not the entire duties, but some import duties. When you say duty on spare parts, we have import duties which they have removed some of them, but import VAT and import NHIL is still staying. So my caution is that, our brothers and sisters in that industry should be aware that the duties that have been abolished today as a result of the passage of this bill waiting for the President to assent, we will not get blanket exemption but rather what we will get is that, only import duties will be exempted, but the Import VAT and import NHIL still stay and they are going to pay that. “

He also added that, Ghanaians should be mindful that the tax cuts are temporal, and would return in the year 2021 following some ECOWAS treaties which Ghana had signed.

“…This tax can only last up to 2020 and in 2021, no matter who is in government it is going to come back. I’m saying this because Ghanaians need to be educated on  that so that tomorrow when this tax comes back they would not say that government A has done this and government B is trying to do something else,” he added.

Meanwhile, a Deputy Minister for Finance, Kwaku Kwarteng, argued that government has conducted extensive consultations on the tax amendment; hence they are optimistic that it will bring relief to spare parts dealers.

“…I also would like to state that, what government is seeking to do with this measure is to remove its own contribution to the price buildup of spare parts in the country, with the objective that this will be translated to the benefit of businesses and the consumers of transportation services,” the Deputy Minister added.

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By: Godwin Akweiteh Allotey & Duke Mensah Opoku/citifmonline.com/Ghana
Follow @AlloteyGodwin

The post ‘Deception’ in spare parts import duty cut exposed – Ato Forson appeared first on Citi 97.3 FM - Relevant Radio. Always.

According to him, the budget does not fit into the country’s medium-term objectives and will lead the country into difficult times.

[contextly_sidebar id=”oRFnkLfnSYkkU1LRjSUPScle10VwcLfA”]”This budget is very deceptive, it is populist, it does not preserve the medium term objectives of this country. I’ll say that Ghanaians should brace for a difficult medium-term ahead of us. The minister said he was going to abolish the special petroleum tax; but he was quick to say that he was going to abolish the 1% of the component of the special petroleum tax, so he is not going to abolish the special petroleum tax per say. It is in two categories, 1% and 2%.”

Cassiel Ato Forson, who is also the Member of Parliament for Ajumako Enyan-Essiam constituency in the Central Region, said the government’s decision to scrap taxes on imported vehicle spare parts would result in dumping of old vehicles in the country.

He lamented that, it would have a negative ripple effect on various sectors of the country’s economy including health.

“Go to Abossey Okai today, we did a research on them some time ago, and in excess of 80% of what they sell are over-age vehicles. What you are doing is that, you are encouraging over-aged vehicles, the emission rate is going to go up, and the health hazards are there. Ghana is continuously going to be a dumping ground, so I think it is not well-thought through.”

He further cast doubt on the government’s announced plans of raising revenue, which he said were “overly ambitious.”

“I’ll tell Ghanaians not to be happy yet, because what I can see is a case of robbing Peter to pay Paul.”

He predicted that, the government will not meet its revenue targets for the fiscal year.

Meanwhile, the New Patriotic Party (NPP) Member of Parliament for Effiduase Asokore, Nana Ayew Afriyie, has discredited Mr. Ato Forson’s claims, saying the government will introduce measures to ensure proper regulation of the various sectors that will enjoy tax reliefs to ensure that they are not abused.

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By: Jonas Nyabor/citifmonline.com/Ghana
Follow @jnyabor

The post NPP’s 2017 budget is “deceptive and populist” appeared first on Citi 97.3 FM - Relevant Radio. Always.

The paper estimates the Total Cost of major NPP Promises in their manifesto and assesses the Party’s proposed tax cuts on economic growth and revenue generation to finance the cost of the promises.  The relationship is robust even after controlling for economic growth.

The paper finds a negative and elastic relationship between corporate tax rate and economic growth with an elasticity of about 3.17, suggesting that a 1% reduction in corporate tax rate will increase economic growth by 3.17% at the margin.

The paper also finds a positive, significant but inelastic relationship between real GDP growth and real tax revenue with an elasticity of 0.2, suggesting that a 1% increase in real GDP would increase real tax revenue by 0.2% at the margin. Deducing from the two results, a 1% reduction in corporate tax rate would cause about a 3.2% increase in economic growth at the margin which would further increase real tax revenue by 0.64% (i.e. 0.2% x 3.2%) at the margin.

Hence the increase in tax revenue resulting from the stimulation of the economy would not be enough to compensate for the loss in tax revenue resulting from the tax cuts. Hence the proposed strategy of reducing corporate tax to stimulate economic growth and relying on the ensuing tax revenue increase from the growth stimulus to finance the proposed promises is very far-fetched.

The paper concludes, therefore, that given the rigid nature of budget allocations due to the statutory expenditures in the budget, the expenditures associated with the promises could only be financed through deficit financing ,and therefore a significant increase in debt which will render public debt unsustainable

Introduction

Tax revenue is very critical for every economy. Yet, the impact of taxation on growth and investment has remained a hotly debated issue, not only to the academics but to politicians and policy makers as well. Proponents of tax cuts argue that lower taxes would both stimulate the economy in the short run and increase normal output in the long run through their positive effects on incentives to work, spend, save, and invest. To them, higher taxes hurt the economy by distorting behaviour – reducing work effort, spending, saving, and risk-taking. For example,  Romer and Romer (2014), investigated the impact of tax changes on economic activity in the postwar United States (1950-2007). They found that an exogenous tax increase of 1 percent of GDP lowers real GDP by roughly 2 to 3 percent.

In many poor developing countries, a low tax-revenue relative to GDP prevents them from undertaking ambitious development expenditure programs. Furthermore, due to the inefficient tax administration systems in these countries, tax rates tend to be high and concentrated on few tax payers and on indirect taxes.  Mobilizing additional resources through new tax regimes, external financial support, and deficit financing to finance budgetary expenditures is therefore a policy priority.

Ghana has pursued major tax reforms over the last two decades. The country moved progressively from a historically high corporate tax rate regime of 65 percent in the 1980s to 32 percent in 2001 and 25 percent in 2006. In 2006, when the corporate tax rate fell to 25 percent, corporate income tax revenue dropped by 3.1 percent while real GDP growth rose by 0.3 percent, (up from 5.9 percent in 2005 to 6.2 percent in 2006) before falling by 1.9 percent in 2007, (down from 6.2 percent in 2006 to  4.3 percent in 2007).

Non-oil tax revenue increased from GHȻ4.2 billion in 2008 to GHȻ23.7 billion in 2015, representing an increase of 461.6 percent in nominal terms and 137.3 percent increase in real terms. Tax Revenue as a percentage of GDP also increased from 14.0% in 2008 to about 17.0% in 2015.

Ghana’s tax system, especially the corporate income tax regime compares favorably with its peers in the lower middle income bracket—the average corporate income tax rate for LMIC is 29.6% compared to Ghana’s 25%. The movement of real GDP and real tax revenue has always been positive, with growth rate higher than the growth in real tax revenue. This explains the fact that the growth rate in real GDP is not strong enough to pull up the growth rate in real tax revenue.

Figure 1: Trends in Various Economic Indicators: 1980 – 2015

The NPP argue that Ghana has a very high tax regime and that a further reduction in corporate income tax rate and abolition of other indirect taxes could generate substantial benefits to the country. In this spirit, the New Patriotic Party’s (NPP) as stated in its 2016 Manifesto, promises to reduce corporate income tax rate from the current 25 percent to 20 percent and also abolish a host of other indirect taxes, including the following, when it wins the power to govern.

• removing import duties on raw materials and machinery for production within the context of the ECOWAS Common External Tariff (CET) Protocol;
• abolishing the Special Import Levy;
• abolishing the 17.5% VAT on imported medicines not produced in the country;
• abolishing the 17.5% VAT on Financial Services;
• abolishing the 5% VAT on Real Estate sales,
• abolishing the 17.5% VAT on domestic airline tickets; and
• Reducing VAT for micro and small enterprises from the current 17.5% to 3% Flat Rate VAT

Furthermore, the NPP proposes to pursue some very ambitious development projects. For the purpose of this paper we highlight just four (4) of these projects, namely:

• one-district-one factory;
• one-village-one-dam in the northern regions;
• one-million dollars-per-one-district per year; and
• one-extension officer per 500 farmers.

The intent is to stimulate economic growth through tax cuts with the resultant higher output also spurring higher tax revenue. On top of the proposed tax cuts, the NPP hopes to create fiscal space to support the financing of the expenditures by: broadening the tax base through the  formalization of the economy;

• enforcing tax compliance;
• reducing government expenditure through increased collaboration with the private sector and prioritization of government expenditure;
• reallocating savings from the reduction of interest paid on the country’s debt stock;
• increasing oil and gas revenues from TEN and SANKOFA fields;
• eliminating corruption, especially in the procurement of goods and services, estimated at about 1.5% of GDP annually; and
• plugging the leakages in the administration of public finances.

The general perception is that, some of these policies are not only shambolic and vague but their revenue impact cannot be quantified. Besides, many of them are not new as the current NDC government is already implementing a number of tax administration reforms, including, broadening the tax base, enforcing tax compliance, and plugging revenue leakages. The NPP admits that the NDC government has been able to mobilize unprecedented amount of resources in taxes and loans over the past eight years, which was estimated at GHȻ486 billion (NPP Manifesto, 2016).

Available figures from various budget statements show that nominal tax revenue plus borrowing amounted to GH¢179.9 billion cumulatively over the period 2009-2015 compared with GH¢20.6 billion over the period 2001-2008. Taking the 2016 revised budget estimates into account, this would amount to GH¢216.7 billion in eight years contrary to the NPPs claim that the NDC government have mobilized an unprecedented resources in taxes and loans of up to GHC486 billion over the period 2009-2016. This remarkable performance in revenue mobilization could be largely attributed to improvements in tax administration.

Thus, if the efficiency gains from the measures being proposed by the NPP have been largely reflected in tax revenue already, then repeating them will make only limited impact on tax revenue.

1. How much does it cost to implement NPP’s proposed policies

To make any meaningful analysis of these policies, it is important to know how much they will cost. Estimating the cost of some of the policies is quite straight forward. Our preliminary estimates show that the proposed reduction in corporate tax rate alone will result in a revenue loss of approximately GHȻ1.4 billion as shown in Table 1. Abolishing VAT on financial services will incur a revenue loss of GHȻ240.6 million. Abolishing the special levy will result in a revenue loss of GHȻ688.1 million while abolishing VAT on raw materials will lead to a revenue loss of GHȻ175.4 million. Table 1 show that six out of the seven proposed tax cuts will result in an estimated revenue loss of roughly GHȻ2.6 billion in 2017 alone.

Table 1: Projected Revenue Loss from Proposed Tax Cuts (Ghana Cedis)

Source: Revenue Policy Division (MoF)/GRA                                     Note: 1.0US$=GHȻ4.0

Now let’s look at the development projects.  As mentioned earlier, we select only four of those projects for the purpose of this paper. Let’s start with the one-village-one-dam policy. The NPP’s unofficial projection is to construct at least 2,000 dams at a unit cost of $300,000 (myjoyonline, 2016). This brings the total cost of this project to roughly US$600,000,000 and using an exchange rate of US$1 to GHȻ4, this will amount to GHȻ2.4 billion as shown in Table 2. With regards to the one-district-one-factory policy, available evidence suggests that a factory, depending on the type and size, will cost a minimum of US$7.0 million. Implementing this across the 216 districts will require a budget of at least US$1.5 billion, which is equivalent to GHȻ6.0 billion. Assuming that the one-million dollars per one district policy is to be implemented separately from the above policies, this will give us a straight figure of US$216 million or GHȻ864 million per year.

Table 2: Estimated Cost of Proposed NPP’s Selected Projects

Source: Author’s calculations

According to the sixth Ghana Living Standards Survey (GLSS 6), about 51 percent of Ghanaian households are engaged in farming and about 44.7 percent of economically active Ghanaians are engaged in agriculture. Given the total labour force of 11,940,000 (2014 est.), the labour force participation rate of 79.6 percent, and using a conservative agriculture labour force growth rate of 1.23 percent, the total farmers population is estimated to reach about 4.4 million by 2017.

Assigning one extension officer per 500 farmers will therefore, require at least 8,800 extension officers. At an entry salary level of GHȻ1,200, this policy will cost at least GHȻ131.2 million per annum. Thus, using the least cost scenario, it appears that the four policies alone will cost the government roughly GHȻ9.4 billion in one fiscal year, which translate into 12.4billion over the four year period. Of course, some of them are one-time expenditures and are likely to be staggered over the 4-year political cycle or more—the dam and the factory belong to this category. At the extreme, we are talking about roughly GHȻ93 billion for these four projects alone per year, which translate to GHȻ96 for the four year period. The recurrent component of the four projects alone, namely, the one-million dollars-per-one-district per year and one-extension officer per 500 farmers, however, will amount to just about GHȻ1 billion a year. Over the four year period, this will amount to GHȻ4 billion.

2. Theoretical and Empirical Literature
   • Theoretical Framework

Taxes can affect growth through potentially two channels namely, their impacts on factor accumulation and total factor productivity (Ferede and Dahlby, 2012). First, taxes can raise the cost of capital and reduce incentives to invest, which ultimately affect economic growth adversely.

Furthermore, by providing preferential incentives to some sectors, taxes can distort capital allocation and reduce the productivity of overall investment. Secondly, taxes can affect growth through their influences on total factor productivity.

Taxes distort factor prices and induce efficiency loss in resource allocation (Feldstein, 2006), eventually lowering total factor productivity.

Ferede and Dahlby (2012) also indicated that taxes can affect total factor productivity through their potential effects on entrepreneurship. Entrepreneurial activities generate new ideas that can raise total factor productivity, noting that adverse effect of taxes on entrepreneurship reduces the creation of new ideas and lowers total factor productivity.

Tax cuts may be potentially financed in two ways: spending cuts and deficit financing. While spending cuts is the most desirable the current budget regime in Ghana—very rigid due to so many statutory funds—makes spending cuts very unlikely.

The resource envelope is usually exhausted after the payment to statutory funds and interest on public debts even before consideration for compensation of employees. This makes goods and services and capital expenditures (capex) very vulnerable—main options to be cut.

However, recent trends show that the budget for goods and services is already very thin and could barely support MDAs’ service delivery.

The MDAs complain not only about the size but also the delay in releasing their goods and services budget to them. This suggests that goods and services budget might not be a good option for consideration as an expenditure reduction policy since it is already low.

Since the [NPP] party in 2017 may not have the political courage to cut employment, will capital expenditure (capex) become the victim of expenditure cut? Cutting back on capex would imply two things: (1) abandoning pipeline projects, and (2) failing to fulfill [some] campaign promises. Interestingly, most of the NPP’s own [heavy] campaign promises fall into this expenditure category. And given the commitment to continue with pipeline projects, it appears this expenditure item may be difficult to cut as well.

So will the proposed tax cut be financed through budget deficit financing? Fiscal deficit may be financed through various sources: (1) domestic and external borrowing, (2) monetization, and (3) sale of national assets, among others.

Under the ongoing Extended Credit Facility (ECF) Programme with the International Monetary Fund (IMF), central bank financing is zero at least until 2017 [and with commitment to keep it at zero thereafter].

Even if the government defies this conditionality and proceed to borrow from the central bank, this will have far reaching consequences for the economy—at hindsight the currency will collapse. Sale of national assets is always not politically desirable as the government would have to contend with nationalist groups and labour unions.

It appears the most preferred option will be borrowing from both internal and foreign sources. Already, there are concerns over Ghana’s public debt ratio, which is considered relatively high at 65.9 percent as at July 2016. Increasing the debt stock could trigger macroeconomic instability through high interest rates, high inflation and exchange rate depreciation. Not only are the political opponents watching, the development partners are also watching, so are the rating agencies and investors.

It appears the NPP still has some hope. The supply-side economists posit that tax cuts could be self-financing due to the large incentive effects they are likely to generate. If the last argument is anything to go by then the NPP [government] does not need to do anything more as those tax cuts will finance themselves through the large incentives they generate in the economy. But some economists disagree with this proposition.

They argue that although tax cuts could generate some incentives, they are not large enough to pay for themselves. The extreme view from the Ricardian School is that tax cuts would raise interest rates and lower confidence and thereby reduce output in both the short run and the long run.

The views on the impact of the tax cut on the economy are diverse and divided. The question of how the proposed tax cuts will be financed, therefore, becomes an empirical question.

Empirical Review

Policy makers and researchers have long been interested in how potential changes to the tax system affect the size of the overall economy. However, understanding the impact of tax changes on the size of the economy is an empirical question. Majority of the literature has focused on the impact of personal income tax.

Romer and Romer (2014) observe that “tax changes have very large effects: an exogenous tax increase of 1 percent of GDP lowers real GDP by roughly 2 to 3 percent. Dackehag& Hansson (2012) analyzed how statutory tax rates on corporate and personal income affect economic growth in a panel of 25 OECD countries.

They found that taxation of corporate and personal income negatively influences economic growth—the correlation between corporate income taxation and economic growth is even more robust. Veronica and Lenka (2012) confirmed a negative relationship between corporate tax burden and long-term economic growth in EU member states for the period 1998-2010.

Adudu and Simon (2015) found in Nigeria that efficient tax reforms are necessary conditions for enhanced sustainable economic growth. In a related study, Wilfred (2014) finds that taxation is negatively related to investment and the output of goods and services (GDP) and positively related to government expenditure in Nigeria.

The mean corporate tax rate in Ghana over the period 1990 to 2015 is roughly 30%, while government expenditure to GDP was 20.4% which compares favourably to Ghana’s peers in the middle income category.

 Concluding Remarks

This paper examined the effects of taxation policy on economic growth in Ghana. In particular, the paper examined the impact of corporate income tax cuts on economic growth.

A set of tax variables and control factors that can potentially influence real GDP growth is considered in the econometric analysis. Our main findings can be summarized as follows: We find evidence of an elastic relationship between tax variables and real GDP growth rate in both the short run and long run. In particular, we find that a 1 percent reduction in corporate tax will cause real GDP growth rate to increase by 3.17 and 2.09 percent in the long-run and short-run respectively.

The Generalized Least Square estimate showed that tax revenue is growth inelastic. We also found a bi-directional causality between tax revenue and growth for Ghana, though the causality from growth to revenue is mild.

We also found a positive and robust relationship between government expenditure and real GDP growth rate in the short-run. FDI inflows have a positive effect on real GDP growth both in the short-run and long-run.

Estimates by the tax authorities show that a cut in the corporate income tax rate by 5 percentage points could cost the country roughly GHȻ1.4 billion in corporate taxes alone and over GHC2.5 billion in proposed tax cuts. However, the measure could also improve overall tax revenue by0.416 percent in the short-run.

Considering the heavy expenditure projects being considered by the NPP government, which could cost up to GHȻ93 billion to implement, this paper argues that the NPP [government] would have to resort to high deficit financing in order to finance its budget. And given the country’s commitment to zero central bank financing under the IMF programme, the only options is to the resort to commercial borrowing with its attendant consequences for the economy.

Policy Recommendations

The paper then makes some policy recommendations on how to improve tax revenue without necessarily jeopardizing growth.  The NPP [party] may not be able to pursue the proposed tax cut and expenditure programmes simultaneously.

It may have to choose one of the two policies at a time. The possible options therefore, are as follows: (1) borrow heavily on commercial terms to be able to implement both policies simultaneously; (2) suspend the tax cuts in order to be able to admit expenditure programmes, (3) suspend development projects in order implement the tax cuts.

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By: Casseil Ato Forson, MP, Deputy Minister of Finance

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