Discussion Paper No. 2001/97
Taxation and Fiscal Reform
in Ghana
Tony Addison1 and Robert Osei2
September 2001
Abstract
To finance basic pro-poor services, the Government of Ghana must mobilize more
public revenue. But tax reform has been highly controversial in Ghana. An attempt to
introduce VAT in 1995 failed after widespread protests. Although a second attempt to
introduce VAT in 1998 succeeded, strong resistance to tax reform remains, and the total
tax base remains narrow and over-dependent on petroleum taxes. This paper argues that
slow progress in public expenditure reform, in particular in raising spending on basic
services, has impeded the public's willingness to pay taxes, since many people see little
benefit. This is especially the case in the poorer regions, which in addition have borne
the brunt of the rising petroleum tax. The paper concludes that much more attention
must be given to the political economy of fiscal policy in Ghana, if lasting
improvements to the fiscal system are to be achieved.
Keywords: fiscal policy, taxation, Ghana, sub-Saharan Africa
JEL classification: O23, O55, H20
Copyright
ã UNU/WIDER 2001
1
World Institute for Development Economics Research of the United Nations University
(UNU/WIDER), Katajanokanlaituri 6 B, FIN-00160 Helsinki, Finland; addison@wider.unu.edu
2
University of Nottingham, UK; robert.osei@nottingham.ac.uk
This study has been prepared within the UNU/WIDER project on New Fiscal Policies for Growth and
Poverty Reduction which is directed by Tony Addison.
UNU/WIDER gratefully acknowledges the financial contribution to the project by the Government of
Italy (Directorate General for Development Cooperation).
Acknowledgements
Paper presented at a UNU/WIDER project meeting on 'New Fiscal Policies for Growth
and Poverty Reduction', Helsinki, 17-18 November 2000. This project focuses on public
expenditure management, taxation, and the macro-economic effects of fiscal policy in
mainly (but not exclusively) low-income countries. Further details of the project can be
obtained from WIDER's web site (www.wider.unu.edu) or from the project director,
Tony Addison (addison@wider.unu.edu).
We thank participants at the project meeting for their comments. This paper represents
work in progress. Further comments are welcome.
UNU World Institute for Development Economics Research (UNU/WIDER)
was established by the United Nations University as its first research and
training centre and started work in Helsinki, Finland in 1985. The purpose of
the Institute is to undertake applied research and policy analysis on structural
changes affecting the developing and transitional economies, to provide a
forum for the advocacy of policies leading to robust, equitable and
environmentally sustainable growth, and to promote capacity strengthening
and training in the field of economic and social policy making. Its work is
carried out by staff researchers and visiting scholars in Helsinki and through
networks of collaborating scholars and institutions around the world.
UNU World Institute for Development Economics Research (UNU/WIDER)
Katajanokanlaituri 6 B, 00160 Helsinki, Finland
Camera-ready typescript prepared by Adam Swallow at UNU/WIDER
Printed at UNU/WIDER, Helsinki
The views expressed in this publication are those of the author(s). Publication does not imply
endorsement by the Institute or the United Nations University, nor by the programme/project sponsors, of
any of the views expressed.
ISSN 1609-5774
ISBN 92-9190-016-8 (printed publication)
ISBN 92-9190-017-6 (internet publication)
Introduction
The design and implementation of public-expenditure management and taxation
systems is one of the most important tasks facing low-income countries. This is
especially the case in sub-Saharan Africa, where weaknesses in fiscal policy have
contributed to slow growth and limited human development. Yet improvements in
public expenditure management and taxation remain fraught with difficulty, not least
because of their political dimensions (Addison 2000). Within the low-income group,
Ghana presents a particularly interesting case; over two decades of economic stagnation
and decline began to be reversed with the start of economic reform in 1983 and the
adoption of the Economic Recovery Programme.
Ghana has successfully stabilized its economy, thereby reversing most of the distortions
and macro-economic imbalances of the period before 1983. The economy has achieved
respectable rates of real GDP growth—averaging over 4 per cent—in the 1990s,
compared to the negative average growth rate over the period 1970-1983 (Table 1). The
average inflation rate fell to about 19 per cent in 1998 relative to 122 per cent in 1983.
However, poverty remains widespread and it is still predominantly a rural phenomenon.
The 1998/1999 Ghana Living Standards Survey (GLSS3) shows that the incidence of
poverty was about 29 per cent per cent nationwide and 36 per cent in rural areas; the
Rural Savannah and Rural forest areas account for almost 70 per cent of total poverty in
the country. In fact the incidence of poverty in the rural savannah has increased from
about 56 per cent in 1991/1992 to over 58 per cent in the 1998/1999 period (Table 2).
The need for a closer look at equity issues in Ghana cannot be over-emphasised; about
23 per cent of the population live in the rural savannah region and contribute over 40
per cent to national poverty. The incidence of extreme poverty is therefore still high.
Most of the reduction in national poverty has only been experienced by those close to
the poverty line, particularly those living in the urban areas.
Table 1
Selected macroeconomic indicators for Ghana, 1970-1999
GDP
growth
Inflation
Dom.
interest
rates
Terms of
trade
Debt: GDP
Debt serv.:
GDP
Debt serv.:
Exports
Aid: GDP
1970–1983
-0.004
50.0
13
160.7
31.1
2.2
10.5
3.0
1984–1991
5.4
28.3
20.3
119.2
58.1
6.1
36.6
8.9
1992
3.9
10.0
19.4
95.6
70.2
4.9
28.2
9.6
1993–1995
4.1
41.4
31.4
95.5
90.9
6.1
25.5
10.2
1996
4.6
46.6
41.6
88.5
88.6
6.9
27.1
9.4
1997
4.2
27.9
42.8
88.5
86.9
7.3
29.8
7.2
1998
4.6*
19.3
34.3
98.1
8.5
31.1
1999
4.4*
13.8*
26.4
Notes: * Data obtained from the government budget statements.
The inflation figure quoted from the budget is the end of period rate
1
Table 2:
Poverty incidence by location (Ghana, 1991/1992 and 1998/1999)
Upper poverty line = 900,000 cedis
Lower poverty line = 700,000 cedis
Poverty Incidence
Contribution to
Poverty Incidence
Contribution to
Total Poverty
Total Poverty
rd
3 Ghana Living Standard Survery – 1991/1992
Accra
Urban
Urban
Urban
Rural
Rural
Rural
22.4
28.3
25.8
37.9
49.7
60.8
72.1
3.6
4.8
5.6
4.0
13.8
35.4
32.8
11.6
14.9
12.9
27.0
30.7
45.1
55.9
2.7
3.6
4.0
4.0
12.2
37.4
36.2
All Urban
All Rural
All Ghana
27.5
62.4
50.8
th
18.0
82.0
100
15.3
45.8
35.7
14.2
85.8
100
Accra
Urban
Urban
Urban
Rural
Rural
Rural
4.7
26.8
24.8
42.2
46.3
41.4
70.5
0.9
5.3
5.9
4.4
16.1
31.6
35.6
2.4
17.1
15.1
29.7
30.1
24.4
58.2
0.6
5.1
5.2
4.5
15.1
26.9
42.6
All Urban
All Rural
All Ghana
22.8
51.6
42.6
16.7
83.3
100
14.5
36.2
29.4
15.4
84.6
100
4
Ghana Living Standards Survey – 1998/1999
Source: GOG, 2000
The government’s response to this severe poverty problem is set out in the Medium
Term Development Plan drafted in 1995. In broad perspective, the plan's objective is for
Ghana to become a middle income country by 2020 (the plan is therefore referred to as
Vision 2020). To secure faster poverty reduction, Ghana needs to achieve sustained
economic growth—certainly more than the 4.4 per cent in 1999. The government also
needs to raise public spending on basic services and infrastructure of most value to the
poor—in particular primary education, basic health care, sanitation and safe water and
economic infrastructure (for example better transport infrastructure in the north). The
task for policymakers is therefore to ensure that fiscal policy contributes to broad-based
(poverty-reducing) economic growth and the direct improvement of human
development indicators.
This paper explores these issues, focusing on the mobilisation of more public revenue
through tax reform. Ghana needs to raise revenue, in order to achieve higher levels of
development expenditure (and match aid-financed capital expenditures with sufficient
recurrent spending). But revenues must be mobilised in ways that do not unduly distort
incentives, or patterns of private investment. Taxation reform has already proved to be
highly controversial in Ghana, the 1995 introduction of VAT failed—after widespread
protests—and was finally brought into operation in December 1998.
2
In section 1 we look at the trends and structure of public expenditures and revenues as
well as the implications of trends in the fiscal deficit for the macroeconomy. Section 2
outlines the political economy of taxation in Ghana paying particular attention to tax
reforms after 1983. We also discuss the incidence of petroleum taxes and its implication
for poverty reduction in the poorer regions of Ghana. We conclude the paper by
emphasising the importance of revenue mobilization to Ghana. However, we caution
that until government expenditure policies become more credible there is a need to give
more consideration to equity issues in taxation in Ghana
1
The fiscal position in Ghana
1.1 Public spending: trends and structure
Table 3 shows the structure and trend of recent public spending. Ghana has managed to
restore spending in real terms, although little progress has been made in shifting
spending to development and/or pro-poor priorities. Government expenditures ratios
(expressed as a per cent of GDP) increased over the post–ERP period; the most
significant jump being in 1992 (the year Ghana returned to constitutional rule) when the
expenditure/GDP ratio increased by over 4 percentage points. Comparatively, the share
of public expenditures in GDP was over 4 percentage points higher than the SubSaharan average of about 23.2. Moreover, while the average for the sub region seems to
have declined in the 1990s, the same cannot be said for Ghana (Table 4).
A look at the components of public expenditure shows that the public wage bill
accounts for the lion's share: it averaged over 27 per cent of the total in the pre-ERP
period, reaching about 34 per cent in 1992 (Table 3).1 Although the share of wages in
total expenditures has declined in more recent years, it is still higher than the pre-reform
average. Interest payments have also become an important component of public
spending especially during the 1990s, increasing from about 12 per cent of total
expenditure in the late 1980s to about 32 per cent in 1997. This is a significant portion
of government expenditures, and needs to be given serious attention if faster progress is
to be made in reducing poverty. Two reasons account for this increase in interest
payments. First, high domestic interest rates which have averaged over 30 per cent in
the 1990s, significantly more than the early 1980s average of about 13 per cent. Second,
Ghana’s external debt ratio of about 87 per cent of GDP in 1997 is almost 3 times the
average for the pre-reform period (Table 1). This has resulted in the debt-servicing ratio
increasing from an average of about 11 per cent of GDP over 1970-1983 to about 31 per
cent of GDP in 1998.
Despite the duration of economic reform, the pattern of public expenditures in Ghana
still does not appear to be ‘pro-poor’—or at least it is no more pro-poor than it was in
the pre-ERP era. Although there have been slight increases in both health and education
expenditures (as a per cent of GDP) their importance relative to other expenditure items
1 As Amoako Tuffour et al. (1996: 7) point out, this is probably an under-estimate since government
transfers to subvented institutions include personnel related expenditures excluded from the
government wage bill. We expect that this ‘additional public wage bill’ will have decreased in more
recent years with the increased momentum of the divestiture program.
3
has declined—the share of public health spending in total expenditures decreased from
an average of about 9 per cent over 1984–1991 to about 7 per cent in 1997. Public
spending on education relative to total government expenditures also decreased from
about 19 per cent in the pre-ERP era to about 15 per cent in 1997. This is particularly
worrying given that expenditures in Ghana have been traditionally biased towards the
urban areas and also towards university education and tertiary health care. A World
Bank poverty report on Ghana in 1993 reported that only 25 per cent of the total health
budget was earmarked for primary health and preventive care. This was markedly better
in education where the proportion spent on basic education was about 62 per cent in
1989 compared to about 44 per cent in 1984. Even if the share of spending on primary
education and health care as a proportion of the respective sector totals has increased
over the years, it still does not warrant a reduction in the share of education and health
expenditures in the total budget. In a 1995 World Bank poverty assessment report on
Ghana it was also noted that social spending was not well targeted to the poor. Public
expenditure on health was too low and the existing spending was urban biased (World
Bank 1995: 2).
In summary one can say that although some progress has been made in reducing the size
of the public-sector wage-bill, it has yet to be translated into increased resources to
priority sectors such as health and education. Rather resources have been taken away
from these priority sectors to finance mainly the servicing of public sector debt (both
domestic and foreign). In the government’s Interim Poverty Reduction Strategy paper
the projected shares of spending on primary health and basic education in their
respective sectoral totals shows a significant improvement, when compared to the shares
in the early 1990s. Also the projected shares of both health and education spending in
total public expenditure are expected to increase in the medium term. However these
projections will depend on whether the projected reduction in the spending on interest
payments can be achieved. Fortunately Ghana does not have any pressing security
concerns (assuming that Côte d'Ivoire does return to stability). Therefore military
spending has been low and can be expected to stay that way, thereby avoiding the
burdens experienced in more insecure sub-regions of SSA (Addison and Murshed 2000,
Ndikumana 2000).
Table 3
Trends and structure of public expenditures in Ghana, 1970-1998
Expenditure
(% of GDP)
Capital:
Total Exp.
Goods:
Total Exp
Interest:
Total Exp
Wages:
Total Exp
Military:
Total Exp
Health:
Total Exp
Education:
Total
1970–1983
16.2
18.5
49.9
12.4
27.8
----
----
1984–1991
13.1
18.1
56.0
11.6
31.4
4.8
1992
17.8
19.7
48.2
12.3
34.3
1993–1995
21.6
19.5
40.9
18.7
1996
22.2
26.0
34.0
1997
20.6
18.7
35.6
19.1
Health:
GDP
----
Education:
GDP
2.9
9.3
20.6
1.3
2.8
4.6
7.9
16.6
1.4
3.0
26.5
4.1
7.0
13.8
1.5
3.0
23.0
24.4
3.0
7.0
13.6
1.5
3.0
31.5
25.8
2.4
6.9
14.6
1.4
3.0
1998
3.0
1999
Notes:
Expenditure ratios are obtianed from the World Bank and the IMF (i.e. 1994 onwards is from the IFS-IMF). Military
expenditure data were obatined from the WDI of the World bank. Although they differ slightly from the SIPRI data the
general trend for both data sets indicate a decline in this expenditure item.We report the World bank figures because
they cover a longer period. Education expenditure data were obtained from the the World bank (WDI2000). They were
expressed as a per cent of the GDP and so we divided them by the total expenditure to GDP ratio to get them as a per
cent of the total public expenditure. The same was done for the health expenditure ratios.
4
Table 4
Comparison of the Structure of Publc Expenditure in Ghana
and the Sub-Saharan Africa averages
Period
Gross Public Total Interest Wages and Capital
Investment
Payments
Salaries Expenditure
(% of GDP) (% of total) (% of total) (% of total)
1990-1995
10.8
11.0
21.3
41.9
1996
13.3
17.2
18.2
44.8
1997
12.4
22.9
18.8
40.9
1998
11.3
22.9
19.5
39.4
1990-1995
7.4
17.4
20.0
26.5
SSA (Excl. 1996
South Africa) 1997
6.4
15.6
20.6
28.0
6.6
14.0
21.1
28.7
1998
6.1
13.3
24.1
23.5
1990-1995
7.3
22.4
22.7
29.5
1996
6.6
18.7
20.8
33.5
1997
7.4
17.1
19.7
35.8
1998
6.6
14.5
22.4
25.8
1990-1995
6.9
11.5
25.5
21.3
1996
5.9
11.8
27.0
19.6
1997
6.1
11.2
26.7
19.9
1998
6.3
16.6
29.2
17.6
Ghana
West Africa
Africa
1.2 Revenue generation: trends and structure
Revenue mobilization has risen under successive IMF supported adjustment
programmes, with the share of tax revenues in GDP increasing from an average of about
11 per cent over the decade preceding the ERP (1983) to about 19 per cent in 1998 (see
Table 5). In comparative terms, this is higher than the SSA (excluding South Africa)
average by about 1 percentage point although still lower than the African average of
about 24.5 per cent in 1998. Box 1 gives details of revenue reforms since 1984.
The components of tax revenues (in Table 5) shows that trade taxes—which have been
the major source of revenue for governments in Ghana—have declined from an average
of about 40 per cent (of total government revenue excluding grants) during the pre-ERP
era to about 28 per cent in 1998. This is an encouraging trend given that over-taxing
international trade acts as a disincentive both to manufacturing as well as export
promotion. Two factors account for this declining importance of trade taxes in Ghana.
5
Box 1
Chronicle of tax reforms in Ghana
1984 (June). Tax rates on cigarettes and beer are increased, whilst those on personal income tax are
lowered.
1985. National Revenue Secretariat (NRS) is established, as well as two major revenue organisations (CEPS
and the IRS) as autonomous institutions outside the civil service. The NRS is responsible for supervising the
activities of CEPS and the IRS as well as recommending revenue policy to the government.a An investment
code that provides a range of tax incentives for investors (mainly in agriculture, manufacturing, construction
and tourism) is introduced.
1987. Corporate tax rate on manufacturing concerns reduced to 45 per cent from 55 per cent; special taxes
on cigarettes, beer, alcoholic, and non-alcoholic beverages; excise duties imposed on all locally produced
goods except petroleum products; 10 per cent sales tax on domestic electricity consumption is abolished;
abolition of import duty and purchase tax on all commercial vehicles; deduction of duty on basic raw
materials and capital goods.
1988 (January). Reintroduction of sales tax clearance certificate to enforce timely payment of sales tax and
excise duties collected on behalf of the government by manufacturers.
1990 (January). Introduction of super sales tax on luxury goods, ranging from 50 per cent to 500 per cent.
1991. The super sales tax is reduced to a new range of 10 to 100 per cent; corporate taxes applicable to
agriculture, manufacturing, real estate, construction and services are lowered to about 35 per cent; the NRS
is relocated under the MFEP although it retained some degree of independence; the personal income tax
threshold is raised from the 126,000 to 150,000 cedis.
1993. The contract for the design and implementation of the VAT is signed. Increase in petroleum taxes to
counteract the pay increases awarded to civil servants and other public service organisations in the election
year. Petrol, kerosene, and gas oil prices increased by about 60 per cent, whereas LPG increased by about
20 per cent.
1994. Debt collection Unit established under the MFEP in January. In December the VAT bill was passed
into law, to be operational in March 1995.
1995. VAT became operational in March at a flat rate of 17.5 per cent compared with the sales tax of 15 per
cent. In June VAT was withdrawn and sales tax reintroduced at a rate of 15 per cent after mass
demonstrations in almost all the regional capitals in the country.
1996. The petroleum sector was deregulated. This involves a process whereby the procurement of crude oil
and finished products needed as a top-up of the Tema Oil Refinery capacity will be through competitive
tendering between all the oil marketing companies and the Ghana National Petroleum Corporation (GNPC).
1998. Reintroduction of the VAT at a rate of 10 per cent adopted by parliament in February. Taxpayers
Identification Numbers are introduced to make assessment and collection of taxes from small businesses
and market traders easier.
Note
a This
arrangement followed the Canadian system (Seth Terkper 1995).
6
First the falling terms of trade especially in the 1990s has meant that the export tax base
has been reduced; the terms of trade fell from an average of about 119 over the period
1984-1991 to about 98 in 1998. Second, the government has made a conscious effort to
promote exports, which has been predominantly cocoa. There has been a significant
increase in the real producer price of cocoa in the 1990s compared with the late 1980s
which has resulted in increased output (Figure 1)
Table 5
Trends and structure of government revenues in Ghana (1970-1999)
1
Total
Revenue
(% of GDP)
Grants
(% of GDP)
Tax Rev
(% of GDP)
Direct tax
(% of total)
Indirect tax
(% of total)
G&S Tax
(% of total)
Trade tax
(% of total)
Petroleum
taxes
(% of total)
1970–1983
10.9
0.05*
6.5
20.7
---
27.3
40.4
---
1984–1991
12.7
2.3
11.3
21.5
66.9
29.5
37.4
12.02
1992
11.9
3.3
10.8
18.6
71.8
49.2
22.6
19.2
1993–1995
18.0
3.8
14.7
18.0
64.1
40.1
24.0
20.1
1996
17.6
2.6
15.1
21.7
63.9
36.7
27.3
17.0
1997
17.3
1.9
14.7
24.8
59.8
34.1
25.8
15.2
1998
18.7
2.7
16.2
22.9
63.6
35.3
28.4
14.1
1999
13.3
Note:
* The average does not span the entire period.
Figure 1
Plot of real producer price of cocoa in Ghana (at 1990 constant prices)
160
140
100
80
60
40
20
0
19
70
19
71
19
72
19
73
19
74
19
75
19
76
19
77
19
78
19
79
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
Cedis per Head load
120
Real producer price of coca
7
Table 6
Structure of government revenue in Ghana compared to the Sub-Saharan Africa averages
P eriod
Total Tax
receipts
(% of total)
D irect Taxes
(% of total)
International
Trade taxes
(% of Total)
Total G rants
(% of G D P )
Tax : G D P
1990-1995
79.3
18.9
26.2
3.4
13.2
1996
81.7
21.7
27.3
2.6
15.1
1997
82.0
24.8
25.8
1.9
14.7
1998
83.5
22.9
28.4
2.7
16.2
1990-1995
90.6
20.1
17.9
2.1
15.9
SSA (E xcl.
1996
91.2
21.0
21.5
1.8
16.0
South A frica)
1997
90.8
20.8
21.1
1.8*
16.3
1998
89.2
20.7
20.3
1.7
16.0
1990-1995
93.6
13.9
17.8
1.7
12.7
1996
94.8
13.8
20.0
1.6
13.4
1997
93.6
14.5
19.0
1.5
13.6
1998
90.7
14.4
19.1
1.4
13.7
1990-1995
87.8
32.1
13.5
1.2
20.5
1996
87.0*
31.3
14.3
0.7
21.1
1997
87.0
28.6
13.3
0.7
21.2
1998
85.9
30.8
13.0
0.7
21.2
G hana
W est A frica
A frica
ratio
Compared to the pre-1983 period receipts of taxes on goods and services have generally
increased in Ghana, although the more significant increases have occurred during the
1990s. By 1992 the share of revenue from taxes on goods and services in total revenue
accounted for about 50 per cent (almost twice the pre-1980 average). Although this ratio
fell to about 35 per cent in 1998, we expect to see a gradual increase after the reintroduction of the VAT in 1998; the provisional out-turn for VAT receipts exceeded
the projected figure by over 13 per cent in 1999 (GOG 2000). Taxes on goods and
services have therefore become the most important source of revenue in Ghana,
certainly in the 1990s.
The direct tax component of total revenue does not seem to have changed very much
from the pre-1983 period. In fact compared to the adjustment period it declined from
about 21 per cent over the decade preceding 1983 to about 19 per cent in 1992. It has
however picked up in more recent years increasing to about 23 per cent in 1998.
1.3 The macroeconomic framework: recent developments
Figure 2 shows the overall fiscal deficit over time. Prior to 1983 public expenditures
persistently outstripped revenues resulting in large fiscal deficits which peaked at about
11 per cent of GDP in 1976. After 1983 the public expenditure-revenue gap narrowed
and by the late 1980s revenues had outstripped expenditures translating into a surplus
which was maintained until 1991. Most of the surplus that was achieved in the late
1980s and early 1990s was due to the large inflows of foreign aid. As Figure 2 shows
deficits excluding grants achieved a surplus in only two years; 1991 and 1994. In 1992
there was a re-emergence of the large fiscal deficits that had been witnessed over the
1970s. This coincided with Ghana’s return to democratic rule. The large deficits
reappeared in 1996 (another election year) after recovering from the 1992 level,
although with a much smaller ratio. These troughs in the budget deficits are in a sense
consistent with the fiscal illusion hypothesis in political business cycle literature. This
8
hypothesis asserts that politicians follow expansionary fiscal policies in pre-election
years since voters are, in the terminology of Alesina and Perotti (1995; 8-10). ‘fiscally
illuded’ and don’t fully understand the implications of expansionary policies for postelection years. In the case of Ghana, however, the emphasis is on consumption
spending—increases in wages and other direct cash transfers—and so the expenditure
increases coincide with the election years.
Figure 2
Plot of government budget deficits in Ghana, 1970–1997 (per cent of GDP)
4
2
0
-2
%
-4
-6
-8
-10
-12
19
70
19
71
19
72
19
73
19
74
19
75
19
76
19
77
19
78
19
79
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
-14
Deficits excluding grants
9
Deficits Including grants
Table 7
Budget deficit and sources of deficit financing, Ghana (1970-1999)
1970 – 1983
Deficits
Including
Grants: GDP
-6.0
Deficits
excluding
Grants: GDP
-6.6
Primary
Foreign
deficits: GDP financing of
deficits: GDP
--0.6
Domestic
Financing of
deficits: GDP
5.4
1984 – 1991
-0.1
-1.0
-1.1
0.3
-0.3
1992
-5.2
-6.3
-7.3
0.01
5.1
1993 – 1995
-1.0
-1.0
-4.3
-0.3
0.1
1996
-3.0
-3-6
-4.4
-1.7
4.7
1997
-2.1
-2.6
-2.7
-3.0
5.2
1998
0.1
1999
In 1992 virtually all expenditure items exceeded their programmed levels, with the
public wage bill being the worst ‘culprit’. The share of wages in total expenditure
increased by more than 10 per cent between 1991 and 1992. Coupled with that, there
was a general slackening in tax collection in that year (GOG 1993: 2). Again a similar
excuse was given for the deficits that occurred in 1996; ‘… a higher than programmed
wage-bill, and the non-disbursement of foreign inflows’ (GOG 1997; 3). A careful look
at the numbers in the 1997 budget and, in particular the difference between the
programmed surplus and the deficits that emerged, suggests that other factors were at
work. Specifically, as in 1992 there was a slackening in the revenue collection effort;
non-tax revenues in particular fell short of their programmed level. This suggests that
within Ghana's electoral cycle, revenue slowdown is possibly as important as
expenditure increases.
Prior to 1983, and especially in the late 1970s, both public expenditures and revenues
were declining and consequently the deficits that occurred were mainly because
revenues declined proportionately more. Declining revenues epitomised the economic
crisis that the country faced. By 1982 the economy (and society) had become split
between a formal sector serving mainly a small elite and an informal sector within
which most economic activity took place. Consequently, the base for both direct and
indirect taxation seriously eroded. Frimpong-Ansah (1991: 111) writing on this period
notes that: ‘the remaining limited economic activity had withdrawn into havens of
anarchy beyond the reach of state authority and state taxation’.
With the expenditure-revenue gap rising faster than aid inflows, and a limited (and
shrinking market for government paper), the government resorted to inflationary
mechanisms for financing the rising fiscal deficit—by borrowing from the domestic
banking system (mainly the central bank). By 1982 the government’s share of
borrowing from the domestic bank sector was about 86 per cent (Kusi 1998:10). This
monetisation of the deficit resulted in the crowding out of private investment,
acceleration in inflation, currency overvaluation and, consequently, reduced the incomes
of net exporters (mainly cocoa farmers).
10
In the World Bank/IMF assisted adjustment programme (which started in 1983)
emphasis was placed on the need to reduce fiscal deficits through increased revenue
mobilisation and a reduction in government expenditures. Exchange rate devaluation
and the removal of price controls had the effect of realigning the informal and formal
sectors of the economy resulting in an increase in the tax base and consequently tax
revenues. This has translated into a closure of the expenditure-revenue gap even though
both series have been on the increase over the post-adjustment period (see Figure 3).
Net foreign borrowing mainly financed fiscal deficits over 1983-1991. Huge deficits in
1992 coupled with a shortfall in aid flows resulted in the government resorting to
domestic sources mainly the central bank for finance. This no doubt contributed to the
increase in domestic interest rates and inflation in the years that followed. In more
recent years divestiture receipts have also become a significant financing item
(Dordunoo 2000: 100-103). However, these non-revenue sources of financing are by
their nature temporary, and improving the tax system is crucial to macro-economic
stability and growth.
The oil price increase in 2000 will have adverse effects on Ghana's economy (and
therefore the fiscal position), as is the case in other non-oil producing developing
countries. The strategy to improve the fiscal position set out recently by the IMF only
takes into account the adverse trade shock in 1999 (IMF 2000). Even then it is noted
that the most efficient way of addressing the projected revenue loss (resulting from the
economy's slowdown) will be to increase the VAT rate to 12.5 per cent in 2000 (which
has already been implemented) and subsequently to 13 per cent by 2003. The oil price
shock in 2000 calls into question these projections, and will put pressure on the
government to raise taxes at a faster rate than originally planned—unless more aid is
forthcoming to offset the negative fiscal effects of the terms of trade shock.
Figure 3
Plot of public expenditure and revenue in Ghana, 1970-1997
25.00
20.00
15.00
10.00
5.00
Govt. Expenditure
11
97
19
95
96
19
94
19
19
93
92
19
19
91
90
19
19
89
88
Govt. Revenue
19
87
19
19
86
85
19
19
84
83
19
19
82
81
19
19
79
80
19
78
19
19
77
76
19
19
75
74
19
19
72
71
73
19
19
19
19
70
0.00
The government has consistently failed to meet its fiscal targets in recent years, and this
calls into question the realism of the projections in Vision 2020; considerable catch up is
needed to remain on target to meet them. First, as previously noted, the divestiture
receipts are short-term inflows for the government and are therefore expected to
dwindle in the not too distant future. Second, foreign aid flows—which had been one of
the principal means for financing the fiscal deficit over most of the adjustment/post
adjustment period—have seen a decline in recent years. The aid/GDP ratio in 1997 was
about 7.2 per cent compared with an average of about 8.9 per cent over 1984–1991
(Table 7). The tax effort must be improved if a return to monetisation of the fiscal
deficit and the accompanying inflation are to be avoided. Certainly the introduction of
the VAT is a welcome step in this direction, although one that was not politically easy
to take.
2
The political economy of taxation in Ghana
2.1 The choice of taxation instruments
The dependence on trade taxes has been reduced and this has been compensated for by
an expansion of indirect taxes and non-tax revenues. Tax reforms over the post 1983
period have mainly been geared towards achieving two goals. The first stage reforms
aimed to restore the tax base and strengthen production incentives that had been eroded
by persistent over-valuation and the divergence between prices in the official and
parallel markets. Accordingly, the foreign-exchange market was liberalized and controls
on prices of goods and services were removed. The investment code (passed under
PNDC law 116) in 1985 as well as the new minerals law in 1986 provided a wide range
of incentives for investors in priority sectors of the economy. These incentives included
company tax allowances, for example 40 to100 per cent of the cost of capital investment
could be set against tax (Kusi 1998).
Second-stage tax reforms sought to improve the efficiency of tax administration and to
tackle issues of equity within the system. In line with these objectives the national
revenue secretariat (NRS) was formed in 1986 with ministerial status and charged with
the duty of overseeing the Custom, Excise and Preventive service (CEPS) and the
Internal Revenue Service (IRS) and also advising government on revenue measures.2
The formation of the NRS coincided with measures to make the operations of the IRS
and CEPS independent of the civil service structure. However, in 1991 the NRS was
relocated under the Ministry of Finance and Economic Planning but was still allowed
some measure of autonomy (Terkper 1995: 5-7).
In line with steps to improve the administration of indirect taxes, the government
abolished excise duties on all products except petroleum beverages and tobacco in 1987,
and instead increased the sales tax rate from 10 to 25 per cent by 1988. This rate has,
however, been systematically reduced in recent years and was 15 per cent by 1998.
2 Both CEPS and the IRS were previously under the Ministry of Finance and Economic Planning.
12
The most radical tax reform in Ghana have been the introduction of the VAT. The VAT
was adopted for several reasons. First, it brings Ghana into line with the ECOWAS
protocol that makes it mandatory for members to adopt the VAT system by the end of
1999 (Osei 2000: 258). Second, this system of taxation was thought to be more
efficient, less burdensome in terms of its incidence, and its overall impact more
equitable than the sales tax (GOG 1994: 32). Despite these advantages, the first attempt
at introducing the VAT in 1995 failed due to widespread public opposition. In part, this
was because of the haphazard manner in which it was implemented reflecting
inadequate investment in institutional capacity. Moreover, little attempt was made to
educate businessmen or the public more generally about the rationale for the tax (Osei
2000). It was reintroduced in December 1998 and is now operational in Ghana.
Petroleum taxes are very controversial and are one of the tax instruments most hotly
debated in Ghana today. Two reasons account for this. First there has been a persistent
increase in the prices of petroleum products over this period, and this has mostly been
associated with increases in the petroleum tax. Second, the average Ghanaian doesn't
have much interest in changes in the fiscal deficit, but they do clearly understand the
effects of petroleum tax increases on their cost of living.
Persistent increases in the prices of petroleum products have given rise to speculative
activity, especially among retailers who have periodically made large windfall gains.
The government, in order to get its share of the windfall gains, converted any such gains
that resulted from a rise in the world price of oil into a specific excise duty on petroleum
products (Kusi 1998). Petroleum price increases have also been used to discourage its
smuggling to neighbouring countries (GOG 1991: 20). In 1996, attempts to reduce
speculation related to petroleum products led to the deregulation of the petroleum
sector. This involved a competitive tendering process between the oil marketing
companies as well as the Ghana National Petroleum Company (GNPC) which was
previously the only importer of crude oil into the country. The tender process then
determined the costs (cif) of crude oil, which constitutes about 90 per cent of the cost in
the refinery activity as a whole (GOG 1996: 28-30). In 1998 taxes on petroleum
products were re-structured so that they consisted of two components; an ad valorem
component to the ex-refinery price (applicable to all products) and a specific rate
applicable to road transport fuels (mainly gasoline).
Direct taxes have also seen some reforms over the post 1983 period. To reduce evasion,
the basis for assessing corporate taxes was changed in the 1980s from profits to income.
Corporate tax rates have also been unified and reduced for all sectors; these rates fell to
about 35 per cent by 1993 compared to 55 per cent in 1986 (Kusi 1998). The tax free
bracket for personal income tax has been persistently increased whilst marginal rates
have been lowered so as to reduce the average effective rates. Moreover, to reduce tax
evasion by individuals shifting incomes between corporate profits and personal taxes,
the marginal tax rates of the top brackets on the personal income scale have been made
equal to corporate tax rates.
2.2 Taxation and its incidence
Should the taxation instrument be directed to the objective of poverty reduction? The
standard argument is that taxation should be directed to raising revenue in the least
distorting way possible, and that objectives of equity (poverty reduction and, perhaps
13
additionally, the reduction of inequality) should be addressed by other means (for
example pro-poor public spending and targeted safety nets). But is this argument
completely applicable to Ghana, or do there exist some second-best arguments for
modifying the structure of taxation in order to address equity concerns?
The current IMF view on the distributional effects of adjustment programmes is that
expanding the tax base for property and income taxes will have positive distributional
effects (i.e. they are broadly pro-poor) whereas indirect taxes, particularly on goods and
services, tend to have adverse distributional effects (Tanzi 1997). Ghana’s tax reforms
have not necessarily followed this pattern. The base for property and income tax has
increased. However, for indirect taxes both the base and the rate have been increased.
As we noted earlier, petroleum taxes have become particularly important in the category
of indirect taxes since they provide a convenient way of raising revenue (Younger 1996:
234). For instance in 1993 the ex-pump prices of petroleum products increased by about
60 per cent.3 The reason for the increase as quoted in the budget was as follows:
government revenue will have to be increased in order to pay the present
wage-bill, and the only immediate way for this to be done is to increase
the prices of petroleum products. (GOG 1993:8)
Younger (1996) analyses the incidence of taxes in Ghana using household data and
finds petroleum taxes to be progressive but taxes on alcoholic beverages and tobacco
products regressive. He consequently argues that complaints about gasoline price
increases falling disproportionately on the poor are unfounded (Younger 1996: 251).4 If
tax incidence analysis alone is used to make inferences about welfare then the policy
recommendation implied by Younger’s conclusion will be valid. However, tax
incidence analysis of this kind only looks at the first-order impact and this may not be
appropriate in welfare analysis. Indirect taxes may have spillover effects that may not be
captured by incidence analysis alone. We attempt, in a very ad hoc way, to trace some
of these spillover effects of a petroleum price rise.
Say we divide households in Ghana into five groups: public servants,5 transport owners,
traders, cocoa farmers and other food crop and livestock farmers. The last group
produce for domestic consumption and basically represents the poorest households in
Ghana. With a rise in price of petroleum products all the households are affected by the
resulting increase in the cost of transportation and its consequent inflationary effects. Of
course this will also vary both within- and between-groups; for instance within the
group labelled public servants, the petroleum tax is likely to be regressive when just the
consumption of transport services is considered.6 Our main interest here is to do with
3 The only exception was the price of liquefied petroleum gas (LPG) which increased by 20 per cent.
Even then, the average for all petroleum products was over 50 per cent; Calculations are based on the
1993 budget statement.
4 This analysis is based on consumption of gasoline and transport services.
5 This can be defined to include those with white- and blue-collar jobs.
6 Some of those in the upper echelon of this group either get free fuel or get petrol and car maintenance
allowance from their employers, usually the government.
14
what happens to those in the last group (food crop and livestock farmers) relative to the
other groups when petroleum prices increase.
Most of the farmers that fall in this category don’t sell their produce in the major
markets where they are most likely to benefit from price increases. Most of their
produce is sold to market traders (i.e. the ‘middlemen’) who have some power over
farmgate prices since the supply of these goods is highly inelastic. It is not uncommon
for the middlemen to pay lower prices to the farmers, citing increases in transport costs
as an excuse. The implication of this will be that whereas all households are likely to be
affected by the increased transport costs and inflation, the rural poor in Ghana are in
addition likely to experience a decline in nominal income. For these households this
decline could be substantial and can consequently lead to increased poverty within that
group. Tax incidence analysis will not capture these adverse spillover effects on the
food crop and livestock farmers.
The conclusion of the above analysis—that such a broad based tax may have adverse
distributional effects—is consistent with Colatei and Round (2000) who find, using a
SAM-based CGE model, that structural adjustment may not be benefiting all segments
of Ghanaian society. More specifically, they find that poverty in the savannah farm
households (the poorest group in Ghana) cannot be totally eradicated using transfers
financed from an indirect tax imposed on the other households.7 It must be emphasised
that in the CGE analysis although all the resources generated from indirect taxation are
transferred to the targeted households, poverty is still not eradicated within that group.
Given the trends and structure of public expenditures in Ghana (which as we saw have
been disappointing from a poverty reduction perspective), these regular increases in
petroleum taxes do not seem to have been returned to the poor in the form of better
public spending. Certainly the argument that the non-poor in society consume more
energy products—and therefore a ‘first-order incidence analysis’ of an increase in
petroleum taxes will be progressive—cannot be discarded. However the indirect effects
of these taxes on the poor could be substantial and may actually worsen the distribution
of income. Therefore further increases in petroleum taxes will be justified only if the
extra resources generated are channelled towards specific pro-poor programmes.
3
Conclusions
This paper has explored some of the hard choices that Ghana's policy makers face if
they are to generate sufficient revenues to achieve public spending targets, including
those for pro-poor spending. We also discussed progress to date in public expenditure
management. The following observations were made: First, by and large, public
expenditures in Ghana over the last decade have not been any more pro-poor than they
were in the 1970s—despite all the rhetoric. The planned expenditure policies in Ghana’s
Vision 2020 seek to reverse this trend. However, this can only be achieved if the public
debt problem is brought under control and the share of interest payments in total
expenditure is reduced, and more revenue is mobilized.
7 The authors calculate the amount of transfers necessary for eradication of poverty for the different
groups of households.
15
Second, the structure of taxation in Ghana is moving away from heavy reliance on trade
taxes to indirect taxes on goods and services. This is a step in the right direction as
dependence on these taxes has been found to increase the degree of instability in
government tax revenues (Bleaney et al. 2000).
Third, the trend in the fiscal deficit in Ghana over the 1990s is starting to follow an
electoral cycle. Admittedly, this observation is based on a small sample (only two
elections to date). Nevertheless it is almost certain that Ghana, like many developed and
developing countries that have competitive multi-party elections, will exhibit an
electoral cycle in its fiscal variables (including a slackening in the tax collection effort
in addition to the expansion of public expenditures in election years). The first election
was certainly accompanied by a serious deterioration in fiscal control, the second less
so. We can hypothesise that in new democracies where democratization is sustained, the
amplitude of the electoral cycle in fiscal variables will decline over time as institutions
that act as agents of restraint are developed, and as politicians begin to see that it is in
their long-term political interest to avoid excessive manipulation of expenditures or
taxation for party-political purposes.
In summary, this paper has shown that Ghana must raise revenues if it is to achieve the
sustained high growth that is necessary for poverty reduction. However revenue
generation considerations should take issues of equity into account. This is particularly
so given that expenditure patterns do not appear to have been geared towards tackling
poverty reduction. It is heartening to note that the interim poverty reduction strategy of
the government in the Vision 2020 document (endorsed by both the IMF and the World
Bank), emphasises the need to deepen access to basic social services and infrastructure
available to the poor, but it is clearly proving very difficult for the government to
deliver on these promises (a situation aggravated by the recent and adverse terms of
trade shock).
To end, we make a couple of concluding points. First, given the importance of the road
transport sector to the Ghanaian economy, it is possible that increases in petroleum
taxes may hurt the poor, more than a first-order incidence analysis suggests. In order to
achieve the pro-poor growth envisaged in the Vision 2020, there is a need to raise
revenues to finance projected expenditures. Expenditure policies have, however, not
been particularly credible in Ghana especially in the 1990s, because of both internal and
external shocks. Therefore, further increases in petroleum taxes may only be justified if
the generated revenue is earmarked as additional spending on specific pro-poor
programmes over and above the already projected spending. In other words, policy
makers should give more consideration to equity issues in taxation if the objective of
broad-based growth is to be realised.
Second, investment in democratic institutions is important to tax reform, since tax
payers will be unwilling to comply with tax law unless there is some mechanism for
ensuring that their money is used legitimately. Historically, effective tax systems have
resulted from the exchange of resources for institutions: governments have only been
able to sustain their tax effort if they provide effective institutions (such as law and
order), including limitations on their own powers (Mahon 2000). Ghana has advanced
with regard to both democratisation and the construction of appropriate fiscal
institutions, which are now more transparent. Nevertheless, much more needs to be
done, including the possibility of giving the legislature more power. This may be
inconsistent with findings in the political business cycle literature, where countries with
16
‘hierarchical’ budgetary procedures are noted to achieve more fiscal discipline.
However, for a country such as Ghana—in which democracy is still an infant—it may
be better to give the legislature more powers to act as a check on the executive until
such time as the budget process becomes truly transparent.
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19
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