Tax reforms and debt management to dominate 2017 Budget

Business News of Thursday, 2 March 2017

Source: GN Research

2017-03-02

Ken Ofori Attah FfGhana’s debt stock stood at GH¢122 billion as at the end of 2016

President Nana Akufo-Addo, in his state of the nation address last week assured Ghanaians that the 2017 budget will bring the economy back on the path of sustainable growth and development. Ghanaians, therefore, are anxious to hear the finance minister’s policies that will put the economy back on track on March 2.

This year’s budget will be on the backdrop of many economic challenges, same which led the previous government into the IMF’s Extended Credit Facility program. Even though some gains have been made, especially in the area of revenue management, the economy still ails due to high budget deficit and huge public debt, power sector challenges, falling cedi, the high cost of borrowing and challenging business environment as well as higher utility tariffs among others.

Hence we expect government fiscal policies to be geared toward creating enough fiscal space to undertake essential investments to address the aforementioned challenges.

A major feature of this year’s budget will be its focal point on debt management and taxation reforms. This is because of the tight fiscal space which urgently needs expansion so that the government can undertake expenditures that must be well – structured to grow the economy. According to the President, the country’s debt stock stood at GH¢122 billion as at the end of 2016, representing 74% of Gross Domestic Product (GDP).

This is above the sustainable threshold, posing a grave risk to growth and macroeconomic stability. Considering the huge public debt and interest payments coupled with the limitations on borrowing and the general negative impact on economic activity, the budget must provide a framework well-grounded to help manage the country’s debt problems effective to reduce the debt to sustainable levels thereby increasing confidence in the economy for high growth.

The budget deficit for 2016 was 9% of GDP on a cash basis and 10% of GDP on a commitment basis, missing the 5.3% targeted for 2016 under the IMF program. This situation will decrease the revenue to the government as it will increase interest payment obligations.

There are primarily three ways of reducing the deficit; reducing expenditure, increasing revenue or do both. We, therefore, require government to opt for the third option to attain a rapid decrease in the deficit since delays in achieving fiscal balance will reduce growth and reflect the inability of the government to handle the economy.

Also, GN Research expects major tax reforms in the budget, especially those taxes that hinder the growth of the private sector. In this regard, we expect the promise of reducing the corporate tax from 25% to 20% to be redeemed. We also expect the tax reforms to affect taxes on petroleum and other energy sector products.

Aside these, we are likely to see some measures to expand the tax net. Every government in the past attempted to extend the tax net, yet they have failed largely. This is because of the challenges facing our identification systems and the failure to properly consider the extra revenues to be collected as against the cost of gathering them.

Therefore, there is the need to see some innovative ways of widening the tax net to increase revenue generation. We likewise anticipate the tax reforms not to simply increase government tax incomes, but also serve to unleash the potentials of the individual sector.

Aside from tax reforms and debt management issues, we expect the budget to also outline policies and programs to ensure the growth of other sectors of the economy, example, the health sector, the education sector and the agricultural sector.

Regarding the education sector, we expect some expenditure realignment in order to make room for the promised free senior high school and the increased coverage of the capitation grant and the school feeding program. Hopefully, the debate regarding the source of funding for the free senior high school policy will be put to rest.

In the health sector, the “revival” of the National Health Insurance Scheme (NHIS) will heavily feature in the 2017 budget. The president’s believe that turning around our economic fortunes must start with agriculture imply that the sector will receive a major boost.

The “planting for food and jobs” campaign with an amount of 125 million Canadian dollars is expected to be elaborated on, outlining specific allocation to each sub sector. We also expect policies targeted at providing improved seeds, fertilizers, extension services, storage facilities and market for farm produce to be catalogued in the budget.

In other to engage farmers in all year round farming, the budget must outline plans to irrigate farmlands. In this regard we expect the budget to provide guidelines to actualise the “one village one dam” promise.

Finally, GN Research expects to see measures aimed at solving “dumsor”. The energy sector is in debt crisis just like the national economy, the sector’s debts stood at $2.2 billion as at the end of 2016, a situation which is very disturbing.

If indeed government’ aim at empowering the private sector through the “one district one factory” as a policy to put the economy back on track and returning to high growth, then it is important that the budget provides policies to immediately deal with the energy sector problems.

We are of the view that the 2017 budget will focus on debt and expenditure management, reducing the fiscal deficit and tax reforms to increase revenue and to boost private sector performance.

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