National budget and economic policy comprise projections for government revenues and expenditures for the upcoming fiscal year and reflect economic and non-economic factors. Though it is a directional policy document, its repercussions transcend the proposed objective of the budget itself and the nominal estimates captured.
For instance, Macroeconomics and Microeconomics economists could analyze how national government budget and fiscal policy affect or shape macro and micro-economic indicators.
The 2023 national budget of the government of Ghana, mainly revenue and expenditure projections, will likely be influenced by the ongoing Ghana-International Monetary Fund negotiations, current and future economic conditions and the lagged effects of the previous tax policies of the government.
These factors based on the last IMF program with the government of Ghana, research literature, the general public reactions to the government’s previous tax policies, and future global trends in economic activities will either facilitate the introduction of new tax policies, broaden the tax base or review the existing tax policies for 2023 fiscal year.
Regarding how likely IMF negotiations will influence 2023 tax policies and government revenue measures, a reference can be to the 2015 national budget by the government of Ghana and the IMF Country Report No. 15/103, even though the negotiations started in September 2014. The 3-year IMF Extended Credit Facility Arrangement anchored on the second Ghana Shared Growth and Development Agenda (GSGDA II).
The program focused on substantially strengthening the fiscal position by mobilizing additional revenues and improving revenue collection through tax policy and tax administration reforms.
The 2015 national budget and fiscal policy proposed new tax policies and revenue measures to meet the agreed 3-year Extended Credit Facility Arrangement with the Fund. As captured in the 2015 national budget and fiscal policy of the Ghana government and the IMF Country Report 2015, these were some of the new tax policies and reviews of then-existing tax policies: the imposition of a special petroleum tax of 17.5%; the implementation of the VAT on fee-based financial services; 5% flat rate on real estate; the extension of the special import levy of 1–2% on some imported goods to 2017, increase the withholding tax on Directors’ remuneration from 10% to 20% and the implementation of national fiscal stabilization levy on selected sectors.
These tax policy changes and revenue measures were estimated to contribute about 2% of GDP.
Other tax policies include a review of existing tax exemptions and streamlining the tax treatment of the free zones enterprises and SOEs. Tax administration reforms included improving tax compliance, modernizing tax collection, increasing the VAT threshold for small businesses, and implementing time-bound refunds of VAT credits.
Accordingly, the 2023 national budget and fiscal policy may likely feature some tax policies and revenue measures that hinge on the conditionality of the intended IMF program, all things being equal. A fiscal condition of Ghana that may trigger new tax policy or review existing tax policies in the 2023 budget and fiscal policy by the Fund, as researched by the Institute for Liberty and Policy Innovation (ILAPI), is the low tax revenue to GDP ratio.
Ghana’s tax revenue-GDP ratio in 2019 stands at 13.5%, while other countries with a similar economic structure, such as Namibia, Cabo Verde, Lesotho, Seychelles, and Tunisia, had tax revenue-GDP of 20.2%, 20.6%, 20.6%, 34.3% and 34.3% respectively (OECD, 2021).
The Fund may require the government to swiftly commit to improving the tax revenue-GDP ratio to manage its debt sustainability. However, Ghana’s tax revenue-GDP ratio is more significant than cote d’Ivoire, Botswana, Uganda, Madagascar, Niger, Equatorial Guinea, Chad, Congo, Congo Democratic Republic, and Nigeria.
Furthermore, the global economic growth and economic indicators prospects for 2023 will have a resultant effect on the national budget and fiscal policy for 2023. According to the World Economic Outlook report released on October 22 by the International Monetary Fund (IMF), the global economic activity of 2023 is expected to slow down with accompanying higher inflation and a decline in the worldwide growth rate from 3.2% in 2022 to 2.7% in 2023. According to the Fund, these developments are combined with the cost-of-living crisis, tightening financial conditions in most regions, Russia’s invasion of Ukraine, and the lingering COVID-19 pandemic.
Consequently, Ghana’s growth and tax revenue prospects for 2023 will not be immune or differ positively and materially from or against the Fund’s projection and the economic trends for 2023, all things being equal.
Every year, the national budget and fiscal policy recognize and makes inference to global growth forecasts for a domestic growth reference. Therefore, the government’s projections for revenue (tax and non-tax) and 2023 budget deficit financing will to some extent, depend on the future development of global growth prospects.
Equally important is the performance of other macroeconomic indicators, such as domestic currency performance relative to major trading currencies, unemployment rate, fuel prices, cost of utilities, inflation, domestic and international interest rates on government tax, and non-tax revenues projections.
The extant literature indicates that tax revenue generation depends on the performance of these economic factors (Epaphra & Massawe, 2017; Ghura, 1998; Ihuarulam et al., 2021; Kwesi Ofori et al., 2018). Ironically, irrespective of the current economic conditions prevailing in the Ghanaian economy, government revenue projection for 2023 will show a positive growth rate over the 2022 fiscal year, likewise its expenditure. Since 2010-2022 government’s original revenue and expenditure budget estimates have grown annually at an average rate of 22% and 24%, respectively.
Therefore, the future performance of these economic factors will impact the budget estimates through other transmission mechanisms. The current economic factors are not friendly for imposing new tax policies in the 2023 fiscal year. Instead, it is economically wise for policymakers to review existing tax policies to give some respite to individuals and entities in this challenging economic time.
In this tough economic time, fiscal policymakers could alternatively consider broadening the tax base to cover other unexplored avenues for tax revenue and reviewing tax exemption policy to lessen further financial hardship due to the imposition of new tax policies.
Lastly, government tax policy and revenue measures for the 2023 fiscal year will also be dependent on the previous year’s tax policies and the respective public reaction to government past tax policies. The New Patriotic Party governance led by His Excellency Nana Akuffo-Addo since 2017-2022 has initiated several tax policies. These tax policies have relieved taxpayers, aided tax compliance, and boosted revenue generation.
The government proposed the following tax policies in 2017: granting of tax credits to businesses that hire young graduates, abolishment of 17.5% VAT and NHIL on financial services, domestic airline tickets, and selected imported medicines and the 5% VAT on real estate sales, replacement of the 17.5% VAT scheme with the 3% flat rate for traders, reduction in the special petroleum tax from 17.5% to 15%, etc. Again, the fiscal policymakers in 2018 proposed the following tax policies.
These include reliefs from corporate income tax for privately owned universities that plough back their profits and tax holidays for start-ups by young Ghanaian entrepreneurs aged 35 years or younger. Likewise, in the 2019 fiscal year, the government introduced additional tax measures: a reduction in the personal income tax rate from 35% to 30% for resident’s individual.
Similarly, in 2020, the government initiated further tax policies: an upward adjustment in personal reliefs, implementation of taxpayers’ number (TIN) for tax compliance, abolishment of the application of VAT on management fees of Private Equity, Venture Capital and Mutual Funds, reduction in Communication Service tax rate from 9% to 5%.
Likewise, in 2021 additional tax measures included: a 30% rebate on income tax for hospitality and entertainment companies, waiver of penalty, and interest on accumulated tax arrears up to December 2020, etc.
While we can argue that these government tax policies comforted taxpayers, other tax policy measures have also contracted the fiscal space for new tax policies in 2023, coupled with the current economic crises.
These tax policies include the decoupling of the NHIL 2.5% and GETFUND 2.5% levies from the VAT 12.5%, the renewal and extension of national fiscal stabilization levy 5% to 2024, the renewal and extension of Special Import 2% to 2024, the introduction of financial sector clean-up levy 5%, the introduction of COVID-19 health levy 1%, the introduction of sanitation and pollution levy and energy sector recovery levy, the introduction of electronic transaction levy (E-Levy) on the value of digital transactions 1.5%, upward adjustment of fees and charges for the services of Ministries, Departments and Agencies (MDAs) in 2022 and the introduction of the threshold for VAT Flat Rate Scheme for wholesalers and retailers of goods with annual turnover not exceeding GHS 500,000 effective 2022.
These taxes have escalated the prices of goods and services, and GUTA and Kumasi business owners have demonstrated the effects of these taxes on business operations. This action by GUTA and its members signals public reaction against any new tax policy for 2023.
In conclusion, the 2023 budget and fiscal policy decision by the government may be unusual. The budget may seem to be serving competing needs either to serving IMF conditionalities, the government itself, or the plights of Ghanaians in the wake of economic challenges. These stakeholders will have conflicting demands regarding the 2023 budget.
However, the 2023 national budget and fiscal policy will undoubtedly be influenced by the ongoing IMF negotiations, the current and future economic crises, and the previous year’s tax policies government.
Isaac Yalley is a Tax Economist at the Institute for Liberty and Policy Innovation (ILAPI) in Tema, Ghana. He is also a tax policy expert for economic prosperity.