TAX NEWS - JUNE 2010

Ghana Tax: The President's Dilemma

The growing public discontent over the recent announcement of increases in electricity and water tariffs by the Public Utilities Regulatory Commission has no doubt placed the President, His Excellency Prof. John Evans Attah Mills in a rather awkward situation.

Coming at the heels of astronomical increases in road tolls, fuel prices, business registration fees, ad valorem tax on packaged water, and various fees charged by the Driver and Vehicle Licensing Authority (DVLA), these newly announced utility tariffs appear to be a slap too many in the face of a populace who have been promised some reprieve from the economic hardships supposedly imposed by the Kuffour-led government.

When President Mills told the voting public "I care for you", during his electioneering campaign rounds, he was obviously understood to mean he will act in their best interest, ensuring that whatever hardship government economic policies were imposing on them at the time, would be mitigated.

When the President promised a better Ghana, perhaps he should have also explained that it will come at a price, like tax. It will certainly have to be financed, and one source of financing is taxation.

While the Public Agenda agrees that Ghana's domestic tax mobilization is very low and therefore constrains efforts at financing essential social services delivery in the country, we believe pushing the World Bank instigated cost recovery agenda portends a great danger for our young democracy, as it will be a perfect recipe for social unrest that could roll back our modest democratic gains.

Cost recovery means those unable to pay for these social services will fall through the cracks created by the policy. It means many more people than is the case now, will not be able to have access to potable drinking water and electricity. It also means Ghana's efforts at attaining the Millennium Development Goals (MDGs) of which halving poverty, and increasing access to potable water are key, will be undermined. As the family budget becomes ever more burdened, many families will be compelled to make trade-offs between their children's education, health, and access to water and electricity.

The President's dilemma, we believe, is whether or not to intervene, and if he is to intervene, what form should that intervention take? As Obama said during his first official visit to Ghana and Africa, our way out of the economic and social quagmire we find ourselves lies more in the building of strong state institutions to address the challenges we face. Indeed, political expediency many at time get in the way of sound professional judgment. There appears therefore to be a good reason why the President must not act in a manner that undermines the mandate of the PURC.

But, to stay put can also be interpreted as insensitivity to the plight of the poor and dying Ghanaian businesses, and could cost the President dearly at the polls in 2012, as happened to the New Patriotic Party in 2008.

The only viable option as we noted in our front page story, is a kind of mitigation subsidy to give vent to the accumulating heat. But that in itself has its own challenges. The IMF and the World Bank won't take that, for sure. And if the government goes ahead, it will risk losing much needed development aid from the Bretton Woods institutions.

Indeed, if Ghana can collect enough taxes to finance its development programmes the domestic policy space can be secured for Ghanaians and the Bretton Woods institutions will have little leverage in these matters. However, in our quest to improve our domestic revenue mobilization successive governments have gone for the easy way out - increasing the tax burden on the few who pay tax to finance development of Ghana, rather than to broaden the tax net and get more people to pay their taxes. We have, time and again questioned the rationale for increasing the fees for registering new business activities, at a time when we need to bring the large informal sector of the national economy into the formal for tax purposes. We have also questioned the wisdom in subsidizing the energy consumption of mining companies at a time when the world price of gold has more than doubled in less than a decade.

Yes, Ghana needs money to finance urgent social investments, particularly for the renewal of deteriorating social services infrastructure but let's be ingenious about how we find the money; and let's be guided by the potential impacts of the prescriptions put forward.