Analysing Dr Bawumia’s economic vision

bawumiaJust when I was about to post about the lack of a real economic debate in Ghana, the 2016 vice presidential candidate of the NPP presented a response to the 2016 budget. You can read the full response here.

Dr Bawumia presented the economic policy framework of the NPP in 20 points. The framework presents a largely centre-right vision based on the NPP’s classical liberal economic ideology. I’ll refer here to the four which I think most represents this alternative view to the current government’s policies.

Ghana must put in place an effective legal framework to make sure the politicians on all sides are discouraged from wreaking havoc on the poor people of Ghana for their own selfish interests. We need a legal framework to anchor fiscal discipline. The passage and enforcement of a Fiscal Responsibility Act that has bite will be important in this regard if it is supported by political will. A Fiscal Responsibility law will require governments to declare and commit to a fiscal policy that can be monitored. It will include fiscal rules (including rules governing election year spending), provisions for transparency and sanctions (including sanctions on the Executive). Such a law will be passed by an NPP government.

I am for improving responsibility and transparency 100%. We need to ensure that government does not erode all fiscal gains in the heat of an election campaign. However, as Kwame Ofori Asomaning suggests here, there are times when the economy needs deficit spending for growth. Richard Murphy suggests here that the government does not even control the deficit as much as people think. It’s no wonder that even the fiscally conservative the Economist called George Osborne’s Fiscal Charter a dangerous gamble. So my support of this proposal is not complete. I want more transparency but not straitjackets.

The NPP government will focus on providing the tax incentives for increasing production and generating employment. In the process revenue can be raised from corporate and income taxes. What we will not allow to happen is for the desire to generate revenue to kill businesses and cause unemployment. In this regard, there are tax specific tax policies that we will implement. These include:

A reduction of the corporate tax rate from 25% to 20%

Abolition of the VAT on Financial Services

Abolition of the VAT on real estate sales

Reduction of withholding taxes to the 2008 levels to spur production

Abolition of taxes on private tertiary institutions

Eliminate the policy that requires networks to charge a minimum of 19 cents per minute on international calls coming into Ghana (under the Electronic Communication Amendment Act, 2009) and allow the market to determine the price.

Abolition of the special import levy of 1-2% on imports

Removal of duties on the importation of raw materials i.e. zero duty 58

Removal of duties for the import of manufacturing equipment and spare parts

Review of taxes on the aviation sector to make the airline industry more competitive

Capital Gains tax will be reduced to 10%

The reason why government is within the deficit targets it set during the mid-year review was better than expected domestic revenue from taxation. The IMF expects Sub-Saharan Africa’s growth to remain slow and commodity prices not to recover. And it is the objective of Dr Bawumia to reduce borrowing. So where is the revenue going to come from? I presume the idea is that increased production here will eventually increase tax revenue i.e. the tax cut will pay for itself. There is more than enough reason to be skeptical about this supply-side economics and the Laffer curve. Surely, we’ve learnt enough from Bush’s tax cuts about the dangers it has for an economy. Why not focus on loosening monetary policy to bring down borrowing costs instead? I’m not convinced by this proposal.

An enhanced employment Tax Credit Scheme to provide incentives for companies employing fresh graduates.

If the percentage of fresh graduates in the workforce is between 1- 5% the tax credit would be 40% of salaries and wages

If the percentage of fresh graduates in the workforce is between above 5% the tax credit would be 60% of salaries and wages

Good policy. I support it. However we should be sure that companies don’t take advantage to rig this and essentially employ people paid fully by government. Also this should not make companies refuse to employ more qualified people who would require higher wages. Implement this well and it’s good.

We would put in place a macroeconomic framework underpinned by fiscal discipline that would maintain exchange rate stability. Persistent exchange rate depreciation is bad for the economy. In this regard there, would be a strict enforcement of Section 40 of the Bank of Ghana Act (2002) by keeping a strict ratio between the currency in circulation and foreign exchange cover as exists in the context of a currency board regime as practiced by countries such as Hong Kong, Bulgaria and to some extent the CFA franc zone countries in Central and West Africa

I’m not sure about this yet. I’d appreciate a stable currency but I don’t know if strict monetary rules is the way to go. Nigeria has come under serious criticism for it’s refusal to let the naira depreciate. However, Section 40 of the BoG Act does say

(1) The currency cover assets of the Bank shall be available to meet only the liabilities of the Bank as represented by the total of the amount of currency notes and coins issued by the Bank and are in circulation.

It’s right in the books, folks. So why are we not implementing it? I’ll be honest and say I need more information to decide on this proposal.

More later.

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Jerome Kuseh

Accountant | Economist-in-Training | Finance Blogger
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5 comments

  1. Good analysis and interesting points. Concerning the tax cuts, we are not given details and it’s quite difficult to know how much the drop in 5% (from to 25 to 20) would fetch the government and/or why they settled on 20%. However, being skeptical of this idea shouldn’t also be seen as an endorsement of the status quo. Let’s remember, they aren’t calling for general tax cuts in the economy. He did mention that there would be moves to make the private sector take on some of the burden of the government.

    One of the reason the government is increasing taxes is because of its responsibilities. Maybe, by reducing that burden, they can afford to reduce corporate taxes. Also, although he didn’t mention it, effective tax reform programmes to capture many of the under-taxed or non-taxed reduces the burden on all. The government can be innovative and explore other areas to tax which will not have serious consequences.

    The devil will be in the details

    • More details will help then. 69% of employed people work in vulnerable employment and taxing them would not be easy. I wonder what responsibilities he’d want corporations to take on from the govt. Anyway, we can’t proceed without more details. Thanks for the comment

  2. Good analysis and interesting points. Concerning the tax cuts, we are not given details and it’s quite difficult to know how much the drop in 5% (from to 25 to 20) would fetch the government and/or why they settled on 20%. However, being skeptical of this idea shouldn’t also be seen as an endorsement of the status quo. Let’s remember, they aren’t calling for general tax cuts in the economy. He did mention that there would be moves to make the private sector take on some of the burden of the government.

    One of the reason the government is increasing taxes is because of its responsibilities. Maybe, by reducing that burden, they can afford to reduce corporate taxes. Also, although he didn’t mention it, effective tax reform programmes to capture many of the under-taxed or non-taxed reduces the burden on all. The government can be innovative and explore other areas to tax which will not have serious consequences.

    The devil will be in the details

    • More details will help then. 69% of employed people work in vulnerable employment and taxing them would not be easy. I wonder what responsibilities he’d want corporations to take on from the govt. Anyway, we can’t proceed without more details. Thanks for the comment

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