Enhancing Ghana’s Revenue Generation From Real Property And Informal Sectors

Congratulations to President Akufo-Addo on his victory in the 2016 presidential election. Undoubtedly, the President has laid out a vision for Ghana’s transformation through an integrated approach to economic management, improved healthcare, education and agriculture, technological advancement and enhanced productivity. Realizing such a vision calls for resource availability coupled with efficient and adequate revenue generation in order to fund strategic programs, grow the economy, reduce government borrowing and pay down the national debt. The aim of this article is to highlight some of the fiscal challenges facing the nation and suggest some ways to enhance government revenues from real property and informal sectors to help implement some of the strategic priorities of the central government.

Fiscal Challenges
Provisional data from the Ministry of Finance shows that in the first seven months of 2016, government revenue and grants totaled GHS18.6 billion (18.6 billion Ghana Cedis) while total expenditure was 23.3 billion. This suggests the government spent GHS4.7 billion more than the revenue collected in the first seven months, and implies a much higher revenue-expenditure gap for the 2016 fiscal year. In the 2015 fiscal year, government of Ghana revenue and grants totaled GHS32.0 billion. Government expenditure was GHS38.6 billion. The central government therefore had to borrow at least GHS6.6 billion in order to pay its bills. These amounts exclude arrears of almost GHS5.8 billion the government had to grapple with. Of the total 2015 revenue and grants, domestic revenue was GHS29.3 billion. According to the 2015 fiscal data on the Ministry of Finance website, interest on the national debt for the year was GHS9.1 billion, and compensation of government employees was GHS12.1 billion. As can be seen, just interest payment and compensation of employees consumed 73 percent of Ghana’s domestic revenue, leaving only 27 percent for all other government expenditure.

Ghana’s national debt has risen steadily in recent years. The national debt rose from 16.8 billion US Dollars in 2011 to 27.8 billion US Dollars in 2014 before declining to 26.7 billion US Dollars in 2015. The country’s debt as a percentage of GDP rose from42.6 percent in 2011 to 70.8 percent in 2015 and to 74 percent in 2016. At the end of 2014, 55 percent of Ghana’s debt was held by external parties, including foreign governments, a substantial part of which was owned by international investors and institutions. Although budget deficit financing through external borrowing helps to reduce crowding out in the domestic economy, servicing this portion of national debt implies a transfer of resources from Ghana with standard of living implications. Additionally, spending three-quarters of the nation’s domestic revenue on just interest payments and employee compensation leaves little fiscal space for much needed programs. As admitted by President Akufo-Addo in his maiden state of the nation address, all of government revenue is consumed by these two items and statutory payments, with no money left for any other expenditure.

The new Akufo-Addo administration has made clear its intent to reduce taxes to spur job creation and economic growth. Given the administration’s position on taxes, it has no choice but to find creative and efficient ways to increase domestic revenue while reducing borrowing and increasing exports to boost foreign reserves, stabilize the Cedi and grow the economy. Among the areas the administration can examine for additional revenue generation are real properties and the informal sector.

Real Properties
In order to effectively decentralize government operations, reduce the financial constraints on the central government, spur development at the local level and have economically viable local governments, the Akufo-Addo administration needs to put in place measures to strengthen local government own-source revenue generation. The current 7.5 percent of total annual revenue shared among the nation's district assemblies as District Assemblies Common Fund (DACF) is woefully inadequate to meet their developmental needs. Key to local government own-source revenue enhancement is efficient mobilization and management of property taxes, which have the potential to generate billions of Ghana Cedis in revenue nationally, especially from the major districts and municipalities. Of all the MMDA internally generated funds mandated by the Local Government Act of 1993 (Act 142), property taxes provide the surest source of revenue if properly managed. However, many studies on Ghana's property tax system reveal numerous challenges that inhibit adequate generation of revenue from real properties. These challenges include poor database of real property inventory, obsolete valuation lists, inadequate and unskilled staff, lack of enforcement of property tax laws, political interference, etc. The following are some solutions suggested by experts to address the afore-mentioned problems.

Update and Automate Land Administration Record Keeping: The central government should ensure up-to-date record keeping of all land parcels across the country. To accomplish this, policies should be put in place to facilitate implementation of efficient and comprehensive databases containing land parcels at all local government jurisdictions across the country to serve as the basis of taxable property. The government should implement a policy of computer-assisted mass appraisal techniques and a rate administration system at the local government level to ensure efficient data storage, revaluation and updates of properties. The computer-based system should be backed by an effective manual system to ensure smooth operation in times of power outage. Properly enforced, such policies will ensure regular updating of the inventory of land parcels, speedy addition of new properties, and timely reconciliation of valuation lists with the updated inventory of land parcels.

Build Capacity for Property Tax Collection: Studies show adequate and effective property tax collection also depends on the skill sets of personnel who perform property valuation, as well as community participation in property tax utilization. Studies also show that, in the real properties sector, the nation is plagued with under-resourced or undertrained tax administrators, poor tax collection systems, inadequate penalties for non-payment of taxes and, in some cases, dishonest and corrupt tax collectors. The central government should facilitate implementation of policies to upgrade the technical capacities of those who perform valuation of taxable property by providing the needed training. Luckily, the Akufo-Addo administration has the benefit of the Ghana Economic Management Technical Assistance Project (GEMS-TA), the scope of which can be extended to include resolution of the capacity building challenges in the real sector. Under the auspices of the World Bank, GEMS-TA is a 3- year project which aims at strengthening the Ghana Revenue Authority’s business intelligence systems and Ministry of finance’s debt management, among others. Hopefully, the Akufo-Addo administration will fully embrace GEMS-TA and request that the project’s scope of activities be amended to include capacity building and effective automation for real property revenue collection.

Justify the Collection of Property Taxes: Government should justify the collection of property taxes to citizens by demonstrating the provision of tangible social services with revenues from taxes collected. If citizens are allowed to participate in local decision-making regarding the use of their property tax payments, and if they see tangible benefits from taxes collected, they are more likely to appreciate the value of government revenues and contribute their share of taxes. This implies the need for residents in local communities to notice improved living conditions, better schools, good roads, etc. for them to have confidence in government’s ability to use their taxes to benefit the community. One of the key ways of ensuring this is for the government to adopt community participation in decision-making regarding the use of such taxes.

Ensure Equity and Fairness of the Property Tax System: In general, citizens are more likely to pay property taxes if the property valuation and taxing system is fair. This implies the central government should be bold and implement measures that will ensure the poor who own lower-valued homes are not unfairly taxed, and the rich in society who have political connections do not use their influence to escape the payment of their fair share of property taxes. Indeed, a new and effective property tax policy implementation will reduce the central government’s need to borrow money to help finance the local developmental agenda.

The Informal Sector
Studies show this sector is quite heterogeneous and comprises of workers in areas such as construction, manufacturing and services. Construction workers in the sector include steel benders, carpenters, masons, plumbers, electricians, etc. Those in manufacturing include workers involved in metal works, textiles and garments and food processing. In the services sector, we have chemical sellers and drug store operators, herbal healers, market women, domestic workers, vulcanizers, auto mechanics, welders, food traders, watch repairers, etc. This sector makes up the small and medium-sized enterprises (SMEs) in the country and contributes substantially to economic development. According to the United Nations Industrial Development Organization, SMEs account for more than 90 percent of all businesses registered in Africa.

With proper revenue mobilization and tax policy, the informal sector could prove to be an extremely significant revenue source for the country. However, this sector is the most difficult to tax due to the nature of businesses and ineffective mobilization efforts by government. Studies show some of the issues plaguing the taxation of the informal sector include non-declaration and under-declaration of income, inflation of deductions from tax returns and embezzlement of tax revenues from heads of trade associations. Some of these issues are attributed to poor record keeping, a predominance of cash transactions, lack of voluntary compliance, high illiteracy rates, and the actions of management and personnel involved in tax administration. To fashion out an effective tax policy of the informal sector, it is important for government to understand the peculiar characteristics of that sector.

Many experts agree that this sector is characterized by the predominance of self-employment, high failure rates, lack of training and management expertise, the absence of official protection and recognition, low wages, little or no job security, and, in many cases, the absence of trade unions. Additionally, many businesses in this sector do not have access to the formal credit system, and some even occupy unauthorized vacant spaces or private land due to lack of resources to secure suitable spaces. Due to many of these peculiar characteristics, government policies affecting the sector are in most cases undemocratic in that policy decisions tend to lack input from people in the informal sector. Furthermore, many people in the sector either do not have access to, or incur higher costs of, government services than their counterparts in the formal sector.

To seriously increase revenue generation from the informal sector, the government needs to find effective ways of enticing workers and employers with needed assistance so that they feel their contributions are valued by policy makers. For example, the central government can facilitate the setting up of small business development assistance programs in Ghana’s administrative regions, districts and municipalities to cater for the specific needs of the sector, tailor policies to their needs, provide management training and help facilitate access to low cost credits to the extent these types of assistance do not exist.

Provide Business Development Assistance Programs: The motivation of informal sector businesses to willingly pay taxes depends on the value they perceive to be deriving from such taxes. Through public private partnerships (PPPs) the government can set up more efficient and effective small business development centers, business information centers and business incubators to help the informal sector. The business development centers can provide the SMEs with “one-stop shopping” for management and technical information provided by networks of business experts at the district and municipal levels. Together with business information centers, they can provide business counseling using retired business executives and educators to enable SMEs in the sector gain the needed resources and business acumen to better manage their enterprises. They can also provide access to computer and software to aid in record keeping and business management. To the extent possible, government should use PPP to facilitate the housing of small businesses under one roof or in a common space for those who need it, to help address the space problems and reduce business costs. This can help provide flexible space, affordable rent, management training, shared business services, business development, etc. As part of the training, businesses should be sensitized on the relevance of taxes in providing government services, as well as on how to properly complete and file tax returns. These efforts by government can help bring many businesses in the informal sector into the tax bracket to help boost government revenue.

Provide Financial Assistance: Studies show that microenterprise programs that make very small loans to businesses in local communities to finance start-ups and other needs have been helpful to businesses at the margins of the mainstream economy. Existing programs to assist SMEs in the country, such as the Ghana Venture Capital Fund, are not as effective and efficient as they should be. The success of SMEs strengthens their ability to pay taxes for government services. It is therefore important that effective policies are implemented to facilitate and expand microloan access to small businesses in the informal sector. Through PPPs, government can facilitate the creation of small and medium-sized enterprise forums to bring investors such as angel fund investors and owners of SMEs together to enhance visibility and financing. Effective policies should also be put in place to enable district and municipal governments to create community development venture capital funds to aid entrepreneurs in low income inner-city communities. Such policies will be in line with the President’s vision of inner-city and zongo development, as well as the one district-one factory policy. It will also lay the foundation to widen the informal sector tax base to improve government revenue. The financing of such venture capital can be sought from private foundations, private companies and the central government.

Tailor Policies to Informal Sector Needs: Efforts should be made to include representatives from the informal sector, especially small business representatives, in policy decisions affecting businesses in the sector. This is because those in the sector understand the needs of their members better. Policy decisions should include helping business owners in the sector to effectively manage their businesses, to have well laid out succession plans, and to plan for retirement in order to ensure business continuity and reduce post-retirement poverty. Once these businesses recognize that government cares about their wellbeing, they are more likely to reciprocate by paying their fair share of taxes to government.

Conclusion
The new administration and the central government need adequate revenue to operate, reduce borrowing and grow the economy. Effective, efficient and adequate collection of real property taxes can boost local government revenue and relieve the central government of the burden to borrow huge sums of money to finance development activities in the districts and municipalities. Automation of taxable real property recordkeeping and valuation procedures, coupled with capacity building and enforcement of property laws can lead to higher revenue generation from real property across the country to help achieve the government’s vision. The informal sector has huge potential to contribute significant revenue to help government fund its operations. However, businesses in this sector have problems, many of which are ignored. If the central government wants to increase revenue generation from this sector, frantic efforts need to be made to address key management and space problems of the sector and justify the collection of property taxes to help bring many businesses in the sector into the tax bracket.

Stephen K. Aikins, PhD, is an associate professor at the School of Public Affairs, University of South Florida, USA. He is currently a Fulbright Scholar at the Ghana Institute of Management and Public Administration where he teaches public sector accounting and finance, as well as advanced financial accounting. He has experience working in both the public and private sectors for nearly 20 years, 10 of which were spent in the financial services industry. Prior to being in academia, he served as Assistant Vice President for Internal Audit at Bank of the West in Omaha, Nebraska, USA. The views and information presented in this article are those of professor Stephen Aikins and do not represent the Fulbright program or the US Department of State.

By Professor Stephen K Aikins