REDUCING corporate tax may not be the most effective way of nurturing private sector growth, a leading economist has argued in response to last week's budget announcement to cut the rate once again to 25 percent.
Speaking at a seminar last Friday, four leading economists lauded the major policies and targets of the 2006 budget; pointing out, however, that certain concerns and constraints need to be boldly resolved by Government in order to move the economy forward from resilient stability to high growth. The question of Government's avowed goal to increase private sector development, and the effectiveness of corporate tax reduction in achieving this aim, was prominent amongst these concerns.
Giving an overview of the budget, Ernest Aryeetey, Director of ISSER, welcomed the budget as a good one.
He was, however, skeptical about Government's intention to increase productivity and create jobs through tax incentives. Corporate Tax, which was reduced from 32.5 percent in 2005 to 28 percent, will be further reduced to 25 percent in 2006, complimenting the reduction in National Reconstruction Levy rates.
Prof Aryeetey noted that studies have shown that “tax was a far less constraint than many others,” to the private sector. There needs to be a much more direct way of providing incentives than taxes,” he said.
He added, “The biggest problem to growth is the low productivity of existing firms and the budget in my view does not address this. I would like to see greater attention given to increasing productivity.”
To Government, he said, “Let's focus more on removing the constraints on productivity enhancement in selected sectors. We must restructure the incentive and decide which sectors are in need of such supports and which sectors can best use such supports.”
He was one of four academics who, at the ISSER – Merchant Annual Budget Review Seminar, held Friday in Accra, gave their initial views on the 2006 budget read only the previous day.
Professor Aryeetey noted that there is need for some sectors of the economy to be selected and enhanced, in a way that the 2006 budget does not allow for. He affirmed: “Incentives do not suggest much selectivity in sectors where productivity gains will be highest.”
Discussing the macro-economic implications of the budget, Robert Darko Osei, Research Fellow at ISSER, said the economy in 2005 was quite resilient but there remained “significant bottlenecks with the economy.”
Stating that the 2006 budget is more responsive to the concerns of the private sector than this year's budget, Dr Osei said, “I think that the targets in the budget can be achieved. A lot of tax incentives are given.”
He noted that domestic investment has shot up to 29 percent, a huge jump on the 19 percent in 2001. “I suspect a lot of this was due to a boom in construction.” He said the economy has been generally resilient since 2001. He believed inflation has also shown a consistent drop, and this has only been affected by crude oil prices. He described the outlook in the 2006 budget as “positive for the corporate sector and could translate to growth.” He identified lack of credit, high interest rates as a result of the large spread between the lending and borrowing rates, and real appreciation of the exchange rate as key constraints that could torpedo the monetary, financial and fiscal gains that the yet-to-be-implemented budget may generate.
Another Research Fellow at ISSER, Peter Quartey, who tackled the sectoral implications of the budget, said decentralised land administration and the creation of more customary land secretariats would facilitate the establishment of businesses and reduce the cost of doing business in most sectors. Dr Quartey pointed out that the industrial and commercial sectors were not contributing much to growth, noting that the budget was silent on that. “They are doing much of distribution than production.”
He observed that the “2006 budget relies heavily on fiscal policies and to some extent monetary policies to achieve the 6 percent growth.” Putting the reduction in Corporate Tax into a global context, Dr Quartey noted that in South Africa the rate is 29 percent, which is similar to the average in the developed world. While the rate is 30 percent in Nigeria, he stressed that the neighbouring country has selected priority sectors, namely manufacturing and agriculture, which enjoy a 20 percent rate. He thought Ghana should be looking at such a preferential scheme, as well.
While recommending the Domestic Contents Bill, Dr Quartey lamented that the budget gave “Virtually no information on how to stop the job losses in textile and garments industry, and poultry. But the issue there is also one of smuggling and copying of brands produced from China. It is not an issue of competition but an issue of cheating and smuggling,” he stressed.
He said putting zero income tax on the minimum wage was of little use, “What proportion of the workforce receives minimum wage?” he asked. He criticised the situation with the export free zones “where you can employ people below the minimum wage.”
He welcomed the scheme to offer tax credit to employers, saying “It is welcoming, but long overdue. It will help graduates get a job but it should go hand in hand with job placement. Replacement is a cheaper way of recruiting. There should be a tax incentive for job placement,” adding, “Our educational system should be more tailored towards industry needs.”
He cautioned that the private sector could still be hit by an extra cost: utility tariffs. “So far, we don't know what's going to happen. And they have implications on businesses.”
He lauded the budget all the same saying it “will make funds available to industry and increase employment but the likely net gains will also depend on other factors such as international prices, and the overall performance of the local economy.”
Meanwhile in another post-budget analysis seminar, organised by Databank yesterday, a leading economist called upon private sector owners to take the initiative in seeking investment by listing on the stock market.
“So many idle resources are trapped in the private sector, considering the fact that the capitalisation at the stock exchange forms 19 percent of the country's GDP,” according to Nii Kweku Sowah, Acting Director General of Securities & Exchange Commission. He compared the situation in Ghana to that elsewhere – the US and the UK for example – where the stock capitalisation is greater than the country's total GDP. “This is because the private sector in those countries is more open to investment,” Dr Sowah said.