05 August 2017

IEA proposes 1% VAT rate hike to support free SHS

The Institute of Economic Affairs (IEA) is proposing a 1 percent increase in the VAT rate to help sustain government’s free senior high school (SHS) policy.

The Institute said this at a meeting with journalists to discuss the Mid-year review presented by the Finance Minister on Monday.

Speaking to JOYBUSINESS after the meeting Director of Advocacy and Programs, Dr. Frankie Asare- Donkoh the Institute is making this proposal because the policy can help improve education in the country. 

“We believe that free and all inclusive educational system is a major driver and indeed a catalyst for sustainable growth and development,” he said.

Justification for the tax hike

“Successful implementation of this initiative will not only ensure equity in the educational system but also have a positive multiplier effect in all sectors of the economy through a skilled and competent workforce.

“We believe that free and all inclusive educational system is a major driver and indeed a catalyst for sustainable growth and development,” he added.

He was, however, of the view that the sustainability of the financing source for this programme.

This is because the 2017 Budget indicates budgeted funding for the initiative to include GHC188.28 million (47%) – government of Ghana and GHC211.72 million (53%) – ABFA. 

While this funding arrangement could introduce another level of rigidity in the budgeting system, the ABFA source of funding which contributes the major part of the total amount as we know is not stable but highly volatile.  

This is due to dynamics in the oil and gas industry; specifically relating to fluctuating oil prices which pose risk to sustainable funding for this initiative.

Dr. Asare Donkoh added that given the important nature of this initiative for our country’s sustainable development, we are therefore calling on government to revisit its funding arrangement for this important initiative.

A national forum or stakeholder workshop on how to ensure sustainable financing for the free SHS programme in Ghana as a  matter of urgency will be welcomed.  

“We believe that a more sustainable funding should be pursued domestically,” he said.    

For example, just as we did for NHIS, increasing the VAT rate by say 1% and ring-fencing it for exclusive funding of the Free SHS will be very ideal.

Domestic tax revenue provides a more stable and predictable source of financing expenditure for important public programmes such as free education he added.

Government has already announced that it would start implementing the policy from next month. Projections by some civil society groups put the cost of the policy at around GH3.6 million cedis every year.

It is estimated that about that about 1.7 million students, who are eligible to have secondary education in the country, are expected to benefit from the successful implementation of the project.

Debt management strategies by government

The Institute commended government for its debt re-profiling initiative it, however, noted that the increasing participation of non-resident investors in the domestic bond market is laudable.

However, it said, “we think that it has to be managed in order not to over expose the economy to external shocks such as sudden withdrawals that can impact negatively on exchange rate stability.”

Management of the economy

IEA was of the view that government is on track in achieving macroeconomic stability as most of the macro-indicators are moving in the right direction.   

The challenge, however, is the sustainability of these gains which means more needs to be done in the following an aggressive domestic revenue mobilisation effort, expenditure controls and ensuring sustainable debt management.

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