Adopt A Balanced Fiscal Strategy

– In the face of significant economic challenges, Leslie Mensah urges incoming govt

Story: Isaac AIDOO, Accra

A LEADING economist with the Institute for Fiscal Studies (IFS), Mr Leslie Mensah, has stressed the urgent need for the next Ghanaian government to adopt a comprehensive and balanced fiscal strategy.

He outlined a framework for managing public finances that incorporates tax cuts, expenditure rationalization, and innovative revenue generation, particularly as Ghana faces significant economic challenges, including high debt levels and constrained fiscal space.

Mensah underscored that while tax cuts can provide relief to businesses and individuals, they must be accompanied by credible proposals to manage the resulting revenue shortfall. He specifically highlighted the COVID-19 levy and e-levy, which collectively generate about GH₵5.5 billion annually, or 0.5% of GDP.

The removal of these taxes, he warned, could create a substantial fiscal gap.

“Whoever intends to remove these taxes must confront the gap that will be created and decide whether that gap will be offset by constraining expenditure or raising fresh revenues from elsewhere. It would be irresponsible to simply cut these taxes and ignore the ramifications on the public finances,” Mensah said.

Raising revenue from the extractive sector

One of the key solutions Mensah proposed is leveraging Ghana’s rich extractive sector to boost government revenues. He pointed out that well-managed revenue streams from mining and oil production could reduce the overall tax burden on individuals and businesses.

“If you can raise more revenue from the extractive sector, then you can lower the tax burden. Proposals to cut taxes would be more credible and acceptable if they were situated within the context of a broader revenue strategy,” he explained.

Mensah emphasized that policies encouraging investment in mining and oil production must be paired with stronger governance to ensure revenues are optimized and equitably distributed. With the global energy transition driving up demand for critical minerals, Ghana is uniquely positioned to benefit from its natural resources.

Rationalizing expenditure

Mensah also called for a rationalization of public spending as a critical element of fiscal strategy. He urged policymakers to identify non-essential expenditures and prioritize areas where savings can be made.

“What are those expenditures that we have to constrain? What are those areas of spending where we have to find savings so that we can minimize our borrowing requirements?” he asked, highlighting the importance of reducing reliance on debt.

Rethinking debt utilization

Ghana’s public debt has risen rapidly over the past decade, culminating in a debt default. Mensah noted that much of this debt had not been used for productive public investment, such as infrastructure or education, which could have yielded long-term economic benefits.

“Going forward, we’ve got to rethink not just how much debt we take on, but how we use that debt,” he advised, calling for borrowing strategies that align with growth-oriented investments.

Avoiding politically-driven tax proposals

Mensah criticized politically-motivated tax proposals that prioritize voter appeal over fiscal sustainability. “What is wrong and irresponsible is a proposal to cut taxes simply to make voters happy in the very dire public finance circumstances in which we are,” he said, urging leaders to focus on policies that ensure long-term economic stability.

A coherent revenue strategy, Mensah argued, would not only stabilize Ghana’s public finances but also restore confidence in the government’s ability to manage the economy. He called for reforms that include:

            •           Tax Policy Reform: Targeted tax cuts balanced by measures to increase revenue in other sectors.

            •           Enhanced Resource Governance: Policies to maximize revenue from Ghana’s extractive industries while promoting environmental sustainability and equitable benefit-sharing.

            •           Debt Management: Borrowing for growth-oriented projects rather than consumption.

Broader Implications for Ghana’s Economy

Ghana’s fiscal challenges are compounded by global economic pressures, including rising commodity prices and tighter financial conditions. Addressing these issues requires bold and strategic action. Mensah’s recommendations come at a time when Ghana’s economy is under intense scrutiny, with policymakers seeking to balance economic recovery with the need for fiscal discipline. By adopting a balanced approach to tax policy, spending, and debt management, the next government can strengthen Ghana’s public finances and create a foundation for sustainable economic growth. This, Mensah concluded, is essential to alleviating the burden on Ghanaians and positioning the country for a more stable and prosperous future.