Ghana - Current economic position and prospects (Vol. 4 of 10)

RESTRICTED ~~~~ ~~P%VV Io P1~ ~, lu I;3. Ifxo A V WI. 17r This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION THE' (GTjRRENT EGCON0M:TCG POSTTTON OF GHANA (in ten volumes) VOLUME IV PUBLIC FINANCE October 26, 1970 Western Africa Department  CURRENCY EQU IVALENTS 1 New Cedi = US$0.98 1 dollar = NO 1.02  TUV' MTCCTfl1\T This annex is based on the findings of a mission in April and May 1970 LU G]haLn cVll.poeIu oUf MLL. Ba-re.,dU A. ue V rieb IL ief of Missr. Mr. Fateh Chaudhri General Economist Mr. nlomas 'Klein DBaLance of EyieiLL &1 E2XLteLInal Deb Miss Kathar ine Mor timer Pa pulationl, ELploymeLLt & EdLLucatiLU ni Mr. M. Taher DaJani* Fiscal Mr. Ved Gandthi Fiscaal Mr. NaKe Kamrany Social Sector Mr. Jivat Thadani Industry Mr. Aifredo Soto Transport Mr. Hans Schulte Transport Mr. Charles Metcalfe Agriculture Mr. Bruce Johnston** Agriculture Mr. Merrill Bateman** Agriculture Mr. Herman Nissenbaum Project List Mr. John Weston Electric Power Mr. Edward Minnig Electric Power Mr. S. Rangachar Research Miss Beverleby Baxter Secretary * Seconcled by the International MorLetary Fund ** Consultants This annex is based on visits by Messrs. M. Taher Dajani and Ved ?. Gandhi in February and March and the Economic Mission in April - May 19/U. This volunie has been prepared by Mr. Ved P. Gandhiand it incorporates the budget for 1970/71.  VOLu- IV?: PUBLIC FINANCU TABLE OF CONTENTS Page No. INTRODUCTION PUBLIC FINANCE: MAJOR TRENDS AND ISSUES ............. 1 Government Consumption 1.......... ................ Development Expenditures ...... .................. 1 Tax Effort o.....*...*o.*oee..eooo.......o...... 6 Public Debt o .......a.e.oe..eeeeoeo*ooee...e. 0 7 Fiscal Policies 1970/71 ........................... 8 Organization of the Report ...... ................ 8 I. GROWTH AND PATTERN OF RECURRENT EXPENDITURE o ......... 10 Recent Growth Rates of Recurrent Expenditure .oo *oo** ooo * o.... oooooo.o.. . . 10 "Structural" Growth Rate of Recurrent Expenditure . ................................. 11 Recurrent Expenditure - Functional Classification ....0 0 0........0................... 14 Current Expenditure - Economic Classification ......0......... ........ ......... 18 "Minimum" Growth Rate of Current Expenditure ooo. oooo..o.. ...o. .O O Oo .. ... 20 Recurrent Expenditure, 1970/71 .................. 21 Summary and Conclusion .............4... ........ 0. * 22 APPENDIX: CROSS-SECTION DATA ON DEFENSE EXPENDITURE AS A PROPORTION OF GDP .. ... ...... 22 II. TRENDS AND COMPOSITION OF CAPITAL EXPENDITURE ..........o.......o...................... 25 Capital Expenditure versus Development Expenditure o..o.o..oo....o..o..oo.oo..e....o.o...ooo 25 Investment in State Enterprises .........o....... 25 Recent Decline in Capital Expenditure .... ....... 27 Composition of Capital Expenditure ..... ......... 30 Capital Budget, 1970/71 ............................ 31 Summary and Conclusions ..... ................... 32 APPENDIX: LIST OF STATE ENTERPRISES IN 1966 ......... 34 III. LEVEL AND STRUCTURE OF TAXATION ..o ...... oooes........ 36 Tax Effort ..* ................................... 36 Development of Tax Structure .................... 36 Present Problems of Taxation 9009..............0 39  TABLE OF CONTENTS (Cont'd) Page No Structure of Taxation ..0....,............. ...... 40 Cocoa Export Duty ...o......40..... .. h0 Progression in Cocoa DuLty Rates ..... ..... 41 Costs of Cocoa Marketing Board ........... 43 Future of Cocoa Revenueis ................. 46 Investment Fund .............. 46 lIport Duty *s...............o........ee.... 48 Exemptions from Import Duty ........... 49 Effective Tax Burden on Imports .......... 50 Reforms in Import Duty Structure o........ 51 Import Taxation, 1970/71 ................. 52 Personal Income Tax ooo..0.......... ......... ..... 54 Income Tax Rates o.o.ssoes*...... s o. sosooo 55 Personal Exemption 05...00..000*06060* @5** 57 Inco:me from Agriculture ............oo* o... 61 Taxation of Small Businesses ............. 65 Corporate Taxes * ..............o...........*... 65 Company Tax .......o ...................... 65 Excess Profits Tax ................ 0..... 67 Progression in Corporate Taxation ..,..... 68 Taxation of Excess Profits ..............o 68 Company Tax Incentives ................... 69 Tax Treatment of Losses ............o..... 69 Taxation of Total Profits versus Retained Profits .................o...... 69 Taxa-tion of "Pioneer" Industries .... $a** 70 "Turn.over Tax" Clause ................... 71 Excise Duties and Sales Tax ................... 71 Issues in Excise Taxation ..,....e... 75 T;ax Exemptions Under the Capital Investment Act, 1963 75............... ;...55 7$ Built-in Elasticity of Ghana's Tax Structure * . ............. 77 Tax Svstem: An Over-all View *....... 79 APPENDIX: STRIUCTURE OF LOCAL TAXATTON ...... ....... 81  TABLE OF CONTENTS (Cont'd) Page No. IV. BURDEN OF PUBLIC DEBTS ............. . e e......* 83 External Debt ............ ... ........... . 86 Domestic Debt ...*.*.**.*.*.. **.. .. .. ... .. . 86 Social Security Scheme .................. 86 Conclusion .... .. 93 V. FISCAL PROSPECTS ...................... 94 Alternative Projections ................. 94 Assumptions ... ... ... .......e..95 Budgetary Gap ................ 98 VI. FISCAL STRATEfGY .... ... ... .............. 100 Short Run Measures ................ 100 Long Run Measures ................ 101  - iv - LIST OF TABLES Table No. Page lo. 1A Over-all Budgetary and Macro-economic Trends, 1961 - 1969/70 2 1B Over-all Budgetary Ratios, 1961 - 1969/70 3-5 2 Functional Classification of Recurrent Expenditure, 1965 - 1970/71 12-13 3 '"Structural" Growth of Recurrent Expenditure, 1965 - 1969/70 15 4 Travelling and Transport Maintenance Allowances of Government Employees 17 5 Economic Classification of Current ExDenditure, 1965-68 19 6 Transfer Payments to State Enterprises, 1965 - 1969/70 28 7 Short-fall in Capital Expenditure, 1965/66 - 1969/70 30 8 Canital Exnenditure of Central Government. 1965/66 - 1970/71 30-a 9 Tax Revenues by Source. 1960/61 - 1970/71 37 10 Tax Effort Record, 1960/61 - 1970/71 38 I1 Rates of Cocoa Export Duty. 1970/71 42 12 Cost Per Ton Incurred by Cocoa Marketing Board, 1966-1969 44 13 Projections of Cocoa Export Duty Receipts, 1970/71 - 1974./7q Ia 14 Typical Statutory Import Duty Rates, 1970/71 48 15 Average TmnortDuty Rate, l961-961 QF 50 16 Effective Tax Burden on Imports, 1969 53 17 Average and Marginal Rates of Tncome Tax, 1969/70 56 18 Distribution of Income Taxpayers 58 19 Standard Assessm.ents - Som.e T'nir'l Ratesj 19qAo70 66 20 Commodities Classified by Rates of Excise Duty, 1970/71 72 21 Tfaretive Ecise Duty Rates, 1966-1968 73 22 Effective Indirect Taxaticn Rates, 1968 74 23 Rlilt-in D1ast_1r_ty.v of NornrGoe TAsts 78 24 Public Debt Charges, 1966/67 - 1974/75 84 25 S4ze of Pbliehli elnht.. 1960/61 - 19Q6R/69Q 85 26 Size of External Debt, 1960/61 - 1968/69 87 97 R4S7I nf DomeYstI Debt, 10 An/A6 - 1-70 AR 28 Classification of Domestic Debt by Holders and Periods of Maturrty 89 29 Balance Sheet of Social Security Funds, 1965/66 - 19070/71 01 30 Investment of Social Security Funds, 1965/66 - 1970 92 341 10At Poein 1969 O = 1071.17C:. 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