Soaring debt linked to flawed tax system – Terkper

… warns revenue distortions are forcing gov’t into unsustainable borrowing cycle

By Joshua AMLANU & Ebenezer NJOKU

The nation’s mounting debt crisis stems directly from fundamental flaws in the tax system that have undermined revenue collection and forced government into an unsustainable borrowing cycle, Seth Terkper, former finance minister and current Special Presidential Advisor on the Economy, has said.

Speaking at the launch of his book ‘VAT in Africa – The Ghanaian Experience’, Mr. Terkper warned that distortions in Ghana’s tax framework are creating a dangerous fiscal pattern whereby insufficient revenue collection leads to increased government borrowing to fill expenditure gaps.

“If the revenue is distorted, you won’t have enough, sufficient money for expenditure. And that leads to borrowing to fill the gap. And then we are going down into debt,” Mr. Terkper said.

He highlighted a link between tax policy effectiveness and the country’s fiscal sustainability.

Ghana’s public debt has emerged as one of the most pressing challenges facing the economy in recent years, with debt restructuring as part of a US$3billion International Monetary Fund programme agreed in 2023.

Mr. Terkper, who served as finance minister from 2013 to 2017 and oversaw major tax reforms including the current VAT Act, identified proliferation of levies as a key factor undermining the tax system’s effectiveness.

He noted that while VAT was designed to replace numerous consumption taxes, many of these have returned in the form of levies… creating administrative complexity and compliance challenges.

“When the VAT was introduced, it actually replaced a lot of consumption taxes. Many of them have come back in the form of levies,” he explained.

He described this trend as a distortion of the streamlined tax framework established during the 2013-2016 reform period.

The former minister warned that complex tax systems encourage avoidance and evasion, further reducing government revenue.

“If you make it complex, you are making it difficult for the taxpayer to comply. If you make it complex, you are making it difficult for GRA to administer the tax,” he said, referring to the Ghana Revenue Authority.

Mr. Terkper advocated maintaining what he described as the “pillars of the fiscal system” – a simplified structure based on two core taxes: one on income and another on expenditure. This approach, he argued, reflects international best practices adopted by advanced economies.

“Every country has pillars of taxes. In most of the advanced countries, until recently the tariff scheme, they don’t rely very much on tariffs,” he said, noting that developing countries like Ghana depend heavily on trade taxes and Customs duties.

Tax experts have acknowledged that crisis situations such as the COVID-19 pandemic or global financial crisis may necessitate temporary revenue measures – but cautioned against allowing such measures to become permanent fixtures that increase the overall tax burden.

“When the crisis is over, if you don’t remove it, it increases the tax burden. And then people are tempted to evade, avoid,” he warned.

Instead of introducing new taxes during fiscal difficulties, Terkper recommended utilising stabilisation funds to avoid disrupting the core tax framework. “That’s when we should fall on mechanisms like the stabilisation fund. So that we are not tempted to use the tax to introduce new taxes.”

His comments come as government faces pressure to increase revenue mobilisation while managing the economic impact of high taxation on businesses and households. Ghana Revenue Authority has consistently fallen short of revenue targets in recent years, contributing to persistent fiscal deficits.

Mr. Terkper emphasised that effective tax administration, rather than new taxes, should be the focus for improving revenue collection. He stressed the importance of voluntary compliance supported by robust enforcement mechanisms, noting that tax serves “everybody’s purposes” as citizens.

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