Poverty Implications of Trade Liberalisation Financing in Ghana

Abstract

Balancing government budget in the midst of trade liberalisation requires reducing expenditure levels or increasing existing taxes and or introducing new taxes. This study investigated the impact of the option of increasing existing domestic taxes, value added tax, corporate tax and income tax, to compensate for lost tariff revenue from trade liberalisation on poverty at the national and household levels in Ghana. A recursive dynamic computable general equilibrium and a microsimulation model were used for the study for the period 2005 to 2015. The main source of data was the 2005 Social Accounting Matrix. The policy simulations implemented were trade liberalisation; trade liberalisation with lost tariff revenue replaced by 31% upward adjustment in value added tax; trade liberalisation combined with 50% increase in corporate tax; and finally, trade liberalisation accompanied by 40% rise in income tax. The simulation rates were enough to keep government revenue neutral. The study concludes that trade liberalisation combined with value added tax, corporate tax, and income tax, separately, reduce the incidence, depth and severity of poverty. It is recommended that government uses all three tax instruments with special emphasis on income tax to compensate for shortfall in tariff revenue resulting from trade liberalisation.