2.5% VAT increment set back to fighting inflation – ASEPA

The Alliance for Social Equity and Public Accountability (ASEPA) has described the proposed 2.5 percent upward adjustment of the Value Added Tax (VAT) rate as contradictory to efforts employed to curb inflation, especially those of the central bank’s monetary policy interventions.

Presenting the 2023 Budget Statement and Economic Policy on the floor of parliament last Thursday, the Minister for Finance, Ken Ofori-Atta, announced that as part of measures to enhance revenue generation, the Value Added Tax rate will see a 2.5 percent upward adjustment from 12.5 percent to 15 percent.

At a press briefing on the 2023 budget in Accra, the Executive Director of ASEPA, Thompson Mensah, said this will not only pose difficulty to the consumer but also put the country into possible recession.

“As part of the 2023 budget, government wants to increase VAT by 2.5 percent – taking the total VAT value to 21.90 percent. Inflation is currently at 40.4 percent, Producer Price Index sits at 61.7 percent. The 2.5 percent, increase in VAT will skyrocket prices even further in such a precarious situation, which will fuel inflation to unprecedented levels,” he said.

He predicted that when approved, the increment can also lead to an increase in the policy rate and will worsen the cost of borrowing in 2023.

“In response to the skyrocketed inflation in 2023, the central bank will automatically increase the policy rate to curb inflation. This will worsen the cost of borrowing in 2023. People will not be able to borrow due to the high-interest costs; those who will be able to borrow risk falling into a debt trap; and nonperforming loans (NPL) sitting on the books of banks will skyrocket, leading this country into a recession.

“Every economist wonders why at this very stage of a national crisis, wherein inflation is over the roof, government’s response is to increase a consumption tax like VAT. But the contradiction is that while the central bank is working hard using monetary policy tools like the policy rate to curb inflation, the finance ministry is on the other hand fuelling inflation,” he said.

He suggested that instead of increasing VAT, which will pose more difficulties to the citizenry, government must maintain the old rate and channel its efforts to reducing the hardship.

He added that government should be circumspect about its policy decision and not retrogress efforts that are already in place to rescue the country.

“Now the Ministry of Finance’s own policy is contradicting and undermining the central bank’s monetary policy efforts,” he said.