HOW DOES A GOVERNMENT RAISE REVENUE TO PROVIDE PUBLIC SERVICES AND INVESTMENT?

QUESTION OF THE DAY

HOW DOES A GOVERNMENT RAISE REVENUE TO PROVIDE PUBLIC SERVICES AND INVESTMENT?

A reader walked into the Foroyaa office and asked whether any government which comes to office tomorrow must reduce government expenditure by increasing taxes, increase cost recovery for services, retrench workers and freeze wages?

We have pointed out that there are two types of policies which governments rely on in providing public services and public sector employment.

The first is the tax based policy which Gambia has relied on since Independence. This year 64 percent of the budget is coming from taxation and 25 percent from grants. Hence 89 percent of the budget is coming from taxes and grants. Since the government had interfered with the flexible exchange rate system and fixed the rate of the dalasi above its market value and continued with policies different from what it agreed with donors, grants are not forthcoming. Hence expenditure has been going higher than the revenue generated. The budget deficit had risen to 3.4 Billion in 2014. To finance such deficit, the government has to borrow money. This domestic debt has grown from 11.3 Billion in 2013 to 20.7 Billion in 2015. If one borrows one must pay. This is why such tax based governments must increase taxes and expand the tax base to earn more income and freeze wages and other benefits to reduce expenditure and save more money to pay debts.

What then is the solution?

The solution is simple. It is the second policy option available to a Government. A Government which aims to be free from the austerity trap must move from tax based policies to production based policies.   First and foremost, the first act of a government which adopts the production based model is to give priority to prospecting so that all oil and mineral resources would be identified and harnessed so that one would increase government revenue known as sovereign national wealth, without relying entirely on taxes and grants.

Secondly, such a government would sign performance contracts with all public enterprises after assessing their revenue potential to ensure that they pay annual dividends to government to increase income for public services without relying entirely on taxes.

In the same vein, the private sector would be given tax incentives so that it could carry out its corporate responsibility in generating employment and carrying out social services. The cooperative ventures and the regional, district and village councils would also contribute their quota in employment and income generation and service provision. Hence there would be no need to increase taxes beyond the means of tax payers, introduce cost recovery in rendering services, freeze wages and employment. A country would be able to increase earnings and employment and provide infrastructural development and services on a sustainable basis and move into a middle income status rather than a least developed country status as was the case in the first Republic or heavily indebted poor country status as is the case in the second Republic.