The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The government rejected plans for a $30m hike in so-called “sin taxes” on alcohol and tobacco in the run-up to the 2020-2021 budget, the International Monetary Fund (IMF) has revealed.

The fund, in a report accompanying its decision to grant The Bahamas a $250m loan, disclosed that the Minnis administration had been mulling one-year excise tax increases of ten percent and $5 per gallon for tobacco and alcohol products respectively.

“A sin tax may be imposed for one year on items deemed harmful (including alcohol and tobacco). Excise rates on these products could rise by ten percent and $5 per gallon, yielding about B$30m in additional revenues in fiscal year 2020-2021,” the IMF said in a report that appears to have been written during the final stages of the government’s budget preparations.

However, the measure was never unveiled or included in the 2020-2021 budget, indicating that the proposal was dropped late in discussions over the government’s plans for the upcoming fiscal year that starts on July 1.

Marlon Johnson, the Ministry of Finance’s acting financial secretary, yesterday acknowledged a hike in so-called “sin taxes” - levies on products deemed to be harmful to human health or have an anti-social impact - had been “a policy consideration” during internal government debates leading up to the Budget’s unveiling on May 27.

“It didn’t come forward in the Budget presentation,” he confirmed. “During every Budget exercise a whole lot of ideas and considerations are put forward. He referred Tribune Business to K Peter Turnquest, deputy prime minister and minister of finance, for further comment. The latter did not respond to Tribune Business phone calls or text messages before press time last night.

It is thus unclear why the Government rejected tax increases on products which, due to their addictive nature, tend to have an inelastic demand and therefore generate increased revenues for the Public Treasury whenever rates are raised.

However, such a move would likely have proven unpopular with Bahamian consumers already battered by COVID-19 unemployment increases and income reductions, and who saw such products as providing some relief from the restrictions imposed by the Government’s COVID-19 lockdowns and curfews.

It would also have gone against Mr Turnquest’s prior public pledge not to implement new or increased taxes on the Bahamian people in the wake of the pandemic, while the extra $30m raised would have been relatively insignificant when set against the $1.327bn fiscal deficit that is projected for 2020-2021.

Meanwhile, the IMF revealed that the Government had initially planned to cut its recurrent (fixed cost) spending far more deeply than it ultimately did. Some $300m worth of cuts were planned in the 2020-2021 “draft Budget’, the Fund revealed, but the actual document features only $113.5m of these compared to the revised 2019-2020 figures that were approved by Parliament in February just prior to COVID-19.

The $2.574bn worth of recurrent spending that the Government actually settled on also represents a $35.3m increase on the post-COVID-19 estimate for 2019-2020, with the IMF seemingly voicing scepticism that the Minnis administration would achieve all the cuts it had initially sought.

The Washington D.C.-based Fund estimated that the Government would achieve less than two-thirds, or just $195m, of its targeted $300m recurrent spending cuts. The Government subsequently settled for much less than either figure, but the IMF is also projecting that it will only realise just over half - some $11m - of the $21m savings it is seeking in the upcoming fiscal year from loss-making state-owned enterprises (SOEs).

“Staff estimates that the additional measures could yield total savings of about $175m in fiscal year 2020-2021. As a result, staff projects the overall deficit at 6.7 and 9.5 percent of GDP in fiscal year 2019-2020 and fiscal year 2020 2021, respectively,” the IMF report said.

Those deficit projections are greater, and lower, than the Government’s own estimates of 6.4 percent and 11.6 percent for the same two fiscal years respectively. Mr Johnson said the Government typically took “a very, very conservative approach to budgeting” and would likely take encouragement from the Fund’s projection that the record 2020-2021 deficit will be less big than the Ministry of Finance’s forecast $1.327bn.

The IMF’s own estimates show the Government incurring an $802.6m fiscal deficit for the present 2019-2020 fiscal year, followed by $1.122bn in the upcoming Budget cycle. It is forecasting that revenues will drop by $504.3m and $730.2m in these two years, with Dorian-related tax concessions accounting for $232.5m and $169.8m worth of these sums, respectively.

As a result, the Fund is forecasting that The Bahamas will face deficit financing “gaps” of $381.9m and $550m for 2019-2020 and 2020-2021, respectively, equivalent to 3.2 percent and 4.7 percent of economic output or gross domestic product (GDP) respectively.

These shortfalls, the IMF added, will have to be filled by a combination of its own $250m loan, borrowing from other multilateral institutions such as the Inter-American Development Bank (IDB) and Caribbean Development Bank (CDB), and private sector loans guaranteed by the World Bank.

Still, the IMF backed the Government’s fiscal policy response to the COVID-19 pandemic and its focus on supporting the healthcare system, employment, businesses ranging from the smallest to largest, and the poor and most vulnerable groups in society.

“Fiscal policy has appropriately shifted toward providing economic relief to mitigate the impact of pandemic,” the IMF said. “These measures come on top of the recovery and reconstruction outlays and tax exemptions following Hurricane Dorian.

“The fiscal position is expected to deteriorate sharply this fiscal year and next. To accommodate some of the increased fiscal needs, the 2020-2021 budget introduces current spending cuts of 20 percent across ministries, excluding interest expenses and the wage bill, to be achieved through postponing non-priority programmes and improving efficiency......

“The authorities have put in place contingency plans to protect priority spending. In addition to the current expenditure cuts and proposed increase in excise taxes in the 2020-2021 budget, they are reviewing public expenditure (including by state-owned enterprises) to allow the government to reprioritise spending flexibly and timely should downside risks materialise,” the Fund added.

“The Ministry of Finance is also proposing a temporary tightening of expenditure controls across ministries and agencies in order to reduce non-priority spending. Freezing wages and payroll increments could provide substantial savings, especially over the medium-term.”