The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A well-known banker yesterday said the Government has to “increase the tax rate” to hit its revenue and overall fiscal consolidation goals, adding: “You can’t have your cake and eat it too.”

Gowon Bowe, Fidelity Bank (Bahamas) chief executive, told Tribune Business that the Davis administration cannot target increasing “the effective tax rate” to 25 percent of Bahamian gross domestic product (GDP) without introducing new and/or increased taxes.

He argued that this was exposed in the Ministry of Finance’s strategy, or road map, for increasing revenues by 4.8 percentage points of GDP over the next four years. Pointing to the $840m collective arrears in VAT, real property taxes and Business Licence fees, and projections that the Government will gain a one-time $500m boost from compliance and enforcement initiatives, Mr Bowe queried how the subsequent $200m annual revenue increase is to be achieved.

“If you have $840m, which you are saying is the total arrears estimate for Customs, VAT and real property tax, and you are going to get a one-time boost of $500m, how are you going to get an increase of $200m per annum? You have to increase the tax rate,” the Fidelity chief told this newspaper.

“What are you doing to bring in this extra $200m per annum? It can’t be revenue enhancement only. It has to be a change in taxation. You cannot say you are going to increase the effective tax rate to 25 percent of GDP but not increase taxes on the backs of Bahamians.”

He described the Ministry of Finance’s report, ‘Securing the revenue target of 25 percent of GDP’, as more “a conceptual document” than one that sets out definitive measures that will be implemented, adding that many of the initiatives outlined have been talked about “for many years and not just in 12 months”.

Suggesting that comparisons to high-spending, high-tax European welfare states were not the best for The Bahamas, and needed to be placed in their proper context, Mr Bowe said the report “very dangerously” made repeated references to percentages and ratios of GDP rather than employing actual dollar amounts.

This, he added, “gives too easy an excuse” to governments if they miss their fiscal targets. Mr Bowe, who headed the private sector’s Coalition for Responsible Taxation (CRT) when VAT was introduced in 2015, said reliance on GDP percentages would enable administrations to persist with runaway spending during periods of strong economic growth while, during recessions, they could blame financial woes on factors outside their control.

“The danger with that is what happens in years of recession and contraction of GDP,” he explained. “Are you going to honour the percentage or honour the dollar value? When we have periods of tremendous growth, does that give the Government licence to increase expenditure because the economy has grown?”

Relying on GDP ratios would enable the Government to increase spending in the latter scenario because the economy’s expansion will keep the percentages in check, and Mr Bowe added: “It gives too easy of an excuse when targets are not met. You may say we couldn’t control a recession, but you can control the dollar amount.

“For a small island state like The Bahamas, we should start from the very basic. What is the dollar amount we need to run the country, and only increase that dollar amount by the increase in inflation. We have to be more serious and deliberate. What is the cost necessary to run The Bahamas, and what are the revenue levels necessary to cover that cost?”

Warning that the Government “cannot have its cake and eat it”, Mr Bowe said many Bahamians were especially wary of increased tax revenues being used to further expand spending and the size of government rather than being used to eliminate persistent annual fiscal deficits - pegged at $564m for 2022-2023 - and ultimately pay down the national debt.

“It ultimately goes to the concept of value for money,” he told Tribune Business. “Bahamians don’t have a difficulty paying more taxes if they feel expenditure is being done in an efficient manner and provides valuable services. Realistically, we need to increase taxes, but the difficulty is if we increase taxes are governments going to be prudent in the use of those increased taxes or will they go on a spending spree with the new revenue?

“That’s always the hesitancy of the populace. We tend to forget there is legacy debt to clear when we see new revenue. We have a history of when we see new revenue, there’s some extenuating circumstances that justify an increase in expenditure. We have hurricanes that come, and events like COVID-19, but in the absence of a plan to mitigate the effects of those events are we not setting ourselves up to fall into the same trap?”

Simon Wilson, the Ministry of Finance’s financial secretary, yesterday said he and the Government were “fairly confident” they can hit fiscal targets, including a $1.3bn revenue increase over the four years to 2025-2026, without imposing new and/or increased taxes. He added that it was vital that the 25 percent revenue-to-GDP ratio be hit “because without it we cannot guarantee fiscal stability”.

Kwasi Thompson, former minister of state for finance under the Minnis administration, yesterday argued that the Ministry of Finance’s report “raises more questions than it answers”. In particular, noting that it carried a March 2022 date, he queried why the Government had taken five months to release it and not disclosed it prior to, or during, the 2022-2023 Budget and subsequent June debate.