The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The International Monetary Fund (IMF) has urged The Bahamas to develop an annual “tax expenditure budget” to better identify revenue leakages and assess the economic impact of its spending.

The Washington DC-based Fund’s recommendation was disclosed in the Fiscal Responsibility Council’s (FRC) assessment of the 2021-2022 Budget and the Davis administration’s supplemental version, which noted that it can help improve the fairness and efficiency of a country’s tax system.

“The IMF has made recommendations for the development and tabling of an annual tax expenditure budget, along with the estimates of revenue and expenditure, with the objective of enhancing the budgetary process by facilitating a more comprehensive assessment of the Government’s spending within the economy, both direct and indirect, and the resulting impacts of policy priorities and outcomes,” the Council said.

“Tax expenditure budgets aid in exposing possible avenues of revenue leakage, and can spur improvements in the equity and efficiency of a tax system.” The Council’s disclosure of the “tax expenditure budget” proposal came just before its report said The Bahamas’ consumption-based tax system made it difficult for the Government to target fiscal policy where it is needed.

The report was also released just days before the Prime Minister is due to present the mid-year Budget to the House of Assembly tomorrow. The Council, in its analysis, said successive administrations had reduced capital spending to limit the size of the fiscal deficit, and questioned whether the lower outlays are sufficient to support infrastructure build-out and economic growth.

“The 2021-2022 Budget and medium-term projections demonstrate a reduction in capital expenditure to 2 percent of GDP in fiscal year 2022-2023 and fiscal year 2023-2024. The reductions are necessary to achieve the improved fiscal balances projected,” the Council added.

“However, the fiscal year 2021-2022 Budget does not delineate the productivity of projected capital expenditure and the efficacy of the 2 percent capital expenditure-to-GDP target. Reduced capital expenditure lessens the widening of the overall fiscal deficit, but the 2021-2022 Budget does not set out whether the capital expenditure target is sufficient to support sustainable growth in the economy and appropriately maintain the underlying infrastructure.”

Noting that the greatest risks when it came to achieving the 2021-2022 Budget’s revenue projections lie on the revenue side, the Council added that it did not receive the estimates and assumptions underpinning the Government’s forecasts.

“However, the revenue forecasts presented in the 2021-2022 Budget are considered reasonable, subject to significant downside risks due primarily to the threat of the emergence and spread of more virulent strains of the COVID-19 virus, slower than expected roll-out of the national and international vaccine programmes, slower than expected return of tourism and other contact intensive sectors, and sustained supply chain rigidities in the global economy,” the report said.

“The 2021-2022 Budget assumes growth in nominal GDP of 14.1 percent for fiscal year 2021-2022, which is higher than the estimate of 12.7 percent for the calendar year 2022 by the IMF in its October 2021 World Economic Outlook publication.

“Given the risks to growth in the economy, the relatively more bullish posture of the assumption in the 2021-2022 Budget could result in an overestimation of revenues if economic output underperforms,” the Council continued.

“Moreover, to the extent the sectors and activities with the greatest potential for growth currently enjoy tax concessions, such as the tourism sector, expected increases in tax revenues typically associated with increased economic activity may not materialise.”

Government revenues were some $92m ahead of projections for the first quarter of the 2021-2022 fiscal year, and around $162m up at the half-year. Turning to a more detailed analysis of the Government’s projections, the Council said estimates were “reasonable” while there was sufficient “credibility” behind the VAT projections.

“The projected increase in tax revenues for fiscal year 2021-2022 is mainly driven by projected increases in international trade tax and domestic VAT revenue of $103.7m (14 percent) and $175.8m (76.6 percent), respectively, compared to fiscal year 2020-2021. Together, these two sources account for around 80 percent of the budgeted growth in total revenues for fiscal year 2021-2022,” it added.

“The increase in international trade taxes is mainly driven by higher customs and other duties, export taxes and departure taxes which are projected to grow by 24.9 percent, 142.7 percent and 779.4 percent, respectively, compared to fiscal year 2020-2021.

“The projected increase in the respective categories reflect an expectation of a return to pre COVID-19 activity levels, as imports and exports respond to pent up demand for goods, and border openings facilitate increased international travel. The estimates are considered to be reasonable and largely reflect base effects of recovery from the sharp contraction in the corresponding year.”