The Tribune

• Growth, ‘VAT gap’ close to drive $1.2bn jump

• Bahamas forecast to grow economy to $16bn

• GDP rise to finance bigger Gov’t, surpluses

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government’s top finance official yesterday reiterated his optimism that “no new tax measures” will be required to grow its revenues by some 43 percent to over $4bn during the next four years.

Simon Wilson, the Ministry of Finance’s financial secretary, told Tribune Business that closing the “VAT gap” and stricter compliance and enforcement are among the initiatives that will enable the Davis administration to expand the Public Treasury’s income by almost $1.2bn between now and the 2026-2027 fiscal year.

Speaking after the Government tabled its 2022 Fiscal Strategy Report in the House of Assembly, he also revealed plans to modernise the Department of Inland Revenue (DIR) via a joint review by the KPMG accounting firm and LTI. Mr Wilson, describing the latter as “a big Indian conglomerate”, said the outcome was intended to transform the Government’s main revenue collection agency into a top-level tax administrator.

However, fiscal observers yesterday again voiced scepticism that the Government will hit its $4bn revenue goal - also representing its 25 percent revenue-to-GDP ratio target - without the imposition of any new and/or increased taxes. They argued that relying solely on economic growth to generate increased tax and fee income was unlikely to be enough to meet the Government’s objectives.

Hubert Edwards, the Organisation for Responsible Governance’s (ORG) economic development committee head, told this newspaper: “Having moves from around $2.4bn in revenues to $2.8bn, to now make that jump to $4bn suggests there is significant underlying tax treatment going to be applied.”

The Fiscal Strategy Report shows the Davis administration is betting that growing The Bahamas to a $16bn-plus economy, based on nominal annual gross domestic product (GDP), will be sufficient to drive the necessary revenue growth that will finance the forecast increase in government spending as well as generate an annual Budget surplus of more than $200m for the three years from 2024-2025 onwards.

This will also enable the Government to avoid imposing new and/or increased taxes, and there was no mention of any such measures in the Fiscal Strategy Report, with the revenue-side focus placed almost entirely on compliance, enforcement and cracking down on tax cheats and bill duckers.

However, this will only become reality if the Bahamian grows by 20.9 percent in nominal GDP terms between this fiscal year and 2026-2027. This would take economic output from $13.236bn to $15.996bn, an increase of more than $2.7bn over four years, using a measure that does not strip out the impact of inflation.

The economic growth estimates, according to the Fiscal Strategy Report, were said to have been derived by the Ministry of Finance’s Computable General Equilibrium (CGE) model, which analysed the likely expansion prospects for five industries - trade, financial services, tourism, “transformation” and “other”.

The “transformation” sector was said to include total output from industries such as “manufacturing, construction, agriculture, forestry, fishing, mining, gas, water, quarrying and electricity production”. Trade comprises the wholesale and retail sectors, with financial services also incorporating real estate, and “other” featuring activities such as transport and storage; information and communication; social security; public administration; education; human health and social work.

Unveiling an upbeat analysis for all five categories, the Fiscal Strategy Report said: “Over the medium-term, the transformation sector is forecast to experience nominal growth of 18.3 percent over the period fiscal year 2022-2023 to fiscal year 2026-2027.

“Sectoral growth is attributed to improvements in agricultural activity, particularly with as a result of increased use of technology in agricultural production. The sector will continue to benefit from increased government support to farmers and fishermen via grants and concessions in an effort to promote food security [and] the proliferation of innovative entities such as Eden Farms, focused on hydroponic food production.”

The “trade” sector was forecast to grow by a similar 17.3 percent over the same four-year period, with tourism expanding by 45.1 percent due to a combination of visitor demand for The Bahamas as well as continued foreign direct investment (FDI) in resorts and hospitality industry. Growth in financial services, aided by high-end real estate purchases by foreigners, was pegged at 19.3 percent.

Much depends on hitting these growth targets in the absence of any new tax measures. Mr Wilson confirmed the Government’s fiscal forecasts do not include potential revenues generated by the sale and trading of The Bahamas’ proposed blue carbon credits, a priority initiative for the Davis administration that it has been vigorously pursuing since taking office in September 2021.

This was hinted at by the Fiscal Strategy Report’s “transmittal letter”, signed by Mr Davis and Mr Wilson, which said: “While a key strategy for Government has been the pursuit of the monetisation of the nation’s blue carbon credits, the technology remains novel.

“As such, Government intends to continue pursuit of this important revenue opportunity made available through prior targeted investments in environmental conservation. As this opportunity materialises, future fiscal frames will be updated to include this feature.”

And nor do the projections include any economic and fiscal benefits from The Bahamas’ ambitions to become a digital assets hub, which have cooled - at least temporarily - due to the international scrutiny this nation has faced due to the FTX crypto currency exchange’s collapse.

“The passage of the Digital Assets and Registered Exchanges Act 2020 (DARE Act) was pioneering legislation which placed The Bahamas at the forefront of the financial services sector with respect to creating an enabling environment for growth of the evolving crypto and digital aspects of the financial services sector,” the Fiscal Strategy Report said.

“Given the novel and rapidly evolving nature of this new industry, the preparation of macroeconomic and fiscal forecasts of the impact of this industry are highly speculative in nature. As such, the potential macroeconomic and fiscal impacts of this industry have not yet been included in the forecasts provided herein.”

As a result of these treatments, the Government could yet enjoy an unbudgeted boost that enables it to hit the report’s revenue targets. These forecast that the Government’s revenues will rise from the $2.8bn predicted this fiscal year to $4bn in 2026-2027, with total spending increasing - albeit at a slower rate of 11.6 percent - over the same period from 2022-2023’s $3.368bn to $3.76bn.

Comparisons with last year’s Fiscal Strategy Report show that total revenue and spending forecasts for 2025-2026 have both been increased by more than $200m in the latest version, indicating that the size of government will continue to grow.

Mr Wilson told Tribune Business that the $1.2bn revenue increase over the next four years was justified based on the work being done to increase yields and crackdown on leakages, loopholes and delinquent payers. “We are doing a VAT gap analysis,” he explained. “We believe that better compliance programmes would lead to far more yield.

“The information we have, the preliminary information we have, is we could achieve the 25 percent [revenue-to-GDP target] without new tax measures. It comes out of the compliance programme. We have a couple of things going on which we think will help us achieve that $4bn.

“We have KPMG and LTI, which is a big Indian conglomerate, doing a review of the Department of Inland Revenue’s operations and procedures, and the need to move the Department a step up to what they call a third-level tax administration authority - top tier. There are some good building blocks there, but we think it will be a worthy investment. We believe a modernised Department of Inland Revenue will be good for us.”

Mr Wilson said some revenue enhancement measures were already “bearing fruit”, especially when it came to real property tax collections, which are “outpacing last year”. He declined to be drawn on how large the “gap” between current and maximum VAT collections is, adding: “We’re doing a study on the VAT gap because we think one exists. We haven’t finished it, and it will help us build our strategy.”

Seasoned fiscal observers, though, remained sceptical that the Fiscal Strategy Report forecasts will be hit. ORG’s Mr Edwards acknowledged that increased economic growth will inevitably raise government revenues, but said: “The question you would ask in interrogating that is how likely is it to get to that $16bn level in GDP? We have to wait and see. Without that, to get to that $4bn, there would have to be tax treatment.”

Gowon Bowe, Fidelity Bank (Bahamas) chief executive, told Tribune Business that the forecasts seemed “ambitious and optimistic”. If the GDP growth numbers were not achieved, he warned that this could have “dangerous consequences” for the country’s debt and deficit numbers, both of which are a function of economic output, as well as the country’s creditworthiness.