The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The International Monetary Fund (IMF) yesterday warned the Government’s 2031 debt target will be “out of reach” without “further revenue reforms” including a possible VAT rate increase.

The Washington D.C.-based Fund, in a statement on its recent Article IV visit to The Bahamas, asserted that ambitions to cut the country’s debt-to-GDP ratio to 50 percent will not be achieved through the Davis administration relying solely on compliance and enforcement measures alone. However, the Government late last night said it has “no intention” of raising the VAT rate due to the ‘cost of living’ crisis.

Besides potentially raising the VAT rate from its present 10 percent, the IMF also called for Water & Sewerage Corporation tariffs to be increased for “heavy users” and urged that the Public Hospitals Authority (PHA) collect patient fees from those with insurance and the ability to pay, while also voicing scepticism over the size of the Government’s forecast Budget surpluses.

In particular, it warned that the forecast $448.2m surplus targeted for the next fiscal year will likely be “smaller” than projected as revenues will “underperform” unless the Government enacts further reforms. However, the Davis administration has repeatedly ruled out new and/or increased taxes, instead putting its faith in economic growth and enforcement/compliance measures to drive revenues and eliminate annual deficits.

Other revenue-raising measures suggested by the IMF, several of which have been recommended before in past IMF Article IV consultations, include replacing the Business Licence fee by extending the 15 percent corporate income tax to “large domestic firms”. These were not defined, although a tax based on profits as opposed to top-line turnover will likely find favour with the private sector due to improved equity.

The Fund had previously called for The Bahamas to implement “a personal income tax for the top earners”, a measure designed to prevent companies avoiding or evading corporate income tax through the payment of salaries - rather then dividends - to their shareholders. And it also renewed its argument for the elimination of the $60,000 real property tax ‘cap’ to ensure wealthy homeowners pay more.

Noting the Government’s ambitious goal of achieving a 3.5 percentage point increase in its primary surplus over the three fiscal years to end-June 2026 , the IMF also suggested this target should be spread out over a longer period to give the private sector more time to adjust to fiscal retrenchment.

The Davis administration is forecasting that it will achieve a primary surplus, which measures by how much its revenues exceed recurrent or fixed-cost spending with debt service payments stripped out, of more than $1bn in its 2025-2026 fiscal year - a jump of more than half a billion dollars or $524m compared to the outturn for the recently-completed 2023-2024 fiscal year.

However, the Fund argued that the Government cannot depend on tax enforcement and compliance alone to hit its fiscal targets. “The authorities’ debt target of 50 percent of GDP by fiscal year 2031 provides a useful anchor for policy. The 2024-2025 Budget targets an overall fiscal balance of –0.5 percent of GDP [a deficit], and 2.8 percent of GDP in 2025-2026,” the IMF wrote.

“Improved tax administration and lower interest payments will get the fiscal position part of the way to the Government’s targets. However, in the absence of additional policy measures, revenues are likely to underperform and the fiscal balance will be smaller than assumed in the authorities’ forecast - especially in 2025-2026) - putting the debt target out of reach for 2031.

“Further revenue measures are needed to support the targeted fiscal adjustment,” the IMF added. “The budgeted 3.5 percentage points of GDP increase in the primary balance between 2023-2024 to 2025-2026 was achieved only once in the 18 years prior to the pandemic, and that was as a result of an increase in the VAT rate and a sharp reduction in expenditure two years after recovery efforts following Hurricane Matthew.

“However, the adjustment could be spread out over a moderately longer horizon, raising the primary balance to 5.5 percent of GDP by 2025-2026 and to 7 percent of GDP by 2028-2029. This would still bring debt to 50 percent of GDP by 2030-2031, and would allow the private sector a longer horizon to adjust to the withdrawal of fiscal resources.

A primary surplus equal to 5.5 percent of GDP for 2025-2026 would be lower than the 6.4 percent ratio targeted by the Government. “Such an adjustment could be achieved through some combination of” a series of revenue-raising options, the IMF said, including the potential VAT rate increase; shift to a corporate income tax; personal income tax for high earners; and greater water tariffs for major consumers.

“These measures, along with supply side reforms, would ensure the debt target is met and help build fiscal credibility while still generating resources to increase investments in education, targeted social transfers and climate resilient infrastructure,” the Fund added.

The Government, though, is under no obligation or pressure to accept or adopt the IMF’s recommendations. A number are likely to prove unpalatable, especially any increase in the VAT rate, given the Prime Minister’s focus on reducing the cost of living and how his administration touted its reduction immediately after they took office.

Philip Davis KC also recently ruled out any increase in Water & Sewerage tariffs which have not been raised since 1999, and implementing patient fees at PHA facilities is also likely to be off the table given the potential voter backlash with a general election less than two years away.

Eliminating the real property tax cap and switching from a Business Licence to 15 percent corporate income tax are the elements in the IMF package likely to gain most traction with the Government, with options for the latter move having been discussed in its 2023 ‘green paper’ on tax reform. However, any changes beyond those impacting the largest multinationals are unlikely to take place until after the next election.

The IMF did credit the Government for improving the public finances post-COVID, while noting that borrowing costs have fallen. The Davis administration’s $186.7m deficit for the 2023-2024 full-year also beat the IMF’s own $379m forecast by almost $200m.

“The fiscal deficit was 1.3 percent of GDP in 2023-2024, around 2.5 percentage points of GDP lower than fiscal year 2022-2023,” the IMF said. “The adjustment was driven by both revenue increases - better tax compliance, a cyclical rebound and policy measures - and expenditure containment [involving] lower transfers to public corporations and some under-execution of capital spending.

“Central government debt fell to 78.8 percent of GDP in 2023-2024, but there has been an upswing in the reliance on Central Bank advances - now at 2 percent of GDP. Global factors have pushed down sovereign spreads on foreign currency debt, but domestic financing has increasingly relied on issuance of short maturities, raising the near-term gross financing needs.”

As for the recent passage of legislation to give effect to the 15 percent corporate income tax on multinationals with annual turnovers above 750m euros, the Fund added: “Additional legislation will be needed to lessen disincentives to invest in tangible depreciable assets through accelerated depreciation or refundable tax credits, and to bring offshore indirect transfers of Bahamian property into the tax net......

“The authorities have taken steps to increase the transparency and effectiveness of domestic debt management operations. This has included instituting competitive auctions for primary issuance and building a cash buffer to accommodate potential shocks.

“Fully staffing the debt management office, publishing rules for changing the composition of securities issued, and improving the capacity for liability management operations would help to further strengthen debt management,” the IMF added.

“The reconstitutions of the Fiscal Responsibility Council and the Public Sector Audit Committee are welcome. Members of both committees should be independently selected. To enhance fiscal transparency, beneficial ownership information should be published for all companies that are awarded public contracts. The audited financial statements and procurement information for public corporations should also be published.”