It takes determined and careful effort to write on public policy given that things are always fluid and dynamic and positions often draw scrutiny. Over this series of articles, looking at the Bahamian tax regime, I am always mindful that there are things I do not know but also that with careful analysis there are important things that can be explored and suggested. This, the final of four parts, look at developing issues, which seems to have the potential to move the needle, and share a few cautionary points.
In Part III, attempting to show the urgent need for tax reform while arguing against being wedded to any one thing, I outlined the following: Consider the 2021/22 budget projections. Revenue was projected at $2.244 Billion and expenditure $3.198 Billion. Without any deep analysis, there is $1 Billion (actual deficit 951 Million) which is unfunded by taxation and will therefore require debt financing…However, let us remind ourselves that pre-pandemic we also had significant deficits (2017 - $660M; 2018 - $415M; 2019 - $215M) and in fact had them for many decades. The numbers show that over a sustained period revenue has never been sufficient.” This clearly shows where we are as a country. The level of recurrent revenue being generated by the tax system is inadequate to cover recurrent and capital expenditure.
The piece then further elaborated, “This [the above] is supported by the narrow percentage of revenue to GDP, which over the last five years has been as low as 15.3% (pandemic impacted) and projected to be to be only 18% in the current fiscal. These low percentages must be assessed against the ideal revenue to GDP 25% declared need by the Prime Minister and Minister of Finance. We are currently, at best 7% below that benchmark, based on projections, not actuals”.
The Davis administration has started to seriously ask this question and formulate strategies to fix the problems identified. According to recent statements by the Financial Secretary, there are plans underway to shift the level of revenue to GDP from the current historical averages to 25%. Part of this strategy includes increasing real property tax collection to 3.5% of GDP. It included undertaking a gap analysis on VAT obviously to determine where there are sectors or business that should be included in the tax net. There are plans to take a careful look at compliance for Customs duties; the formation of the Revenue Enhancement Unit; and, to quote the Tribune, “a study on corporate tax, given global pressures for such a levy with a 15 percent rate”. The sum of these strategic initiatives is expected to get the country to that important revenue benchmark. With re-casted budget projection, showing trending from 20.2% to 21.7% in 2023/24 fiscal it would appear that we are on the right path.
The cautionary note here is that the historical trends are hardened actual results, realized after much higher projections. The direction of the thinking is spot on, however, will actual performance hold true. The administration is confident that these measures will address the issues faced by the country. Generally, we would all be happy to see this come to fruition but careful assessment would show that this is not going to be easy at all. The current stance, I believe, bears out the positions I have consistently taken which are that the government needs additional revenue and to achieve that requires us, the country as a whole paying more. The pronouncement that there will be no new taxes seems to take us in the direction of increases in existing ones as evidenced by the declaration around real property tax.
However, will this approach of broadening the tax space and improved compliance be sufficient to achieve our goals? This is the main question that drove this brief analysis in Part III, “At 12%, VAT was projected to produce $800M. This will likely yield more with the recent changes. However, applying fuzzy mathematics, consider that a doubling at that level, to 24%, would have been insufficient to eliminate the projected deficit of $951M. Such is the gravity of what we face”. Making up a gap of near $1B without any contemplation of new taxes will be challenging. Securing this level of additional revenue is certainly not an impossibility but such an argument become exponentially more convincing where there is openness to increase taxes in some areas or to reform existing ones, creating revenue positive outcomes as seen recently with VAT.
The benchmark of 25 percent and the strategies by the government outlined above are positive, a step in the right direction. 25 percent of GDP achieved consistently, and assuming no fundamental increases in expenditure, will lead to a near balance budget but not solve the core of the economic and development challenges of the country. The proper context for assessing optimal tax solutions, including the sufficiency thereof, have to be set against a broad comprehensive suite of economic reforms. The depth of the challenge must be set against the solutions needed to address the country’s debt burden. As the Financial Secretary outlined, the government will be taking this on the in short order.
An interest load of $512M and counting, unknown cost from other areas needing reforms hold important implications for the extent to which there will be resources to turn the trajectory of debt growth and open up greater potential for investments and economic growth. Ultimately getting to 25% of a growing economy is directionally the ideal solution. An economy giving up 25% in taxes with no or very low growth; continued increases in national debt; and unchanged structural economic impediments will eventual flow back to the current existing state.
In March, I outlined a course of thinking that I believe should be employed as the country takes on the challenge of finding solutions for the tax regime. I re-present those points here with some adjustments:
· “Initiate a clear and focused conversation, especially within the financial services industry, on what the issues are and the options facing the country….outside that narrow sector, selling the idea of any form of tax directly affecting income will be an uphill climb and therefore the conversations with and messaging to the citizenry will require careful attention.”
· “Create [or complete] a full study of the tax system with a clear focus on alternatives and the need to address inequities [and sufficiency]”
· “Make taxation systems, tax revenue and space a critical and intricate part of the economic recovery discussion. Conversations to date adopts a rather abstract and disjointed approach. As an example, the ability of the government to meet its interest payments on debt is directly influenced, at some level, by what taxes are collected.”
· “Depending on the economic climate, growth or decline, the sufficiency of taxes changes. Therefore, as we look to secure a more resilient economy, the country must come to grips with the need for greater funding [the stated 25% level is consistent here]. Refuse therefore the temptation to not link all important elements of the economic landscape and ensure that the issue of equity and sufficiency is more than rhetoric”.
The preceding are not intended to be comprehensive or exhaustive but indicative of the thinking that I believe is necessary. The public admission of and actions toward addressing the sufficiency of the tax revenue is an important and fundamental starting point. The admission that there is potential tax capacity, untouched by the most effective local tax, VAT, is an important element of the national discussion. I will therefore repeat a portion of the conclusion from the March piece, “The country is ailing from the financial crisis. The main task is to strategize a path to recovery and resiliency. I make the argument that given important shifts in the economy and potential lingering effects…, an unfortunate buildup of debt, and the performance of government revenue, the time [appears to be here where] a shift to a more progressive taxation system will serve the country better. It is an important matter. A matter demanding the attention of every business and organization, citizen and resident. It is a matter of sufficient national strategic importance that it argues for the suspension of the usual adversarial debates and beckons a sober, practical and collective discourse, for the benefit of the country.”
The approach so far, in not initiating broad discussions on the matter of taxation is an area of lacking. Going forward this must be comprehensive, fundamental, with an eye on external impact and implications, but always focused internally on sustained resilience.
© Hubert Edwards 2021
Hubert Edwards is the Principal of Next Level Solutions Limited (NLS), a management consultancy firm. He can be reached at firstname.lastname@example.org. Hubert specializes in governance, risk and compliance (GRC), Accounting and Finance. NLS provides services in the areas of enterprise risk management, internal audit and policy and procedures development, regulatory consulting, anti-money laundering, accounting and strategic planning. This and other articles are available at www.nlsolutionsbahamas.com.