By NEIL HARTNELL
Tribune Business Editor
nhartnell@tribunemedia.net
The Government will
realise just over half of its projected Value-Added Tax (VAT) net
revenue increase in the first year, the International Monetary Fund
(IMF) has warned, with forecast increases in Customs and real property
taxes also over-optimistic.
The
IMF, in its long-awaited Article IV report on the Bahamas, said the
likely delays in implementing VAT, and this lack of nation’s
inexperience in managing it, given the absence of an already-existing
consumption tax, meant first year revenues from the new tax were likely
to amount to just 1.3 per cent of GDP.
That
percentage is almost a full percentage point lower than the 2.2 per
cent net revenue gain the Government is forecasting. In dollar terms,
assuming an $8 billion Bahamian GDP, the IMF’s 1.3 per cent is
equivalent to a $104 million revenue increase - more than $70 million
below the Government’s $176 million.
The
Article IV report also suggested that the Government had over-estimated
the revenue boost it would receive from ongoing Customs and real
property tax reforms.
While
the Ministry of Finance has pegged the improvement as equivalent to 0.5
per cent of GDP for Customs, and 1 per cent for real property tax, the
IMF’s are 0.3 per cent and 0.6 per cent, respectively.
Collectively,
the IMF’s projections are for revenue improvements that, in dollar
terms, are $48 million below the Government’s for Customs and real
property tax reforms.
The
Fund, meanwhile, placed delays in implementing fiscal consolidation as
among the risks likely to have the greatest negative impact on the
Bahamian economy, alongside crime, a major hurricane, another US fiscal
shock and “disappointing results” from Baha Mar’s operational start.
Apart
from crime and a natural disaster, the IMF rated a delay in fiscal
consolidation as the most likely of these scenarios to happen -
something that could “pose risks to long-term debt sustainability and
the country’s investment grade credit rating”.
This
again shows the pressure the Government is under to make meaningful
revenue and fiscal reforms, while at the same time doing nothing that
would impair economic growth.
It
also highlights the dilemma facing the Christie administration and
private sector, which have agreed that reform must happen but are
divided on the ‘what’ and ‘how’. In trying to ensure the Bahamas makes
the right decision, neither can delay indefinitely.
Touting
VAT as providing “a more efficient means to broaden the tax base,
increase revenues and improve the effectiveness of tax administration
more generally”, the IMF report said the proposed 15 per cent rate,
based on experience, was likely to generate gross revenues equivalent to
7 per cent of GDP.
This
translates into $560 million, in line with the Government’s
projections, with the Christie administration’s VAT net revenue gain
pegged at 2.2 per cent of GDP.
The
IMF, though, cast doubt on whether the Government would hit that target
in the 2014-2015 fiscal year, if indeed it is introduced in time, due
to “capacity limitations in revenue management”.
“Other
limiting factors in the initial year of the reform include delays in
rolling out the public campaign and securing passage of relevant
legislation in Parliament, which could complicate the timely acquisition
and testing of IT systems needed in both the public and private
sectors,” the Fund added.
“The
absence of a consumption tax, and the lack of local experience in its
management, would contain the initial revenue gains from the VAT as
well. Because of these constraints, staff projects the net revenue gain
from the VAT at 1.3 per cent of GDP for the initial fiscal year
2014-2015.”
The
IMF warned, though, that failing to implement VAT would see the
Government’s fiscal consolidation plans “veer considerably off track”,
with the central government’s debt-to-GDP ratio “already above” 60 per
cent by the time the next fiscal year starts.
“Staff
underscored setting the VAT base as broadly as possible, and encouraged
the authorities to ensure that adequate efforts and resources are
deployed to secure the timely implementation of the reform,” the Fund
added.
It
also disclosed that, combined, the Customs and real property tax
departments were generating revenues “below 50 per cent of the
potential”.
“The
Bahamian Customs and real property tax departments rely heavily on
manual procedures and outdated information systems. As a result, revenue
collection is currently estimated at below 50 per cent of the
potential,” the Article IV report said.
“Envisaged
reforms aim to bring management of the two revenue agencies up to
international standards, involving extensive computerisation of revenue
assessment and collection functions, and introduction of risk-based
monitoring of operations.
“Staff
concurred with the authorities that reform of the two revenue
departments could yield significant revenue gains. However, given
pervasive capacity limitations and the record of low tax compliance,
staff urged caution in factoring the anticipated revenue improvements
into the medium-term fiscal framework.”
Elsewhere,
the IMF report showed that collective public corporation debt
(guaranteed by the Bahamian taxpayer for the likes of Bahamasair, Water
& Sewerage etc) had increased from 10.5 per cent of GDP in December
2008 to 16 per cent at end-June 20134.
“The
Bahamian public corporations continue to face significant financial
challenges, notably stemming from inefficiencies in operations
(excessive staffing, aged facilities), but also reflecting these
entities’ tacit social duty to provide affordable services to all
residents including in remote Family Islands,” the Fund added.
The
Government’s fiscal plan calls for tax revenue to increase by an
average 0.8 percentage points of GDP over the next five years, with the
debt-to-GDP ratio falling from a 59.5 per cent peak to 55 per cent by
the 2017-2018 fiscal year.
The
bulk of the revenue increase will come from VAT, with “only moderate
savings achieved on government expenditures in view of limited spending
flexibility”.
With
Baha Mar and other projects set to boost private sector employment
prospects, the IMF said
“pressure on central government hiring should
be manageable beyond 2014, permitting limitation of wage outlays to the
last three years’ average of 7.4 per cent of GDP”.
But,
despite government projections that the existing 1.9 per cent primary
budget deficit will be balanced by the next fiscal year, the IMF warned
that there were “downside risks” due to over-optimistic fiscal and
growth forecasts in the past.
“The
forecast track record shows a tendency toward optimism in staff
forecasts of real GDP growth and the primary balance, pointing to
downside risks to the baseline scenario. This underscores the need for
rigorous adherence to the ongoing fiscal consolidation programme,” the
IMF said.
March 10, 2014
