Yesterday, the Central Bank Governor expressed optimism that the Bahamas is far from defaulting on sovereign debt as it retains several revenue collection options including an income tax.
John Rolle told a webinar hosted by the Chartered Financial Analyst (CFGA) Society of The Bahamas that its members “should not be comforted” by the possibility of the government defaulting on its $10.6 billion direct debt. dollars when assessing the country’s growth prospects. return to fiscal sustainability after Dorian and COVID-19.
Emphasizing that he was not advocating for the Bahamas to impose any type of income tax, personal, corporate or a combination of the two, he nonetheless cautioned Bahamians to remain aware of the possibility that such a levy could be imposed. work in the medium and long term. should the government’s financial needs become pressing.
“In theory, you have already assessed at some level or another what the path to fiscal sustainability looks like for the Bahamas,” Rolle told CFA society members, suggesting they will have submitted their models to stress tests and an assessment of “extraordinary risks” facing this country.
“I can tell you that, in these extraordinary risks, you should not take comfort from a sovereign default because our sovereign has the ability to tap into a lot more resources if it needs to,” he said. added. “You have to take that into account when looking at the outlook and what it means for fiscal space.”
The Central Bank Governor reiterated this view later in the webinar when asked to respond to analyzes by Marla Dukharan, the former Royal Bank of Canada (RBC) chief economist for the Caribbean, who has predicted since the start of the COVID-19 pandemic that the Bahamas is only one or two years away from falling into an International Monetary Fund (IMF) restructuring.
“We need to more easily recognize and admit, as far as, say, our budget framework, that the Bahamas is a high-income – or some say middle-to-high – income country with resources,” Rolle said. “The government has significant options regarding its fiscal approach which it can use if prompted to steer the sovereign towards a better outcome.
“It’s very important in terms of the kind of commentary we should exercise, the reasoning around issues of fiscal sustainability. We need to think a lot more about this.
Mr. Rolle effectively disagreed with Ms. Dukharan on the grounds that his assessment of the Bahamas and the likelihood of an IMF bailout or restructuring is based on a static model that assumes the government has no policy tools to change the debt and deficit trajectory.
His argument, by contrast, is that the Davis administration has multiple untapped options in its tax arsenal that it can call upon if circumstances become pressing – one of which is the possible implementation of more progressive taxation, such as an income tax.
The Governor of the Central Bank underscored this point when he discussed the difference between “the active scenario and the passive scenario” when analyzing the Bahamas economy, the country’s fiscal affairs and its prospects for economic growth. to come up.
Describing the latter, he asked, “Why is a blind man walking on the cliff? Because he can’t see the edge. However, he referred to the former as the man who avoided stepping on the cliff because he could see “and change course.” But you shouldn’t get too close to the edge either.
Asked during the webinar if the Bahamas can approach the IMF for budget support, Mr. Rolle replied: “From a public policy perspective, this is something that is not on the table. It is fully appreciated that if the Bahamas saw this as an attractive route that they could pursue, they would.
“[But] there is no indication that the Bahamas will take a path. This, however, does not diminish the importance of the type of reforms the Bahamas needs to undertake to strengthen the outlook for the fiscal balance sheet.
Mr Rolle identified one such revenue-raising measure as an income tax, although he strongly emphasized that he was not advocating such reform. He acknowledged, however, that such a levy and the need to make the Bahamian tax system more progressive, fair and equitable had been a dominant feature of the tax debate in recent years.
Urging all Bahamians to remain aware of the possibility of an income tax, the Central Bank Governor added, “We need to be aware as a society that tax reform is going to stay in the picture in terms of impact on the sovereign risk profile.
“As Bahamians, let’s face it, let’s recognize that the only tax we’ve kept out of the way thus far, and mentioned from time to time, is income tax. I think from a policy perspective, the Bahamas has signaled that they’re not ready to go in that direction right now, but it’s still an area where there’s still a lot of work and study to be done. make.
“There are recurring discussions in the Bahamas about how to make our tax system more progressive, that is, a system where the government is not funded by consumption taxes that fall disproportionately on low-income people by consuming a larger share of their income.”
Mr Rolle said people should “forget the high tax rates in the Bahamas” as these are inextricably linked to the size and role of government in the economy. He pointed out that tax revenue, as a percentage of economic output, is barely at 20% while many other countries are at around 30%.
Quick to say that he was not suggesting that the Bahamas “aims to target” that 30% range, Mr Rolle said he argued that the Bahamas still had significant untapped capacity and resources to finance the government and public services.
“I didn’t say we should have an income tax,” the central bank governor added for clarity. “I said we shouldn’t ignore the fact that this is an option that the Bahamas have.
“As the Bahamas has yet to enact it for various reasons, we need to understand that this is not a permanent space, and we need to appreciate how it feeds into the medium to long-term position on how we improve the infrastructure we all think about and need.
The Prime Minister indicated that income tax reforms remained firmly in the government’s thinking when he unveiled the mid-year budget on Wednesday. He revealed that converting business license fees into a corporate income tax, which has long been considered and advocated, is one such option.
“Over the past few years, business license fees have averaged 0.9% of GDP. Excluding the impact of COVID-19 over the past few years, nominal GDP growth has been placed around 3%. This tells us that while there may be improvements in economic activity, this is not reflected in increased costs for businesses operating in the country,” Davis said.
“One possible solution would be to move towards a corporate income tax system to simplify the way companies are taxed and improve government revenue.” While business license fees are levied on gross turnover, a corporation tax is based on profits.
Mr. Davis also acknowledged that such reforms could be driven by outside pressure. “Similar discussions have taken place internationally regarding the establishment of an overall minimum tax of at least 15%, determined jurisdiction by jurisdiction, which the former administration has adhered to,” he added.
“The objective is to ensure that the profits of multinationals whose aggregate turnover exceeds 750 million euros are subject to the minimum effective tax rate. Such a measure could be an important source of revenue for the Bahamas and could prevent the profits of multinational companies in the country from being taxed elsewhere.
“Furthermore, not imposing corporate taxes could pose reputational risks to the country, which could undermine the buoyancy of the economy’s future prospects,” Davis said. “We are fully aware that introducing a corporate tax framework would be a complex undertaking, with significant economic and fiscal ramifications.”
He added that the accounting firm Deloitte & Touche has been engaged to study the impact of the proposed global minimum corporate income tax on the Bahamas.