Tax hike measures described as “inevitable”

• Banker: “logical” result “on the road”

• Budget “dependent” on the engine of American tourism

• But Fed rate hikes could slow its rebound

By NEIL HARTNELL

Editor-in-chief of the Tribune

nhartnell@tribunemedia.net

New taxes and/or increased taxes are “inevitable somewhere down the road” as increased enforcement and collection efforts will be insufficient to meet the Bahamas’ revenue needs, an investment banker warned yesterday.

David Slatter, vice president of investment management at RF Bank & Trust, told Tribune Business that reforms to the country’s tax structure seem like the “logical” outcome if the government is to achieve its goal of raising revenue $1 billion annually over the next three fiscal years. years.

He said the 2022-23 budget was “totally dependent” on the continued growth of the U.S. economy fueling the revival of the Bahamas’ tourism industry and associated revenue, and said that nation could not rely solely on outside forces to escape its fiscal crisis.

Speaking after the Federal Reserve yesterday raised US short-term interest rates by 0.75%, the biggest increase since 1994, Mr Slatter told this newspaper that while such actions could not not derail Bahamas tourism, they could “slow” its post-COVID recovery by making Americans – who make up 90% of this country’s visitor base – cut back on spending and travel.

The U.S. central bank’s benchmark federal funds rate is now in a range between 1.5% and 1.75% as it steps up the fight against runaway inflation, and he added of the decision from the Federal Reserve: “This only adds to the need to rein in spending and have a recovery in income to ensure that our fiscal situation is not totally dependent on the recovery in tourism.

“The most recent budget aims to stimulate tourism, to ensure that VAT receipts meet the obligations. It is a budget entirely dependent on the American economy which feeds our tourist sector. The government forecasts VAT revenue to grow 52.4% year-over-year in 2022-23 to $1.412 billion, an increase of nearly $500 million from $915.988 million of the previous year.

The Davis administration forecasts a revenue increase of $1 billion over the next three fiscal years, increasing its revenue from $2.455 billion in this year’s budget to $3.539 billion in 2024-25. Post-COVID reopening and recovery is expected to generate a $537 million year-over-year revenue increase in 2021-22 from $1.909 billion in the prior year, and an additional $346 million increase $.5 million is planned for the next fiscal year 2022-2023. .

Figures like Moody’s, the international credit rating agency, international capital markets players and the political opposition have all argued that these revenue projections are too aggressive to the point of being “unrealistic” amid multiple post-COVID uncertainties. However, the Davis administration fiercely defended its forecast and pointed to the recently “oversubscribed” $385 million bond issue as a signal that it still retains investor and creditor confidence.

Mr Slatter, however, noted that the unsecured Series B portion of this bond carried an interest coupon of 9% – a rate more than two percentage points higher than that attached to previous sovereign bond issues. of the Bahamas. “It’s expensive and unsustainable in the long run, so we need to make some changes,” he told Tribune Business.

“Our view is that it is inevitable somewhere down the road that there will be an increase in taxation. I haven’t heard anything to support this, but it seems logical that they have to raise taxes… Something has to give at some point. The government is trying to collect all the revenue due to it, as it should, but that will not be enough in the future, so at some point there will have to be a change in the tax structure from the country.

“The more you throw the box on the road, the longer you wait to make changes, which makes something that could be quick and easy that much more complicated.” The Davis administration’s 2022-23 budget relies exclusively on economic growth and an increased volume of VAT revenue-generating transactions, coupled with cracking down on tax offenders through increased enforcement and compliance, to meet its revenue targets. .

The Prime Minister himself has repeatedly said that new taxes and/or increased taxes are the “lazy solution” and that such measures would only be a last resort if all else fails. The government’s strategy seems to be to buy time and delay any new tax measures as long as possible, so that the economy, businesses and households can recover from COVID-19.

However, sources who have spoken privately to Tribune Business have argued that there is a “gap” of at least $500 million between the government’s medium-term revenue targets and what it will generate from faster economic growth and compliance that will have to be met through income. new and/or increased taxes.

Mr Slatter said the options available to the Bahamas were to increase existing tax rates, such as that of the VAT, or to turn to more progressive levies such as a payroll tax or a tax. on personal and/or corporate income. The first two, he suggested, will be easier to implement while the second will be more administratively complex.

As for the US Federal Reserve rate hike, the head of RF Bank & Trust said it was widely expected and priced in by global financial markets. Short-term interest rates in the United States are expected to rise further to at least 3% by the end of 2022, raising the cost of credit in an effort to curb inflation, which has to in turn raises fears that the economy on which the Bahamas depends most is heading into a recession.

Some have even suggested that the United States is facing a repeat of the stagflation of the 1970s, with rising unemployment and rising prices at the same time. However, Mr Slatter said that although there are forecasts of a recession in the United States by the end of 2023, the contraction is not expected to last long or be severe.

“There is a risk that the tourism recovery we are experiencing will slow down, but we have the advantage of our location, the short flight time and the cost of vacations is not excessive,” he told this journal. “That’s the main risk; the wealth effect of a declining stock market and slowing job creation in the United States ripples through our tourism industry and economy.

Mr. Slatter, however, expressed optimism that current levels of foreign direct investment (FDI) will also help protect the Bahamas against any downturn in tourism due to US economic problems. And to add: “I don’t think there is a huge risk of a major shock in tourism; maybe the recovery rate is slowing down.

And, since the Bahamas imports most of its inflation from its main trading partner, the United States, any success by the Federal Reserve in lowering prices will also benefit consumers and the economy here. Suggesting inflation could drop to 3-4% if US rate hikes and other measures work, Slatter said the biggest factor beyond anyone’s control remains global oil prices.

“From a Bahamian perspective, it’s good to see the Federal Reserve taking this seriously. Hopefully they get inflation under control sooner rather than later, which will bring prices down here as well,” he said. .