Govt is sacrificing higher economic growth for revenue enhancement
The Minnis administration must be commended for its diligent effort to restore the fiscal health of the nation from the disastrous condition it was in when it took office in May 2017.
Unfortunately, the budget’s focus is on revenue enhancement rather than on economic growth.
This fiscal year, though revenue projection fell short by over $200 million, an impressive 16 percent more revenue was collected than in the previous year largely because the value-added tax (VAT) rate was increased from 7.5 percent to 12 percent. The Christie administration enjoyed similar gains after introducing the 7.5 percent VAT in 2015. In both the Minnis and Christie administrations, however, revenue increases were followed by economic decline. This is starkly different from prior periods when both government revenue and the economy grew together without new or increases in taxes.
Two such periods are 1993 to 2003 and 2004 to 2014.
Between 1993 and 2003 government revenue grew from $617 million to $960 million, an increase of 56 percent; an average increase of 7.3 percent per year. Over the same period, the economic growth averaged 2.7 percent annually, unemployment fell sharply to below seven percent, inflation held steady, the deficit averaged about one percent and debt to GDP never rose above 40 percent.
In the second period, 2004 to 2014, government revenue grew from $1.2 billion to about $2 billion, an increase of 64 percent, an annual average increase of 6.4 percent. And, the economy grew on average annually by more than two percent excluding the two extraordinarily bad years of the Great Recession – 2007 and 2008.
In the three years prior to the introduction of VAT, the economy grew annually by more than two percent; and except for 2012/2013, so did government revenue. In the years after the introduction of VAT the economy contracted in the first year by 1.5 percent. Subsequently, it has grown by less than two percent annually. Since the increase in the VAT rate last year, growth of the economy remains subdued at below two percent, falling short of both the government’s and International Monetary Fund’s (IMF) expectations.
While increased revenue benefits government finances, lower economic growth hurts the unemployed, underemployed, businesses and overall economic activity; and eventually government finances. Today, government revenue is up but unemployment remains high and wages stagnant. The IMF and credit agencies may be pleased, but many Bahamians are not.
The simple reality is that the more money government collects in taxes from the economy the less money remains for businesses to reinvest, create jobs and hence economic growth. Likewise, an increase in money collected in taxes from the people means there is less disposable income for people to spend resulting in a negative impact on economic activity and thereby growth. There is always a fine balance to be had between taxation policy and economic growth policy.
Growth and taxes are antagonistic to each other. The best fiscal policy is the one that errs on the side of growth.
We commend that to the minister of finance.