Response to Statement by an IMF Mission to The Bahamas

First Published: 2013-11-18

"An International Monetary Fund (IMF) team, headed by Mr. Mbuyamu Matungulu, visited The Bahamas during November 3–16 to conduct discussions for the 2013 Article IV consultations…" and they submitted this report…

The Nassau Institute response follows:

We have found no evidence that the introduction of a Value Added Tax leads to economic growth in the near to mid terms. In fact the evidence is the opposite: Growth is negatively impacted leading to increasing deficits and debt to GDP levels.

Most Bahamians agree that Fiscal Reform is a vital component in this process being called Tax Reform, yet the authorities do not appear willing to make commitments to bring its spending under control, nor do they provide comfort that present taxes allowed by law will be collected.

Notwithstanding the fact that it was regional governments that have spent and borrowed the countries they are privileged to lead to the precipice of bankruptcy, the IMF has an unenviable track record in the region with its advice to the governments they consult.

Even though the regional governments have denied that the debt and deficits they signed on to for political expedience over the years would one one day lead to this impasse, the day of reckoning is upon us.

Having said that, most Bahamians agree The Bahamas is in dangerous fiscal waters that requires the input of all Bahamians with the public sector accepting a burden like the private sector has borne over the past 5 to 6 years. i.e. restraint.

To increase the price of goods and services over night will dampen the economy even further, and this does not bode well for helping increase government revenue as mentioned earlier. In fact, the opposite effect is more likely.

According to the Nassau Institute report, The Economic Consequences of the Value-Added Tax for The Bahamas (pdf), prepared by Mr. David Godsell;

"The IMF reviewed 170 cases of austerity in fifteen countries over the last three decades and provides evidence that spending reductions do not carry the negative GDP effects associated with tax increases. Specifically, they find that a 1% cut has no effect on GDP growth, while a similarly sized tax increase reduces GDP by 1.3%."

In other words, spending cuts do less damage than tax hikes.

Tax reform must encourage growth, reduce government spending, deficits and debt, and promote fairness.

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