IDB Says Caribbean’s Tax Revenue Under Threat Amid Deteriorating Outlook

(CMC) — The Inter-American Development Bank (IDB) says while tax revenues in Latin America and the Caribbean (LAC) increased to 23.1 per cent of gross domestic product (GDP) on average in 2018, these gains are now under threat as a result of the region’s deteriorating fiscal outlook, which has been exacerbated by the COVID-19 pandemic and the global economic crisis.

According to the newly released edition of the ‘Revenue Statistics in Latin America in the Caribbean (LAC)’, the increase of 0.4 percentage points from their level in 2017 is the highest level of tax revenues ever recorded in the region.

However, the data reveals that LAC tax revenues remain far below the Organization for Economic Cooperation and Development (OECD), averaging 34.3 per cent in 2018.

“Against this background, the capacity to finance public goods and services and to cushion economic shocks in the region remains limited,” the IDB said.

Revenue Statistics in Latin America and the Caribbean 2020 is a joint publication by the IDB, the Inter-American Centre of Tax Administrations (CIAT), the Economic Commission for Latin America and the Caribbean (ECLAC), the Organization for Economic Co-operation and Development (OECD) Centre for Tax Policy and Administration and the OECD Development Centre.

The IDB said this year’s edition covers 26 countries, including St Lucia for the first time.

The publication notes that tax-to-GDP ratios —measured as tax revenues, including social security contributions paid to general government, as a proportion of GDP —continued to vary widely across the region in 2018, from 12.1 per cent in Guatemala and 13.2 per cent in the Dominican Republic to 33.1 per cent in Brazil and Barbados, and 42.3 per cent in Cuba.

The report states that 15 countries reported an increase in their tax-to-GDP ratios between 2017 and 2018, while seven recorded a decrease, and three remained at the same level.

The publication notes three Caribbean countries —Trinidad and Tobago up 3.3 per cent, Belize up 1.4 per cent and Guyana 1.3 per cent — recorded the largest increases; while the largest decreases were in Argentina and Nicaragua.

“Although revenue performance improved across the LAC economies in 2018, the region has subsequently faced major headwinds, which have intensified as a result of the COVID-19 pandemic,” the IDB said.

“While stronger domestic and external demand underpinned the increase in tax-to-GDP ratios in 2018, economic conditions across the region deteriorated in 2019, in large part due to a decline in commodity prices,” it added.

The report also noted that hydrocarbon revenues across the region’s main producers increased from two per cent in GDP in 2017 to 2.7 per cent in 2018, but are estimated to have fallen to 2.5 per cent in 2019, noting also “hydrocarbon revenues are declining precipitously in 2020 as a result of collapsing oil prices”.

The IDB said that the LAC’s relatively low levels of revenue-generation constrain spending on public services —including health — and raise questions about how countries will finance the emergency social protection measures they are introducing to respond to the COVID-19 pandemic.

Moreover, it said weaker administrative systems for managing taxes and transfers relative to those in OECD countries reduce the range of tools available to the region in effectively responding to the crisis.

“Looking ahead, in the wake of COVID-19, it will be necessary for LAC economies to strengthen the role of tax systems to stimulate inclusive economic development and, in the longer term, to restore their public finances onto a more sustainable footing.”

The IBD said although the region’s tax structure has moved closer to that of OECD countries as a result of higher revenues from direct taxes and lower trade taxes, “persistently low revenues from key taxes, such as personal income taxes (PIT), remain a constraint on revenue generation and a source of vulnerability”.

At just 2.2 per cent of GDP, it said the region’s revenues from PIT in 2017 were far below the level in OECD countries (8.3 per cent), while social security contributions amounted to four per cent of GDP in 2017, compared to 9.1 per cent in the OECD.

At the same time, the region is far more reliant on taxes on consumption than OECD countries.

“Together, this reduces the potential for redistribution and tackling vulnerabilities in a context where persistent inequalities have been an important factor behind social unrest across the region in recent times.”

The report, which also includes a special feature on equivalent fiscal pressure (EFP) in the LAC region that tracks a broader range of fiscal revenues than taxes collected by governments, including non-tax revenues from natural resources and mandatory contributions to private social security schemes.

In 2018, EFP averaged 25 per cent of GDP across the region, up from 24.4 per cent in 2017 and 17.4 per cent in 1990.

According to the report, the highest tax-to-GDP ratios in the LAC region in 2018 were in Cuba (42.3 per cent), and Brazil and Barbados (both 33.1 per cent), while the countries with the lowest tax-to-GDP ratios were Guatemala (12.1 per cent), the Dominican Republic (13.2 per cent) and Paraguay (14 per cent).

The average tax-to-GDP ratio in the Caribbean subregion was 25.7 per cent in 2018, versus 23.1 per cent in South America and 21 per cent in Central America.

The report notes that LAC’s average tax-to-GDP ratio rose from 15.9 per cent in 1990 to 23.1 per cent in 2018.

Between 1990 and 2018, it says revenues from value added tax (VAT) as a percentage of GDP more than doubled for LAC countries on average, from 2.3 per cent of GDP to six per cent.

Over this period, the LAC’s average tax-to-GDP ratio has trended towards the OECD average, which increased from 31.9 per cent in 1990 to 34.3 per cent in 2018.

“The Caribbean’s tax-to-GDP ratio has remained consistently above the LAC average and increased by 1.5 percentage points between 2016 and 2018, the best performance amongst the three sub-regions covered in the report,” the IDB said.