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IDB: 2020 tax revenues decline in Caribbean


IDB: 2020 tax revenues decline in Caribbean

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Washington –The Inter-American Development Bank (IDB) says tax revenues rose moderately across Latin America and the Caribbean (LAC) in 2019 before declining sharply in 2020 as the coronavirus (COVID-19) pandemic drove down global economic activity.

The Washington-based financial institution said revenue statistics in Latin America and the Caribbean 2021, shows that the average tax-to-gross domestic product (GDP) ratio in the LAC region rose to 22.9 per cent in 2019, an increase of 0.3 percentage points, due largely to increases in the Caribbean sub-region.

Although the COVID-19 pandemic subsequently caused a sharp decline in tax and resource revenues in 2020, the report identifies the key role of fiscal policy in the region’s response to the pandemic and considers how tax policy can contribute to a green and inclusive recovery.

The report notes that tax-to-GDP (gross domestic product) ratios in the LAC region ranged from 13.1 per cent in Guatemala to 42 per cent in Cuba in 2019.

Of the 26 countries covered by the average, which includes Antigua and Barbuda for the first time and excludes Venezuela due to data availability issues, the report states 14 registered an increase in their tax-to-GDP ratio in 2019 and 12 experienced a decline.

Other than Cuba, the analysis says the rest of the countries (25) recorded tax-to-GDP ratios below the Paris-based Organisation for Economic Cooperation and Development (OECD) average of 33.8 per cent.

However, the report notes the gap between the LAC and OECD averages has narrowed from 15.4 percentage points in 1990 to 10.9 percentage points in 2019.

The report states the largest increases in tax-to-GDP ratios between 2018 and 2019 occurred in Nicaragua (a rise of 2.7 percentage points, Belize (2.2 percentage point) and the Bahamas (2.1 percentage point).

Looking at the different sub-regions, the report says the Caribbean’s average tax-to-GDP ratio rose by 0.8 percentage point between 2018 and 2019 to 24.9 percent, while South America’s declined by 0.1 percentage point (to 22.9 percent) and the tax-to-GDP ratio of Central America and Mexico increased by 0.2 percentage point (to 21.3 per cent).

The report details how tax reforms in countries such as Nicaragua and Bahamas have been an important driver of the positive trends.

Meanwhile, in all countries where tax-to-GDP ratios went down between 2018 and 2019, the decline did not exceed 1 percent of GDP, according to the report.

A special feature in the report examining the fiscal policy responses to the COVID-19 pandemic, finds that tax revenues declined sharply during the first half of 2020 amid a collapse in domestic demand, but showed signs of recovery in the second half of the year.

“Countries expanded social protection provisions, provided direct support to firms, deferred tax payments and established programs to ease tax liabilities,” the report states.

Meanwhile, latest estimates indicate that total tax revenues in 18 countries across the region declined by 11.2 per cent on average in 2020 from 2019.

“External public debt rose over the same period and will need coordinated management over the period ahead,” the report says.

The report’s second special feature examines the performance of hydrocarbon and mining revenues in 2019 and 2020.

It shows that hydrocarbon revenues in major regional producers rose from 2.5 percent of GDP on average in 2018 to 2.7 per cent in 2019, “driven by one-off extraordinary receipts.”

The report says mining revenues in major producers contracted very slightly over the same period to 0.37 per cent of GDP.

Preliminary data show that fiscal revenues from non-renewable natural resources fell sharply in 2020, “mainly due to sharp declines in oil prices and the effect of COVID-19 tax relief measures on corporate income tax payments in the mining sector”.

The report explains how fiscal policy – and tax policy in particular – will play an essential role in ensuring the LAC region builds back better from COVID-19, while also addressing social vulnerabilities and weaknesses in productive capabilities that pre-dated the pandemic.

“Once the recovery is well under way, countries in the LAC region need to promote tax and spending policies that will underpin inclusive and sustainable economic growth,” says the report, adding that “there is scope to increase revenues from personal incomes taxes (PIT) and environmentally related taxes, as well as social security contributions (SSC) in most countries”.

The report says PIT and SSC generated 9.2 per cent and 17.1 percent of total tax revenues in 2019, respectively, compared with 23.5 percent and 25.7 per cent in the OECD.

Meanwhile, the report indicates environmentally related tax revenues amounted to 1.2 per cent of GDP on average in 2019 in the 25 LAC countries for which data are available, below the OECD average of 2.1 per cent. (CMC)