Safeguarding public resources and strengthening economic and fiscal performance through sound public financial management (Part III)

dence of exemptions, incentives, deductions, allowances, discretionary waivers, reduced rates, and zero rates beyond the standard value-added tax (VAT). These have resulted in a complex tax system with high levels of tax expenditures that not only erode the tax base but also cause severe distortions and inefficiencies, promote informality, and reduce fairness and transparency. Tax expenditures increase taxpayer compliance costs and significantly complicate enforcement activities.

A useful tool for evaluating revenue administration is the Tax Administration Diagnostic Assessment Tool (TADAT) that covers the following nine outcome areas:

(a) Registry and tax database: A complete and accurate taxpayer database fosters efficiency and effectiveness of the revenue administration by reducing the cost of interactions between the taxpayer and the tax administration through less paperwork and face-to-face interactions.

(b) Effective risk identification, assessment and management: Assessing, managing, and mitigating compliance and institutional risks are essential to effective tax management. They help to achieve equitable treatment of all taxpayers, deter non-compliance, focus on non-compliant taxpayers, use human, financial, and technical resources more effectively, and increase the level of voluntary compliance.

(C) Taxpayer services to support voluntary compliance: The adoption of a service-oriented attitude toward taxpayers is necessary to ensure that they have the relevant information and customer support they need to meet their tax obligations and claim their entitlements under the law and regulations.

(d) Tax returns: The filing of tax declarations is a key function of taxpayer obligations and the principal means by which a taxpayer’s liabilities are established and become due and payable. It is crucial for all taxpayers to file their returns in a timely manner.

(e) Tax payment processing: Taxpayers are not only required to file their returns on time but also to pay their fair share of taxes in full and on time. The tax payment processing arrangements should facilitate this.

(f) Reporting: Complete and accurate reporting of information in tax declarations, particularly from business taxpayers is of crucial importance. Under-reporting of taxes is one of the most important issues faced by tax administrations. It should be mentioned that this is true regardless.

(g) Tax disputes and settlements: A well-designed internal administrative process for reviewing tax decisions enhances the credibility and legitimacy of the tax regime. Resolving tax disputes within the tax authority is so beneficial that many revenue bodies have made an internal review mandatory before a taxpayer can seek legal recourse.

(h) Revenue management: Once the filing of tax declarations takes place, it is crucial that revenue collections be fully accounted for, compared with original estimates, and analyzed to facilitate the revenue forecasting by the Ministry of

Finance and other relevant governmental bodies. It is also crucial that verified tax refunds be processed. The system needs to be robust to ensure full and accurate accountability for revenue collections.

(i) Accountability and transparency: Lack of accountability and transparency creates opportunities for tax evasion and under-reporting. Clearly defining the competencies and functions of tax staff, informing taxpayers about tax procedures and their rights, introducing good reporting systems, among others, help to strengthen the accountability of public officials thereby increasing their credibility and boosting voluntary compliance by taxpayers.

Guyana’s tax administration is managed by the Guyana Revenue Authority (GRA) which is a separate legal entity with its own board of directors. A similar situation exists in respect of Jamaica and Barbados. In the other Caribbean countries, tax administration is the responsibility of a department of the Ministry of Finance. Opinion is divided as to which model is better. While acknowledging significant benefits to be derived from tax administration being provided with semiautonomous status, it has been argued that the same benefits could be achieved under a reformed departmental structure. What can be said is that the semi-autonomous model is more expensive to manage and operate. For example, at 3.2 percent, the GRA has the highest ratio of revenue administration expenses to tax revenue compared with the other Caribbean countries. In contrast, in Trinidad and Tobago, the ratio is 0.7 percent.

High levels of public debt, coupled with weak public financial management processes, contributes significantly to less than the desired level of growth, incomes, and living standards for millions of people around the world. The IMF defines public debt management as follows:

The process of establishing and executing a strategy for managing the government’s debt in order to raise the required amount of funding, achieve its risk and cost objectives, and to meet any other sovereign debt management goals the government may have set, such as developing and maintaining an efficient market for government securities.

The report identified the various kinds of risks inherent to public debt portfolios and the execution of debt management functions. These include:

(a) Market risk: Changes in market prices, such as interest rates, exchange rates, commodity prices, or the cost of the government’s debt servicing;

(b) Rollover risk : Risk that debt will have to be rolled over at an unusually high cost or, in extreme cases, cannot be rolled over at all;

(c) Liquidity risk: Cost or penalty for exiting, or where the volume of liquid assets diminish quickly in the face of unanticipated cash flow obligations and/or a possible difficulty in raising cash through borrowing in a short period of time;

(d) Credit risk: Risk of non-performance on loans or other financial assets.

Settlement risk: Risk of loss for failure settle liabilities;

(e) Operational risk: Range of risks, including transaction errors in the various stages of executing and recording transactions, inadequacies or failures in internal controls, or in systems and services; and

(f) Other risks : Includes reputational, legal, security, or natural disasters that affect business continuity.

A robust debt management framework is a key component of governance directed at avoiding excessive risk accumulation while supporting growth and stability. Key components of effective debt management include:

(a) A sound legal framework for incurring new public liabilities;

(d) A centralized and transparent registry of sovereign debt instruments and obligations;

(c) An adequate system of debt recording and reporting;

(d) Sufficient human resources assigned to key debt management functions; and

(e) Adequate technical capacity to undertake the various analyses required to support sound debt management, such as analyzing debt sustainability and portfolio costs/risks, and assessing financial and legal risks from prospective liabilities.

A widely used tool for assessing the soundness of debt management practices is the World Bank’s Debt Management Performance Assessment (DeMPA) Methodology. DeMPA sets out key principles and benchmarks to support institutional and capacity development for countries in need. It focuses on five key institutional pillars for debt management, namely, (i) governance and strategy development; (ii) coordination with macroeconomic policies; (iii) borrowing and related financing activities; (iii) cash flow forecasting and cash balance management; and (v) debt recording and operational risk management. There are a number of subpillars considered crucial to ensure that public debt mandates and portfolios are designed, executed, and managed in a sustainable and cost-efficient way that minimizes fiscal and economic risks to governments.

The report emphasised that high levels of debt act as a brake on growth, stifle private sector investment, create macroeconomic and financial instability, and crowd out public investment needed to overcome infrastructure and social deficits critical for poverty reduction and development. During the period 1970 to the mid-1990s, Guyana was the most indebted country in the world as measured by the ratio of nominal public debt to GDP. It has since benefited from debt relief from bilateral and multilateral agencies, including the Heavily Indebted Poor Countries Initiative (HIPC).

An important observation made in the report is that Jamaica recorded the highest average primary fiscal surplus in the world for a sovereign nation from 1990 to 2018 at 7.3 percent of GDP, while other countries in the region, including Barbados and Trinidad and Tobago, also ranked near the top of the list globally on this measure over the same period. As highlighted in several of our articles, Guyana has been performing quite the opposite in that, except for the years 1994, 2006, 2010 and 2011, it has consistently recorded significant fiscal deficits. For 2020, fiscal deficit was G$103.1 billion or 9.6 percent of GDP, while for 2021 the deficit is projected at G$106.7 billion or 9.8 percent of GDP. This is more than two and one-half times that recorded during the period 2017 to 2019.

In terms of debt sustainability a commonly used indicator of solvency is the public-debt-to-GDP ratio. In our article of 1 March 2021, we stated that Guyana’s total public debt as at the end of 2020 was US$2.592 billion compared with US$1.689 billion at the end of 2019, a 53.5 percent increase. This was due mainly to the recognition for the first time of the overdraft on the Consolidated Fund as well as publicly funded government guarantees. For 2021, the projected public debt is US$3.138 billion. Shown below is the public debt to GDP ratio for the years 2017 to 2020:

2017 2018 2019 2020 Public debt to GDP ratio 52.2% 52.9% 32.7% 47.4%

The lower percentage recorded for 2019 was as a result of the Statistical Bureau’s rebasing and revision of the methodology for calculating the real GDP growth using 2012 as the new base year.

To be continued -