Page 27 - Islands Business May 2023

Economies

The Republic of Marshall Islands was one of the few countries in the Pacific to see Former FSM President, David Panuelo at the opening of the World Bank office in
just one year of economic contraction (2020), with the economy returning to growth Pohnpei in March. The hub will serve FSM, Marshall Islands and Palau. Photo: World
in 2021. However, a new World Bank report notes the country is at a high level of debt Bank
distress. Photo: World Bank
WIDEN TAX BASE, SPEND MORE

EFFICIENTLY

WORLD BANK’S ADVICE TO 9 PACIFIC ECONOMIES

By Sera Tikotikovatu-Sefeti and Samantha Magick in Tonga and Kiribati. It also observes that timely VAT refunds
would help improve trust and voluntary compliance with the
The World Bank says six Pacific Island countries are at high systems, as might digital filing options.
risk of debt distress, and that gradual cuts to government The report suggests that in Marshall Islands and Kiribati,
spending are vital for balancing budgets and avoiding sharp some of the funds spent on copra subsidies should be real-
cuts to public services in the years ahead. located to poverty-targeted social assistance programs, and
The authors of “Raising Pasifika: Strengthening Government that for FSM and Marshall Islands: “moving from a gross-reve-
Finances to Enhance Human Capital in the Pacific: A Public nue regime to a VAT regime is a critical reform, which can im-
Expenditure Review for Nine Pacific Island Countries,” say prove horizontal and vertical equity, and increase revenue.”
Kiribati, Marshall Islands, Federated States of Micronesia, It flags that implementation of the PACER Plus trade agree-
Samoa, Tonga and Tuvalu are all at high risk of debt distress, ment will lead to losses in trade taxes, but that these could
while Vanuatu is rated medium risk and Palau and Nauru’s be offset by higher taxes on tobacco, alcohol and sugary
debt is rated as sustainable. drinks.
The report says: “the COVID-19 shock, combined with To offset the burden that tax reform would place on vulner-
overlapping shocks from natural disasters and global inflation, able groups, the Bank suggests strengthening direct taxes so
risks reversing a decade of progress in building human capital those on higher incomes pay more, and ensuring that spending
across the Pacific.” supports the poor and vulnerable, including through targeted
It says tax collection “needs to be the foundation” of the cash transfers.
countries’ revenue strategies as current tax gaps are esti- The report notes that spending on health and education
mated to be between 8-17% of GDP, but that revenue reforms in the nine countries is already high as a proportion of total
should be introduced once post-pandemic recovery is under- budgets and that more efficient spending of allocations within
way. those sectors is advised. It notes that property taxes are low
“These large tax gaps are from a combination of low com- across the nine economies and suggests that “higher taxes on
pliance and tax bases that are narrow due to high thresholds immovable property can be a useful instrument to raise local
and costly exemptions. In a few cases, the absence of a revenue to finance local services” and strengthen accountabil-
general consumption tax (Nauru), a corporate income tax ity between revenue, spending and local governance.
(Palau), or any income taxes (Vanuatu), represents the most The authors believe maximising the long-term benefits of
significant case of narrow tax bases.” fishing revenues related to the Parties to the Nauru Agree-
It suggests lowering Value-added taxes (VAT) thresholds in ment (PNA) Vessel Day Scheme (VDS) for purse-seine tuna
Kiribati, Palau and Samoa and rationalising VAT exemptions
Continued on page 40

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