Government Revenue/Expenditures

The government of the Commonwealth of the Bahamas operates under the

“mixed economic system”. Unemployment is the main area of concern for the
government. If the unemployment rates were lowered, , Gov. Revenue would
increase, GDP increases, Welfare/Unemployment cost would decrease, crime
would decrease based on all of these.

Their priorities include:

- Welfare of the citizen => To provide services that the private sector is
unable or unwilling to supply, at a price that the people are able to afford,
eg. Education, health care, sanitation etc. Merit /Public goods.

- Strategic Planning => The Government must develop plans to promote

development in particular industries by providing grants, subsidies, “soft”
loans and advisory services to the industry or people.

- Security of the country => The government must ensure that all persons in
the community receive ‘just treatment’. Law and order and appropriate
legislation, will promote economic stability. Provisions must be in place
for proper defense against external danger.

- Managing the economy => The aim of the government is to achieve a high
level of employment and to encourage economic growth through sound
productivity.

- Environmental Protection => Environmentalist has made us view the

world in a different way. We now consider the social cost of air, water
and noise pollution, and the social benefits that arise from increased
employment, greater choices, reduced prices etc.

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 - Preparation of a budget => In order to meet its responsibility, the
government needs to raise the necessary revenue and exercise control
over the economy. The budget plays a key part to in the government’s
strategy to manage the economy.

- Securing a healthy Investment environment=> All economies require

investors to take a healthy interest in business and investing money in
companies. Investors should feel confident to take the risk of investing in
a country. This will largely depend on how well the government is
managing the economy. (Foreign and Local investors.)

- Job Security=> The government would want to create the highest level of
employment possible, because the greater the number of people
employed, the greater the National Income and the less drain there will
be on the nation’s resources.

Sources of Government Revenue

Goods and services provided by the government sector are financed through
taxation. Sources of these include Recurrent and Capital Revenue:

a) Recurrent Revenues
This type of government revenue is a tax that is obtained from various
services offered in the country. It is referred to as “Recurrent” because
these funds occur and is collected on regular bases.

- National Insurance
- Income Taxes
- Customs Import Taxes
- Value added Taxes
- Stamp Duty (Documents)

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 - Ownership of various countries shares (Dividends)
- Vehicle Licensing
- Business Licensing
- Corporate Taxes
- Real Property Taxes

Additional Recurrent Government Revenue can be obtained from “non-

tax” receipts such as:

- Borrowings
- Court Fines
- Rental Income from Government land and building
- Operations of local enterprises:
- Port Authority
- Post Office
- Civil Aviation
- Docking/Berthing Fees

b) Capital Revenue
- Sale of government owned corporations to private investors.(This action is
known as “Privatization”.)
(The opposite of Privatization is “Nationalization” where the government
purchase and operate a private company.)
Eg: Sale of BATELCO which became BTC
Sale of BEC which became BPL

=- Sources of Government Expenditure

There are 2 main types of government expenditures:

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 1) Capital Expenditure => Also known as Developmental Expenditure,
this includes investing in capital goods such as schools, roads,
hospitals which are generally very costly. The money needed for
capital expenditures can be obtained from the “World Bank”.

2) Recurrent Expenditure=> Is the spending on goods for regular

consumption. These would include the following:

- Wages for civil servants

- Purchasing medicines for hospitals, Books for schools
- National Insurance Payments
- National Defense (Police, Defense Force)

- Health and social services

- Interest Payments

Merit Goods and service (necessity)

- Goods & services government feels that each person should have.
- Provide benefits to individuals and society as a whole.
- Generally are not supplied by the Private sector.
- Include schools, hospitals etc.

“Public goods” (Desires)

- Things which people would like to have and which many people regard as a
necessity.
- Would improve our quality of life e.g. roads, street lights, light houses, law and
order, flood barriers etc.
- It is impossible to say how much of these goods a person consumes.
- Is not supplied by the Private sector.
“Transfer Payment” also government expenditure, consists of transfer of money
in the form of grants. (These are not payment for goods or services or for work
done.) These include items such as unemployment benefits, child care benefits,
investment grants, scholarship etc.

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“Real Spending” takes place when goods and services are bought by central and
local government.

There are 2 levels of government:

i) Central Government are the elected officials responsible
for making the major decisions for the country. These include
the Prime Minister, his cabinet and the official opposition.

ii) Local Government, are official elected by people on the

island they represent. (They are a lower level or an
extended arm of the Central government.)

Local Government
i) “The Local government Act”, was formed in 1996 by an act of Parliament.

ii) It is a part of the Central government, and will represent them in their various
communities. There are 31 districts, and elections are held every 3 years.

iii) The goals of this Act were :

- To allow the elected officials (generally leaders in their
communities), to govern and oversee the affairs of
that district.
-To listen to the concerns of the islanders then report them to
the central government.
- To ensure proper use of public funds, maintenance and
development of their district.
- Finances are obtained from government grants and allocations,
collection of customs duty, taxes charged on certain
community services etc.

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Municipal (Local Gov.) - (Quasi) Authorities
This consists of local or self-government cooperating with towns/cities to carry
out activities that are important for the good of the people.

These activities may be profit making, as well as a benefit to the community e.g.
Community swimming pools, Bus services, Sporting Complex, Art Galleries etc.

Other services offered by a municipal authority, for which there may be no

charge include Road services, Fire services, Garbage collection, Public Health,
Parks, Social services, Grave yard care etc.

(Municipalities are a part of the public sector and are set up by the people of a
community to manage their affairs.)

Two advantages of Municipal authorities:

i) People have a say in what goes on in their communities, and participate in
decision making.
ii) Community input helps to guide the overall policies of the government.

Two disadvantages:
i) A change in government usually affects the community and the
sustainability of some community activities set up by municipal authorities.
ii) Lack of resources is a setback in carrying out proposed activities.

Central Bank functions as a QUASI AUTHORITY. Although it is a governments

organization, (they are the government’s bank as well as their advisors), they
operate independently of the government. This is to ensure that the
government does not control or influence them.

National insurance
-The National Insurance program was established in 1972 with the signing into
law of the “The National Insurance Act”.

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-The National Insurance Board (NIB) is in charge of administering the program,
whose primary aim is to provide benefits for sickness, invalidity, maternity,
death, industrial injury/disease and unemployment, as well as financial
assistance made to old age non-contributory Pensioners.
-Contributions are 3.9% (paid by the Employed Person) and 5.9% (Paid by the
employer), for a total of 9.8%
- The ceiling on insurable wages as of July 2018 is $670 (weekly) and $2,903
(monthly).
-The funds paid today represent future payments, so the funds are invested in
both short term and long term placements such as:
- Bahamas government registered stocks
- Treasury Bills
- Long term bonds/loans to quasi-government corporations
- Equity investment
- Net Investment in direct financing lease.

Why does the Government impose taxes?

Taxes may be levied on income, expenditure or wealth, and is one of the

government’s main sources of revenue. Taxes are also imposed for other
reasons including:

- To provide them with the money needed to pay for the many
services they offer.
- To control the amount of spending in a country. (Inflation)
- To reduce inequalities in the distribution of income.
- To protect local industries from foreign competition. (Tariffs)
- To discourage the use of certain products (alcohol, cigarettes etc.)

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 Types of Taxes

There are 5 main types of taxes that the government can impose.
Direct, Indirect, Progressive, Proportional, Regressive.

1.Direct Taxes
a) Income Taxes=> Taxes paid on personal Income

b) Corporate Taxes => Taxes paid by companies on their profits

c) Capital Gains Taxes => Profit made from the sale of a capital asset

d) Inheritance Tax => Taxes levied on wealth which is inherited

e) Stamp Duties => cost of the stamp affixed to documents such as those
which transfer ownership of property. These documents will bear
stamps which are related to the value of the property.

Advantages of Direct Taxes

i) Yield from these taxes will increase automatically as wealth
and population increases.
ii) The tax payer knows exactly how much they have to pay.
iii) The principle of progression may be more easily applied to
this kind of taxation.
iv) The tax yield is easy to determine.
v) The cost of collection is relatively small.
vi) It reduces inequalities in the distribution of income.

Disadvantages of Direct Taxes

i) It takes away ones incentive to work.
ii) It encourages income tax evasion.
iii) It may discourage savings.

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 iv) It may discourage enterprise.

2.Indirect Taxes
These are taxes levied on goods and services purchased by the public.
They are first paid by the producer or buyer of the goods then passed on
to the customers in the form of a price increase.

These include:
- VAT => a 15% tax added onto the cost of good and services.
- Customs Duties => Taxes imposed on all imported goods entering
the country.
- Excise Tax =>These are taxes levied on certain home produced
goods and imports such as tobacco, gasoline,
alcohol, gambling etc.

Advantages of Indirect Taxes

i) A convenient way for the government to raise revenue.
ii) Is imposed when government wish to put a hold on some type of
spending e.g. cigarettes.
iii) Tax evasion is difficult. (VAT, Excise Tax)

Disadvantages of Indirect Taxes

i) They are regressive in nature and bears more heavily on people in
the lower income group.
ii) They are expensive to collect and may lead to tax evasion.(customs)
iii) They are a hindrance to trade especially if goods are being imported
from abroad.
iv) Their tax yield maybe uncertain.

3) Proportional Taxes.
All taxpayers pay the same % of their income in taxes.

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4) Progressive Taxes
Persons with a higher income pay a larger % of their income in taxes. Their
taxable income is arranged in bands e.g.

Taxable Income Tax Rate

0 - $10,000 15%
$10,001 - $20,000 20%
$20,001 - 25%

Example #1: What is the amount of taxes that would be paid on an

annual income of $8,600? And what is his take home pay?

$8,600 x 15% = $1,290 (taxes)

$8,600 - $1,290 = $7,310

Example #2: What is the amount of taxes that a person with a taxable income of
$14,300, have to pay? What is his take home pay?

$10,000 x 15% = $1,500

$4,300 x 20% = $860
$14,300 $2,360 (taxes)

$14,300 - $2,360 = $11,940 (take home pay)

Example #3: What amount would David pay in taxes with an income of $45,000?
What is his take home pay?

$10,000 x 15% = $1,500

$20,000 x 20% = $4,000
$15,000 x 25% = $3750
$45,000 $9,250

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 $45,000 – $9250 = $35,750

Classwork exercise
Calculate the amount of taxes to be paid and the take home income.

a) Income of $5,700
b) Income $18,600
c) Income $55,000
d) Income $75,000

5) Regressive Taxes
As income increases, a smaller % of that income is taken out in taxes eg:
excise taxes alcohol, cigarettes where everyone pays the same amount of
taxes when they purchase the product regardless of their income.

Graphical Representation – Types of Taxes

Income
Direct Taxes
Progressive Taxes

Proportional Taxes

Indirect Taxes
Regressive Taxes
Amount paid in Taxes

Taxable capacity of a country

The ability of a country to implement these various tax methods will depend on
the following:
- The country’s real wealth.

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 - The general attitude of the population towards taxation.
- The type of taxes levied.
- The possibility of tax evasion.
- The level beyond which any increase in taxation might
lead to a reduction in the National Income.

A government needs taxes in order to purchase public and merit goods, to help
those in need (Social services, pension, medicines), meet financial obligations
such as paying civil servants and repaying any government loans and to manage
the economy.

The Budget

The budget is an estimate of the government’s revenue and expenditures for

the coming year, (Forecast.) It is divided into capital and recurrent revenue and
expenditures, and gives details of the proposed changes in the system and rates
of taxation.

The budget is a statement of the government’s financial position that is used for
planning the governments economic and social welfare programs.

When recurrent/capital revenue is greater than recurrent/capital expenditures,

the government budget is a surplus.
When recurrent/capital revenue is less than recurrent/capital expenditures, the
government budget is a deficit.

Budget Surplus – When the government takes more in taxes than it spends. The
excess funds can be used to
i) Pay on the national debt
ii) Assist in development in the society (schools, hospitals)
iii) Invest in other foreign stocks
iv) Lend money to other countries
v) Restock the country’s supply of foreign currency

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Budget Deficit- Occurs when the government spends more than it takes in
taxation, which may result in borrowing from local sources and abroad. (World
Bank, IBRD, IDA, CDB, IDB)

If the government wants to reduce unemployment it may deliberately spend

more than it receives. (Budget deficit, also referred to as deficit spending). This
may mean that they would have to finance this additional spending by
borrowing. (The effects of this increase spending can also cause inflation.)

Both the local and central government borrow to pay for some of their
activities. Governments may borrow from a number of sources:
Short Term Borrowing:
- Overdraft facilities from local commercial banks.
- Issuance of Treasury Bills by the Central Bank
(Maturity 91 – 182 day)
Long Term Borrowing:
- Loans from commercial banks.
- Loans from Overseas. ( World Bank, IBRD, IDA).
- Issuance of Government Securities (Bahamas Government
Registered Stocks and Bahamas Development Bonds
(Maturity 5 – 20 yrs.)

Fiscal Policy
The government uses Fiscal policy when it deliberately change the rate of
taxation and the amount of its own spending in order to bring about changes in
the economy.
It involves taking Budget deficit/surplus and making the necessary adjustments
to increase or reduce the purchasing power within the economy.
This would include increasing/decreasing the amount of leakage and injections.

Monetary Policy

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When using monetary policies, the government tries to influence the economy
by controlling the bank’s ability to make loans.

If the government fears that an increase in prices would cause an increase in

inflation, then they will reduce the supply of money in the economy.
This is done by putting restrictions on the amount of loans that banks can make
or by increasing the interest rate on loans so that fewer people will borrow.

Send assignments : patricem@sac.edu.bs

Assignment Questions
1. What are transfer payments?(Give an example.) (4)
2. Briefly explain the 5 types of taxes, giving 1 advantage and 1 disadvantage
of each. (15)
3. Draw and label the tax graph. (2)
4. Why are Street Lights considered a public good? (2)
5. If the government reduce corporate taxes and increase income taxes would
this provided them with more tax revenue? (3)
6. Why should the government encourage businesses to exports/sell goods to
other countries? (2)
7. What can the government do to assist small businesses? (2)
8. What is a government budget made up of and what can they do if there is a
budget deficit or surplus? (4)

10.What are some of the main characteristics of Local government? (2)

11. What are some of the characteristics of Municipal Authorities? (2)
12. What are the main characteristics of the National insurance program? (2)

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