The Tribune

EDITOR, The Tribune.

The Prime Minister has asked for alternatives to VAT as he rightly reconsiders the July date for implementation of the new tax increase.

There is no doubt we must come up with an answer to our nation’s spiralling debt crisis. If The Bahamas cannot meet its debt payment obligations, and defaults, then the IMF could be forced to move in.

Raising taxes, by VAT or otherwise, is not the answer. It will increase the cost of doing business and the cost of living. To further increase costs and thereby inflation at this time would be to make the Bahamian economy less competitive and more expensive, squeezing budgets, profits and payrolls. There comes a tipping point where the amount of tax levied becomes a disincentive to work. At that point increased taxes shrink the economy leading, ironically, to a decrease in revenue. We are at or near that point. This could lead to increased unemployment and an economic slowdown. Government will then feel compelled to step in and assist both through social services and through Keynesian stimulus. This will only widen the Debt to GDP ratio. VAT will fail. It will hurt our economy. Hurt the people and it will hurt the Treasury. It should be stopped. Government should clearly place tax increases off the table. No Government has ever led an economic recovery by increasing taxation. As Churchill once stated, you may as well stand in a bucket and try to lift yourself up by the handles. Luckily there are alternatives to VAT.

Government needs to set out a multi-year economic plan to grow the economy, eliminate the deficit and start to pay down national debt. It should have the following components: 1. Boost economic growth by cutting red tape, lowering interest rates, cutting tax, reexamining lending criteria imposed on banks by the Central Bank, reducing the cost of electricity and liberalizing the provision of essential services, 2. Boosting Government revenue by collecting back owed real estate tax or auctioning the properties of defaulters, selling Government assets such as shares in BTC, BEC, Government real estate and other assets, and, 3. Reduce the size of Government by 2.5 per cent of GDP per annum for two years for a total cut of 5 per cent in absolute terms. At the same time GDP growth will further reduce Government’s size from a relative point of view. Assuming growth of 2.5 per cent per annum over a two-year period Government’s overall share would reduce by 10 per cent, about what you need. When coupled with boosting revenues you more than cover the deficit and begin debt repayments. The following sets out these ideas in greater detail.

1. Sell Balance of BTC: Government can move forward with the original plan of selling the balance of its stock in BTC to the Bahamian public. Its 49 per cent stake is worth some $200 million. This can be sold to Bahamians in stages over a few years raising some $30 million per annum.

2. Liberalize the Telecoms market and issue new licenses: Government should end BTC’s monopoly as planned and issue new licenses. This will not only mean new licenses fees for Government, it will mean new businesses from which Government can collect on-going revenue. Further, reducing the cost of telecoms will boost business growth meaning Government will see a general uplift on Government revenue as the economy expands. Our advice at the time (I was on the Board that privatised BTC) was that liberalisation would bring a 1 per cent boost in GDP.

3. Reduce the cost of power: the cost of electricity is perhaps the largest single contributing factor to the high cost of living and doing business in the Bahamas. Reducing the cost of electricity by some 50 per cent by liberalizing the market and allowing for competition will make a huge difference to this country’s competitiveness, boosting economic growth. Again, this will raise Government revenue. There will also be the one-off windfall of any sale of BEC, which could be worth hundreds of millions. Government should press ahead with its plans to divide BEC in two, privatise the two companies and liberalise the power generation sector to allow for competition.

4. Reduce Taxes: Governments wrongly assume that increased taxes means increased revenue. But there comes a point when taxes become a disincentive to investment and work. Nigel Lawson, Chancellor in the UK in the 80s, demonstrated that reducing tax can actually increase government revenue because it spurs investment and job creation. Your smaller slice of the larger pie is bigger than the big slice of the smaller pie.

5. Real Property Tax: hundreds of millions are owed in back real property tax. Government recently offered an amnesty and collected a small portion. Now, use the powers in the act to auction the properties of those in default. This could raise tens of millions a year for several years running. It would also put a great deal of property into the hands of Bahamians (thereby fulfilling another of the Prime Minister’s objectives). This will create construction jobs and boost the economy.

6. Tax web shops: It is outrageous that legal businesses that play by the rules are now to be further taxed while illegal businesses that pay no tax are allowed to operate in the open. It is further outrageous that Government has laid out harsh penalties to the private sector if it does not comply with VAT while letting the web shops break the law.

7. Cut Government spending by 2-? per cent of GDP per annum for two years: Government spends way too much money and employs too many people. It is wrong and unfair to assume that taxpayers will simply pay more and more without a plan to reduce the burden of the state. Government needs to be realistic and should look to cut expenditure. Education and Health should be exempt from cuts. All other Ministries and departments should have to come up with them.

8. Cut red tape: there is too much red tape standing in the way of investment. It takes too long to get through the Investments Board, to get building permits, to get licenses. Every delay is an investment delayed. This means jobs delayed and ultimately Government revenue delayed. The more businesses are working, the more investment is underway, then the more jobs created, the more money being spent, the more tax being paid and also the less burden on the state. The Investments Board should set itself an annual investment target each year and be out looking for that money. Also, it tends to focus on large investments with high barriers to clear to get started while smaller applications that are easier to get started and tend to collect dust. Get lots of smaller things going. It spreads money around more.

9. Cut Interest Rates: Interest rates on B$s have to be higher than on US$ to help maintain our reserves of foreign currency and to maintain the one to one link with the US$. But do they really need to be effectively 100 per cent higher? This is a massive burden on the back of anyone who needs to finance their business or on the back of home ownership in this nation. The Government should establish a Committee to examine the rate quarterly and adjust it to something more appropriate. This should be done in the open. I think somewhere up to a 2 per cent reduction today would be both welcome and workable. The Committee should monitor economic activity more robustly and adjust rates, as needed, both down and up. A lower rate will boost investment, generate jobs and thereby boost Government revenue.

10. Look at lending criteria: During the Sub Prime crisis the Government rightly moved to tighten lending criteria to maintain confidence at a very uncertain time. What was appropriate to those economic circumstances may not be right today. Today many Bahamians simply cannot get loans even if they have the equity because the criteria are so stringent that nobody meets them. Meanwhile banks pile up hundreds of millions in unused B$. There is so much money on the sidelines in this country it’s not funny. Loosen it up. Let it flow. You can always clamp down if it gets too hot. We need better fiscal management of the economy.

11. Privatize all Government businesses. Sell off Bahamasair, ZNS, Water & Sewerage, Bank of the Bahamas, the Post Office, etc.

12. Stop worrying about foreign second home buyers, they really are not buying up the Bahamas. It’s high interest rates and tight lending criteria that stop Bahamians from ascending the property ladder. Foreigners aren’t taking over Marathon or Prince Charles Drive. In fact we need more. Go out and market to the world’s elite, bring them here, be a centre for globalization. Let them spend their money in our islands. Let them fall in love with us and be our champions. There are hundreds of millions in this.

What the Bahamas needs is a fiscal plan that looks at our economy in the whole and seeks to reduce debt by curbing public expenditure, freeing up the economy to grow, reducing the cost of doing business and of living and seeks one time windfalls from the sale of Government assets as it transfers ownership to private hands. This is a future economic plan that could work. What we do not need is higher taxes.

GARTH BUCKNER

Nassau,

December 5, 2013.