The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Value-Added Tax (VAT) at the Government’s proposed rate would grow the Bahamian economy by 16.5 per cent over 12 years, an Inter-American Development Bank (IDB) study has shown, despite one businessman yesterday likening the confusion over the new tax to Y2K.

Recalling how companies and individuals rushed to ensure their computer systems were compatible with the new millennium, Dionisio D’Aguilar told Tribune Business of VAT: “It’s got everybody in a tailspin, a bit of a kerfuffle.

“Everyone’s in wait and see, and it’s amazing how this [VAT} deadline is affecting do many business and economic decisions right now. It’s almost as big as Y2K.”

This is despite the IDB’s economic modelling of VAT’s likely impact on the Bahamian economy suggesting it would have grown between 2000-2011 had it been implemented over that period.

Analysing 16 different scenarios, using a combination of different standard VAT (7.5 per cent to 15 per cent) rates; hotel rates (10 per cent and 7.5 per cent); reduced Customs tariffs (average cuts of 7.5 per cent to 17 per cent; and with and without a social safety net, the IDB said all produced positive real GDP growth compared to actual 2000-2011 outcomes.

“In all scenarios, real GDP growth increases relative to the baseline, especially with a VAT standard rate of 15 per cent (16.5 per cent in 12 years, equivalent to one per cent higher each year),” the IDB report said.

“However, scenarios with higher GDP rates are associated with higher impact on poverty levels. The introduction of safety net programmes reduces the impact on poverty without sacrificing too much GDP growth.”

The scenario currently preferred by the Government - 15 per cent VAT,; 10 per cent hotel industry rate; 17 per cent tariff cut average’ and social safety net - produces one of the highest GDP increases in the study, 15.9 per cent over a 10-year period.

This model, perhaps not surprisingly, generates the most revenue growth of all over that period, some 22.2 per cent to $1.56 billion.

“In all scenarios, except scenario 15 with 7.5 per cent standard VAT rate, the growth in tax revenue improves more than 10 per cent relative to the baseline at the end of the simulation horizon,” the IDB study said.

“Scenarios with safety net programmes actually perform better than scenarios with no safety net programmes. Safety net programmes promote consumption and, in turn, increase VAT revenue.”

The IDB report added that all 16 models produced a reduction in unemployment levels and national debt (debt-to-GDP) ratios.

“Higher tax revenue reduces public borrowing requirements, creating fiscal space for more private investment and hence higher GDP growth rates that create new employment,” the study optimistically suggested.

“An overall assumption for the 16 scenarios is that all additional revenue generated by the introduction of the VAT is assigned to reducing public debt. This means less debt, less inflation, and more investment in the long term.”

The IDB study suggested that VAT would create more balanced growth for the Bahamian economy, getting it away from a bias that favoured the hotel industry.

As a result, it said industries such as agriculture, fishing, manufacturing, construction, electricity and water would soak up unemployed workers at a faster rate than the hotels and other service industries.

“The more balanced growth in relation to the baseline scenario reflects the elimination of the bias towards the hotels sector on the current structure of the economy as a result of the introduction of VAT,” the IDB study said.

“The transformation sector has a higher labour absorption ratio than the hotels and other services sectors.”

As for inflation and general price levels, the IDB report suggested there would be an “initial surge” in the year after VAT is introduced, but they would ultimately be lower than that experienced in 2000-2011.

“The initial surge is higher when the statutory VAT is higher, and is somewhat compensated by the decrease of import tariffs,” the study added.

“In the case of VAT of 15 per cent, the initial surge of inflation reaches 3.34 points higher than the historical values. The lower financial requirements of the public sector, together with the lower levels of aggregated demand and reduction of tariff rates, common to most scenarios, explain the drop in inflation in relation to the baseline scenario starting in the second year of the simulation time horizon.”

Yet without social safety nets and support programmes, the IDB study added that VAT “will reduce the disposable income of all income groups.

“The introduction of the VAT is a transfer from the private domain to the public sector, since it is intended to be revenue enhancing exercise,” it said.