The Tribune

By AVA TURNQUEST

Tribune Staff Reporter

aturnquest@tribunemedia.net

PRESSURE from the International Monetary Fund to implement Value Added Tax is not surprising given the agency’s track record in the region, according to Rick Lowe, vice-president of the Nassau Institute.

And Mr Lowe blasted successive governments for ignoring concerns overspending and borrowing deficits, only to present a “band-aid” solution in the form of VAT in the face of a dangerous fiscal situation.

While noting that the “day of reckoning” had come for the public sector to share the burden carried by the private sector for more than five years, Mr Lowe warned that an impromptu increase in the cost of goods and services would not spark an increase in government revenue.

He said: “Most Bahamians agree that fiscal reform is a vital component in this process being called tax reform, yet the authorities do not appear willing to make commitments to bring its spending under control, nor do they provide comfort that present taxes allowed by law will be collected.

“We have found no evidence that the introduction of a Value Added Tax leads to economic growth in the near to mid terms. In fact the evidence is the opposite: growth is negatively impacted leading to increasing deficits and debt to GDP levels.”

Mr Lowe’s comments follow a statement by the IMF at the end of its two-week mission to the Bahamas, in which the Fund urged the Christie administration “to deploy all efforts and resources” to ensure it hit its VAT implementation deadline of July 1, 2014.

The Bahamas would slash its debt-to-GDP ratio by five percentage points within three years of hitting a 60 per cent peak, the IMF believes – if the government can hit its fiscal consolidation targets.

Describing the controversial VAT as the “cornerstone” of the government’s fiscal reform and consolidation efforts, the IMF, which ended its visit to the Bahamas on Saturday, called on the government to obtain “broad-based support” for the new tax.

According to a report commissioned by the Nassau Institute on the economic consequences of VAT for the Bahamas, prepared by David Godsell: “The IMF reviewed 170 cases of austerity in 15 countries over the last three decades and provides evidence that spending reductions do not carry the negative GDP effects associated with tax increases. Specifically, they find that a one per cent cut has no effect on GDP growth, while a similarly sized tax increase reduces GDP by 1.3 per cent.”

“In other words,” Mr Lowe said, “spending cuts do less damage than tax hikes. Tax reform must encourage growth, reduce government spending, deficits and debt, and promote fairness.

“Notwithstanding the fact that it was regional governments that have spent and borrowed the countries they are privileged to lead to the precipice of bankruptcy, the IMF has an unenviable track record in the region with its advice to the governments they consult.

“When you jump off a cliff, you should make sure the water is deep enough for you to land.

“The government has denied for decades that their spending and borrowing deficits aren’t a problem, now all of a sudden it’s a problem? When people were raising concerns, they didn’t pay attention.”

Amid growing opposition to its VAT plans, Prime Minister Perry Christie challenged the private sector earlier this month to present a viable alternative.

Mr Christie pointed out that after the public rejected the option of boosting revenue by regulating web shop gaming, the government had to find some form of taxation to sustain development – a suggestion panned by the opposition as unrealistic and self-serving.

The prime minister also hinted that he might be open to postponing the VAT target implementation date of July 1, 2014, if the government is not prepared for it.

However, Financial Secretary John Rolle told Tribune Business that an “outright substitution” away from VAT, and the adoption of alternative tax measures, is unlikely in the current economic and fiscal environment, as the government needs the “broad-based” revenue increase the new tax is projected to deliver.