The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Value-Added Tax’s (VAT) implementation is “not meant to be without pain”, a former finance minister warned yesterday, arguing that all Bahamians had to share “the cost of repairing” the Government’s finances.

James Smith, now CFAL’s chairman, told Tribune Business that tax reform to increase government revenues was inevitable, and said: “If it’s not VAT, what then?”

Pointing out that the Bahamas could not keep attempting to do the same thing, and expect different results, when it came to increasing revenues, Mr Smith said the country could simply not sustain fiscal deficits of the magnitude it has run up over the past six years.

Noting that deficits of $400-$500 million were increasing the Government’s interest (debt servicing) bill by $50-$60 million annually, Mr Smith said any pain from VAT “pales into insignificance” against the consequences of further sovereign credit rating downgrades.

And, while agreeing that the Government needed to disseminate more information on VAT to the private sector and Bahamian public, the ex-Central Governor indicated that there would be ‘no going back’ on implementing the new tax.

“That’s a train that’s already left the station,” Mr Smith, who is still a Ministry of Finance consultant, told Tribune Business.

This implies that the Christie administration remains steadfast in its goal of implementing VAT by July 1, 2014, and it will not be held back by concerns and, indeed, opponents of its tax reform centrepiece.

Mr Smith, who was minister of state for finance under the first Christie administration, reiterated that VAT was just one element of the Government’s fiscal consolidation plan, the others being spending containment; enhanced administration and collection of existing taxes; and increased economic growth.

Yet he described VAT and altering the Bahamas’ tax regime as “essential” to the Government’s public finances reforms, and told Tribune Business: “The pain VAT brings pales into insignificance with what be lost with a further [sovereign rating] downgrade.

“It [VAT] was not meant to be without its pain. We’re coming out of a serious recession that pretty much wreaked havoc on the financial affairs of the Government, and spread the cost of repairing that across the entire society.”

However, numerous businesses and private sector executives have expressed concern that VAT will impose an extra level of unwanted austerity on a Bahamian economy still struggling to escape the grip of the recent global recession.

As a consumption tax that is ultimately paid by consumers, the fear is that VAT - together with the price increases and inflation (particularly on services) it will likely bring - will depress spending within the economy.

And, as business revenues decrease, their costs will also go up by an as-yet unknown amount.

This highlights the Government’s dilemma as it seeks to put its finances back on a sustainable path; trying to balance the need for more revenue with the simultaneous requirement for economic growth.

Suggesting that the Christie administration had little alternative but to increase taxes in some way, Mr Smith told Tribune Business: “If it’s not VAT, what then? It has to be something.

“We cannot continue shooting along under the same old model for revenue enhancement. VAT seems to be the logical choice.

“If we don’t do anything that’s a decision to continue to run very large deficits, which by themselves, if left to their own devices, will mean that with the interest on new debt we will be adding $50-$60 million [in annual debt servicing costs]. Something has to be done.”

Apart from 2010-2011, when the Government’s GFS deficit was reduced by the $210 million Bahamas Telecommunications Company’s (BTC) privatisation, the red ink has totalled between $363 million and $508 million.

Leaving out 2010-2011, between the fiscal years 2008-2009 to the present 2013-2014, the Government will have added (if the current year’s projections come true) a total $2.158 billion to the national debt - an average of $431.6 million per fiscal year.

The fear here is that, if left unchecked, the $5.2 billion-plus national debt, and a debt-to-GDP ratio approaching 70 per cent, will leave the Bahamas with crippling debt that strips essential public services - crime fighting, education and health - of much needed funding.

The soaring debt and interest bill will also result in spiralling borrowing costs on the international capital markets. In short, the Government’s fear is that its financial woes could take down the entire economy.

Meanwhile, Mr Smith also urged Bahamians and businesses to focus on the long-term, as opposed to the immediate impact of VAT and the adjustments it will spark.

The former finance minister pointed to the other factor driving VAT and tax reform, namely the Bahamas’ commitments under the World Trade Organisation (WTO) accession and Economic Partnership Agreement (EPA) to phase-out numerous existing Customs duty rates.

Mr Smith said VAT was intended to replace the income lost through this. He added that while not all import tariffs would be “rolled back immediately”, this would likely happen with many over a 15-25-year period.

As a result, he argued that VAT’s impact would be mitigated in the medium to long-term, with prices possibly even dropping.