The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government must “rein in” spending to achieve its fiscal consolidation targets, a Wall Street rating agency warning that Value-Added Tax (VAT) and other revenue reforms would not be enough by themselves.

Moody’s, in its full country analysis on the Bahamas, also warned the Christie administration that consumer spending - the very thing it is relying on to drive VAT revenues - remains “weak” despite recent increases in foreign direct investment (FDI).

Data contained in the Moody’s report, released on Christmas Eve, casts considerable doubt on whether the Bahamian consumer, who will ultimately pay the VAT, can stomach the 15 per cent levy given that private consumption contracted by 0.4 per cent of GDP in both 2011 and 2012.

“Critically, tax reforms hinge on a robust recovery in domestic consumption, which has been weak despite several years of fiscal stimulus and high levels of foreign investment,” Moody’s warned.

“Real GDP grew at 1.8 per cent in 2012, and we expect it to pick up to 2-2.2 per cent in 2013/2014. But unemployment remains elevated at more than 16 per cent, dampening domestic demand. Weak private sector credit growth also continues to limit economic activity, particularly in the construction sector.”

Robert Myers, the Coalition for Responsible Taxation’s co-chairman, told Tribune Business yesterday that Moody’s statements on consumer spending “just confirms our fears” about VAT’s likely economic impact.

The Bahamian private sector has warned that VAT’s July 1 implementation, and likely resulting increase in inflation, will further slash consumers’ disposable incomes and living standards. This, they believe, will result in a further retrenchment of consumer spending as Bahamians adjust to new price levels.

“If spending is already weak, at a low, and you start increasing the cost of goods and services, I don’t see how that’s going to start stimulating the economy,” Mr Myers told Tribune Business.

“It sounds like they’ve [Moody’s] got the same concerns we do. You’re not going to tax your way out of this thing. Barbados tried to tax its way out, and look where they got to.”

Moody’s, which assesses the ‘creditworthiness’ of countries and companies, also argued that “meaningful fiscal consolidation [is] unlikely without expenditure restraint”.

It joined the Bahamian private sector in suggesting that the Government has to combine VAT and tax reform with economic growth, and cuts to its existing $1.737 billion recurrent spending budget.

Moody’s added: “Although the planned VAT introduction will be a significant catalyst for the success of the Government’s fiscal consolidation efforts, the ultimate effect of tax reforms on the Bahamas’ creditworthiness will depend on the Government’s willingness and ability to embed them in a broader fiscal strategy that also begins to rein in the Government’s current expenditure commitments.”

Mr Myers added that the Moody’s report also backed up much of what the Coalition had been calling for on government spending reductions.

“We’ve been harping on that as well,” he told Tribune Business. “It’s [the Moody’s report] good, it’s accurate and is an absolutely valid statement. It’s one we support.

“That sort of language is also included in our recommendations to the Government, and you’ve heard us say its about fiscal reform, not tax reform.

“You’ve got to look at the whole fiscal condition, which is what we’ve got to get engaged in, and make some decisions.”

Mr Myers said the Bahamas needed to see “stronger budgeting, top down budgeting” in the Government, arguing that this was “critical” to controlling spending and that every department stuck to its budget.

Moody’s, meanwhile, conceded that cutting Bahamian government spending would be difficult given that it was “critical to generating employment and maintaining significant social entitlement programmes”.

Using Ministry of Finance data, it revealed that civil service wages accounted for the largest chunk of the Government’s Budget at just over one-third of all spending - some 34.4 per cent. Interest payments on the national debt accounted for 11.1 per cent.

The other major shares of the Government’s annual Budget are purchases of goods and services (19.1 per cent); subsidies and other transfers (23.1 per cent); and capital expenditure (12.3 per cent).

“While the Government plans to gradually reduce capital spending in the current fiscal year, high expenditures on social transfers will be difficult to retrench as long as growth prospects remain subdued and unemployment high,” Moody’s acknowledged.

The rating agency’s position on VAT has changed little since 2012, with the 15 per cent rate in line with Caribbean regional peers.

Looking at VAT’s impact on Barbados, Belize and Jamaica, Moody’s said: “Among major Caribbean economies we rate, VAT collections contribute on average about 30 per cent of fiscal revenues and around 8 per cent of GDP.

“While the VAT is an effective instrument for raising revenue and is less distortive than other taxes, we expect it to be revenue-neutral during the first one to two years of implementation owing to offsets by a large set of zero-rated or tax-exempt goods and services, and the elimination of other taxes, such as select excise duties.

“Also, the authorities will be particularly sensitive to the effect of tax reforms on the price competitiveness of the tourism industry, and might opt for certain concessions and lower rates on tourism-related sales.”

Moody’s reiterated its earlier estimates that VAT will generate revenues equivalent to 6 per cent of GDP annually by 2016, accounting for roughly one-third of total government revenues.

And, acknowledging how “unpopular” VAT was proving with both the private sector and consumers, Moody’s said that while the Government had the parliamentary majority to force the enabling legislation through, doing so would come at “a significant political cost”.

That is a reference to the likely implications VAT’s introduction will have for the Progressive Liberal Party’s (PLP) re-election chances in 2017.