The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A key Ministry of Finance consultant “suspects” the Government has given itself enough breathing room to deal with the private sector’s post-Budget ‘double taxation’ fears, adding: “We don’t have two shots at this.”

James Smith, a former finance minister and ex-Central Bank governor, told Tribune Business that the “late decision” to restructure the Value-Added Tax (VAT) proposal meant the Government had no time in which to conduct a detailed assessment of adjusted tariff rates.

This, he implied, explained the Christie administration’s decision not to reduce Customs and Excise taxes simultaneously, and in proportion to, 7.5 per cent VAT’s introduction due to the uncertain revenue impact.

But, with VAT due to take effect from January 1, 2015, Mr Smith said the Government had given itself time to conduct a ‘line-by-line’ assessment of all its tariffs - something that could allow it to make modest rate adjustments.

“I’m not speaking from any inner knowledge, but I think what happened was, at the very late date when they decided to reduce the rate from 15 per cent to 7.5 per cent, sufficient work to measure how the tariff rates would work had not been done,” Mr Smith told Tribune Business.

“They were using the traditional model of rate rebalancing, and were really doing it in response to the World Trade Organisation parameters - replacing revenue lost from the duties that were lost. The model has been tweaked so much now that they have to go beyond WTO objectives.”

Mr Smith’s comments, and Prime Minister Perry Christie’s remark that the Budget presentation was late starting because he was working on it until the early morning hours, tie-in with information reaching Tribune Business that suggests the decision to cut the VAT rate in half - from 15 per cent to 7.5 per cent - was only taken in the final 72 pre-Budget hours.

The move came in response to feedback from both the Government’s and private sector’s various studies and consultants. Robert Myers, the Coalition for Responsible Taxation’s co-chair, alluded to the final frenetic few days in an interview with Tribune Business, noting that the private sector was only able to see the Prime Minister on the Monday or Tuesday before the Budget.

“It was a tough week,” Mr Myers said. “The 10 days preceding the Budget we’re really tough.”

Mr Smith, meanwhile, said the Government had to assess hundreds of tariff and Excise rates spread across numerous product baskets - and all imported in different quantities.

While many so-called ‘breadbasket’ and consumer items attracted zero to low duty rates, others attracted rates all the way to 30-35 per cent - and even as high as 85 per cent.

“I suspect that between now and January 1, the [adjustment] exercise will be complete so as to avoid double taxation,” Mr Smith told Tribune Business. “I don’t think it was possible to do that in a short period of time, and the schedule we have to present to the WTO.”

The former finance minister added that it made no sense for the Government to implement hast`y tariff adjustments that both undermined its revenue/fiscal objectives, and clashed with likely WTO commitments.

“You have to take a look and see how much you’ll lose, and what quantum you are importing,” Mr Smith said of the WTO’s likely effects on the existing border tax regime.

“It’s more complicated as you are no longer using the standard model. To do a proper job requires a new set of calibrations.”

And he further told Tribune Business: “You’re not going to have two shots at this. You have to get it right first time. You couldn’t change the rates in January, and then change them in March. Then you’d look really silly.”

Mr Smith said that while there was no immediate threat of a Bahamian dollar devaluation, such a scenario could occur if no steps were taken to arrest the $5.567 billion national debt’s growth. “There’s a huge lag,” the former Central Bank governor added.

Such a process, he suggested, would start with further sovereign credit rating downgrades and reports that suggested to the world the Bahamas was in trouble. This could then manifest itself in reduced tourist spending and arrivals, and less foreign direct investment, all of which reduced foreign currency inflows and impacted the balance of payments (especially on the capital side), thereby bringing pressure to bear on the one:one fixed exchange rate peg.