The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A Tax Coalition co-chair yesterday called for the 7.5 per cent Value-Added Tax (VAT) rate to be “set in stone for two years”, branding a policy of successive revenue-grabbing increases as his “greatest fear”.

Gowon Bowe told Tribune Business he would not support increasing the VAT rate within six months, or even a year, from its January 1, 2015, implementation as this would suggest the Government had got its fiscal calculations wrong.

Responding to John Rolle, the financial secretary, who yesterday told this newspaper the VAT rate was expected to increase “in the not too distant future”, Mr Bowe said this raised questions as to whether the chosen 7.5 per cent levy was designed merely to “whet the appetite”.

The Tax Coalition co-chair reiterated that fiscal reform had to be based on empirical analysis and facts, not emotion, and described the Budget’s failure to commit to spending cuts/controls as “worrisome”.

And Mr Bowe, a PricewaterhouseCoopers (PwC) Bahamas accountant and partner in his ‘day job’, also urged the Government not to use devaluation “as a scare tactic” to justify its fiscal reform agenda.

Acknowledging that much work and collaboration between the public and private sectors was still required on fiscal reform, Mr Bowe said Mr Rolle was likely “laying the groundwork” for when the Government would require new revenue sources to offset the World Trade Organisation (WTO) induced border tax reductions.

“The question is: Have they selected the best rate given our obligations on the international trade front?” Mr Bowe told Tribune Business.

“Is the 7.5 per cent rate just to introduce it and get us into an appetite, or is it really a sustainable rate for the foreseeable future? If not, there needs to be analysis from the Government on what they’re seeing as being the long-term, sustainable rate.”

Tribune Business reported yesterday that while Mr Rolle’s comments will come as little surprise to informed observers, given the implications of accession to full WTO membership for the existing Bahamian tax system.

Yet they are likely to increase concerns among those who had predicted the Government’s first goal was to ‘get the camel’s nose under the tent’ by merely passing VAT on to the statute books. Their fear all along has been that once this was accomplished, the Government would rapidly increase the rate to the original model’s 15 per cent.

Mr Bowe echoed this theme yesterday, telling Tribune Business: “My greatest fear is we get into a pattern of increasing the [VAT] rate to increase revenue.

“It has to be more comprehensive than that. We need to look at the rate to achieve our end goals, and prepare the public for the brunt of any change from that.

“I would not be in favour of them saying raise the rate six months from implementation, or even one year in, as it suggests they [the Government] did not do the best job of understanding” the revenues and spending required to achieve the necessary debt/deficit reductions,

Summing up his position, Mr Bowe told this newspaper: “That rate should be set in stone for two years to allow the environment to adapt to it, and accommodate any future change.”

The Tax Coalition co-chair acknowledged that there would be “trade-offs” between VAT and border taxes, given the Bahamas’s WTO obligations, when it came to achieving the Government’s revenue targets.

He pointed out, though, that the Coalition for Responsible Taxation had recommended measures to “protect the economy” and generate GDP growth.

Mr Bowe said he hoped Mr Rolle’s comments were “anchored on what the economy can bear”. He urged the Government to avoid taking “a stab in the dark” by merely increasing VAT to make up for foregone import tariffs.

“The Government can’t be making decisions in a vacuum,” Mr Bowe said. “Sentiment can say a lot of things, but you shouldn’t make decisions on gut feeling. Similarly, the private sector should not be expressing doom and gloom.”

He acknowledged, though, the concerns over the absence of specific spending reduction commitments by the Government in the 2014-2015.

This is especially pertinent given that the Coalition’s own study, by Oxford Economics, had found that the greatest deficit/debt reduction impact would be achieved via a mix of spending and revenue reforms.

And the same study also noted that the Government’s restructured VAT model, a 7.5 per cent rate with ‘few exemptions’ and a simplified structure, had to be accompanied by more spending curbs than the initial 15 per cent model.

“There is no clear evidence of expenditure being reined in, and that’s a worrisome element” Mr Bowe told Tribune Business, “as everything we did in the projections had some expenditure curbs.

“It may be early in the process, but there were some commitments made that do not give you confidence that expenditure control is being exercised and will be a serious initiative.”

The Budget, Mr Bowe indicated, appeared to focus more on curtailing spending increases as opposed to reducing it.

He also called for discussions surrounding the implications of the Government’s fiscal policy for its monetary policy, and one:one peg with the US dollar, to be less alarmist.

Michael Halkitis, minister of state for finance, had last week suggested that the Government’s decision not to reduce Customs duties in proportion to VAT was taken to avoid devaluation of the Bahamian dollar.

But James Smith, a Ministry of Finance consultant, subsequently told Tribune Business there would be a significant “time lag” between further fiscal deterioration and pressure on the currency peg.

“I really believe conversations behind that have to be very measured, as our deficit and debt do not correlate directly to our foreign currency reserved on a one:one basis,” Mr Bowe told Tribune Business.

Acknowledging that increasing foreign currency debt could ‘run down’ the reserves if capital inflows were muted, the Tax Coalition co-chair added: “I don’t like the currency valuation being used as a scare tactic. They know the sentiments of the general public.

“All persons that speak to it know we’re very protective of this one:one peg. It shouldn’t be a tool to scare persons.”