By NEIL HARTNELL
Tribune Business Editor
nhartnell@tribunemedia.net
Government policymakers have “certainly forgotten” that a real 10 per cent spending cut must combine with 7.5 per cent Value-Added Tax (VAT) if the Bahamas is to eliminate its fiscal deficits.
Gowon Bowe, the Coalition for Responsible Taxation’s chairman, yesterday reminded both the Christie administration and Bahamian people that reducing the $6 billion national debt was “tied very heavily” to VAT working alongside public spending cuts.
Recalling the Oxford Economics study conducted on the Coalition’s behalf, Mr Bowe said it revealed that a 10 per cent cut in real government spending over the five years to 2018 was essential to achieve the desired fiscal rebalancing.
“To have the 7.5 per cent VAT rate, the Government had to reduce real expenditure by 10 per cent over five years,” Mr Bowe told Tribune Business, “not an absolute reduction in money spent, but in nominal value - other than inflation.
“We were holding the line and not increasing expenditure.”
The Coalition attempted to drum this message into the Government throughout the latter half of 2014, reiterating repeatedly that a lower-rate VAT had to be broad-based (few to no exemptions) and combined with real spending cuts that eliminated waste and inefficiency.
The Coalition’s late May 2014 position paper, for instance, warned: “The Coalition directs the Ministry of Finance’s attention to scenario 6 (VAT at 5 per cent) and scenario 3 (VAT at 7.5 per cent.
“Both have narrow exemptions, which allows the tax to be far simpler to administer and thus significantly widens the tax base and revenue potential.
“However, we highlight that such rates are only viable with expenditure control and improved collection rates in other taxes, which the Government must commit to in order to demonstrate that all sectors, private and public sector and the wider citizenry, must work together to make this happen.”
And Mr Bowe himself said last year: “The two major themes I saw coming through [from Oxford Economics] was that expenditure reductions or expenditure cuts allow the Government to keep the tax burden on the populace at the lowest level.
“You see it with VAT at 7.5 per cent, and both the payroll taxes. It requires expenditure cuts to keep them viable.”
Yet Mr Bowe yesterday articulated a growing concern of many in the private sector, namely that such advice may have fallen on deaf ears.
“This has certainly been lost on policymakers and may have been lost on the public,” he told Tribune Business. “It requires expenditure reductions on the part of government, and that was 10 per cent over a five-year period.”
Prime Minister Perry Christie, in his New Year’s address, certainly gave rise to such concerns by making no mention of what the Government had previously stated was its VAT-related objectives - elimination of $400 million annual deficits and a reduction of the national debt.
Instead, he talked about using VAT’s ‘revenue windfall’ to finance the Bahamas’ so-called social and infrastructure needs, implying that the monies will simply drive more government spending.
The Government has projected it will earn $400 million in gross revenues during the first full year of VAT (the 2015-2016 Budget year), or around $350 million net (once the revenue loss from January 1’s Customs duty reductions are factored in).
Yet Mr Bowe said the question of whether VAT will deliver these revenues was “the big elephant in the room”.
“We know it’s going to bring surplus revenues, as we have service industries that were untaxed in the past,” he added. “We don’t know if service industries are large enough to make up for the revenues we’re going to forego because of the reductions in Customs duties” both short and long-term.
The Coalition chairman said “it remains to be seen” whether the initial $400 million gross annual target is hit, given that the forecast was based on there being no drop-off in consumer demand/consumption with VAT’s implementation.
However, Mr Bowe urged the Government “not to get enamoured with the new money you’re probably going to see”.
“It’s important all persons realise the focus should not be on what the revenues enable you to spend. The focus should be on fiscal reform, so that the revenues from VAT are felt immediately by the economy, and by the debt in the long-run,” he told Tribune Business.
“There will certainly be a significant boost in revenues to the Government, and persons will be looking to make sure that the monies are not squandered by being used before they reduce the deficit and debt.
“It’s not just if you collect $50 million. Is it going to be used to reduce the debt and deficit. The focus has to be on deficit reduction. It needs to be looked at more that they [the Government] don’t increase expenditure in expectation of an increase in revenues; that they hold the line on expenditure.”
Comments
duppyVAT 9 years, 9 months ago
Political spending is a run away train ........... deficit spending has become contagious in most countries today. There are just too many unrealistic dreams, expectations and promises that can only be met through deficit spending ............ spend now and the future generation will pay. Its poor national development planning.
Hope Felix Stubbs can speak into the ear of the PLP and FNM politicians as they craft this long term Bahamian National Deveopment Plan
Economist 9 years, 9 months ago
This is one promise that the government MUST carry through on. If they don't the "Rating Agencies" like Standard & Poor's may down grade the country's rating to "junk bond" status.
Hogfish 9 years, 9 months ago
but Perry and Bernie need a new house first...
Sickened 9 years, 9 months ago
If the politicians (current and future) would only steal 90% of what they do now we would be in good shape. I propose that they pass a bill stating a maximum amount of money that any government can legally steal or accept in bribes. Let's say we start at $300 million per year. That should keep the politicians' living standard roughly where it is now. And then we can think about reducing that amount each year until we get a majority of ethical politicians in government who may consider making stealing and bribery a crime. Is that too much to ask???
duppyVAT 9 years, 9 months ago
If the average consumer would just boycott paying bills for one month ........ that will be the biggest political statement that can be made to this government ......... let us exercise our POWER of the purse ................. Perry can only spend what we give him.
ted4bz 9 years, 9 months ago
Exerting pressure on a poorly produced dry orange only crushes it, nothing more.
ted4bz 9 years, 9 months ago
VAT TIMES THREE
Show me just one thing gov's have done right and I will say no more that their incompetence is not a disease.
Some items and services are taxed only 7.5% but for most commodities and services 7.5% is a trick! Try 7.5% x 3
If you use a credit card in the store it will be taxed VAT two and a half times.
Auto repairs and parts are charged VAT and VAT is charged on top of VAT.
Most of us won't recognize the damages that VAT will inflict on our incomes until some time to come.
VAT is to improve this country credit rating by helping to reduce our credit deficits. Makes nonsense. VAT is a deficit and it will increase the countries deficits by increasing our personal deficits.
Exerting pressure on a poorly produced dry orange only crushes it, nothing more. We will all experience this damage months from now.
ohdrap4 9 years, 9 months ago
true. however, I see my coworkers already complaining about this and that price, and are starting to feel it.
the customs duties reductions could at best maintain the price, BECAUSE THE VAT IS CHARGED ON DUtY. Even if the merchant does not markup on VAT, a 15% reduction on duty, generates about 5% reduction on costs to the merchant, and when vat is charged on the final price, the price will remain the same. ON A SUNNY DAY, for products which were formerly duty free, or which duty reduction is 15% there were immediate increased.
I have always said that, before vat, if you buy a hot dog machine you paid duty once. Now the duty might have been slightly reduced, but, adding vat, the hot dog machine costs the same . PLUs, PLUS, the govt will collect each time you sel a hot dog well into the future, which it did not do before.
ted4bz 9 years, 9 months ago
Allocating monies from one sector of the economy, from the people to another sector of economy, to the deficits is a very risky, poor and irresponsible maneuver especially when there is no preparations made to compensate in advance.
Here is an example: A flood is coming the dam is breaking and we need to hold it back. The only material are the farms. The only thing is to dredge the farms to hold back the dam. The crops are not ready but there is no time to wait for food. Maybe we'll hold back the floods, just maybe, but we'll have no food and no farms for sure.
So, we figured out where to take money from and when there is no more there, but left with a greater challenge, the question remains, then what? Don't tell me, I already know, there is no preparation here either.
Exerting pressure on a poorly produced dry orange only crushes it, nothing more. Just squeeze the damn orange anyways, a typical attitude of all governments everywhere.
Hmmm!
Well_mudda_take_sic 9 years, 9 months ago
This guy Bowe should have been opposing the introduction of VAT from day one, but instead chose to be one of its more vocal proponents. Now he tells us that he has all along been counting on our "spend spend" government (no matter whether it be PLP or FNM led) to cut spending by 10% for VAT to be successful. It's obvious the very talkative Bowe has about as much common sense as a frail small donkey willing to offer a free ride to Loretta Butler-Turner or an extra large conch that can't make up it's mind whether it wants to be diced into a salad or simply scorched!
The_Oracle 9 years, 9 months ago
tedb4bz VAT is only 7.5% total at point of retail, except in cases of margins being increased. In other words, the aggregate is 7.5%, collected at each stage of a value being added. I fear too many people do not understand VAT, including business people, which is causing the multiplier you speak of. Yes there will be inflation, but SOme duty rates have dropped, with all duty rates to drop by 2025. WTO compliance! EU-EPA trade agreement Compliance!
Economist 9 years, 9 months ago
One also has to take into effect that in many instances the Business License fees have doubled. Cost of permits have gone up. Customs charges for clearing goods has gone up. All of this will increase the cost of the goods and services and none of this is vat recoverable. There is a direct cost to the business associated with the administration of Vat.
And, yes, some customs duty has come down, but don't forget that customs then adds 7.5% to the duty that it just charged so a $100 item then get charged $50 duty and then 7.5% is charged on $150 for a total of $161.25. So unless the duty dropped more than 11.25% the cost has gone up.
This means that, when you add the 7.5% Vat to all of the above there is an increase of between 10% and 12% to the consumer.
The_Oracle 9 years, 9 months ago
I agree Economist, costs have gone up significantly, especially shipping, port fees and Licensing fees,even power. Also in the food chain particularly you may well have incremental increases at every stage, import, wholesale, retail in addition to VAT. Here we are 5 days from the beginning of the reporting remittance phase and the E-method of filing is not ready, and the forms are clear as mud anyway. I am also led to believe quite a few Government minister owned businesses have not implemented VAT yet! All those warning letters and fines must be going out as internal Government memo's! Not exactly confidence inspiring, but then, government never is.
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