The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

There is "not a chance in hell" that the 60 percent VAT rate increase will generate the extra $400m revenue the government is targeting, a prominent businessman is warning.

Sir Franklyn Wilson told Tribune Business that it was "unwise" for the Minnis administration to assume a 12 percent VAT will deliver a revenue increase of the same proportion, as the hike will "incentivise" Bahamians to find legal ways to avoid the tax.

Describing himself as "shell shocked" by Wednesday's budget, the Arawak Homes chairman said he was "at a loss to understand why" the government was ignoring all research and advice by ditching the low-rate, "minimal exemptions" VAT model.

He also pointed to several contradictions in the budget communication, in particular the "travel exemption" increase to $500 that coincides with the duty waiver for footwear and clothing retailers.

Questioning "why anyone would go into the retail business", Sir Franklyn said the VAT-induced reduction in consumer spending power was bound to have "significant repercussions" for the Bahamian economy and its projected growth rates.

And he also challenged the projections for an ever-increasing civil service wage bill, given that "the whole thrust of what is being said is to drive personal emoluments down long-term".

Sir Franklyn said it was vital that KP Turnquest, deputy prime minister, provide further rationale for the pain the 2018-2019 budget will inflict when he kicks-off debate this Wednesday.

Otherwise, the Sunshine Holdings chief warned, the confidence of many Bahamians will be shaken through the belief that the Government is "making things up on the fly".

"I'm still so shell shocked," Sir Franklyn told Tribune Business of the Budget. "I haven't had a chance to really digest it fully, but my first blush is this is really, really bad news. This is really troubling. What else could you say?

"What I'm fearful of, and fearful is not the right term, is the Government is not going to get the revenue it thinks it's going to get from this initiative. They're providing sufficient incentive now for people to get into legitimate tax avoidance.

"You cannot assume that, because you got so much money at 7.5 per cent, if you go to 12 per cent it's a proportionate increase," Sir Franklyn continued. "My position is that it's not prudent. There's not a chance in hell of that happening.

"People will find legitimate ways to get around it. They are giving incentives to find ways to be more aggressive in avoiding VAT. He'd [Mr Turnquest] better hope and pray the economy grows if he's to get that revenue."

Such a proportionate increase is exactly what the Government's Budget numbers appear to be banking on. They suggest that a 60 per cent VAT rate increase, going from 7.5 per cent to 12 per cent, will boost gross VAT revenues from the $663.562 million forecast in 2017-2018 to $1.062 billion in the upcoming 2018-2019 fiscal year.

This translates into a 60 per cent revenue increase, matching the magnitude of the rate rise. Yet Sir Franklyn reiterated: "It appears to me that he [Mr Turnquest] will not get 60 per cent more revenues because he increased the rate 60 per cent. There's not a chance in hell of that happening.

"Once you go down this path, you're creating more and more incentive for people to look to avoid this tax.... I am at a loss to understand why. All the studies showed and established that the best model was a low-rate, minimal exemptions VAT. There was a reason for that.

"I don't understand this. I am at a loss to understand the logic behind this Budget. I'm looking forward to the Minister's address on the second reading, where he will provide the rationale for this."

Should the Government proceed with its VAT increase plan, the Bahamas will have come 'full circle' in just five years. For it will have ended up back where it started in 2013, when a 15 per cent VAT with multiple exemptions was comprehensively rejected by the private sector and the Government's own advisers.

Mr Turnquest, in last week's Budget unveiling, said profligacy by past PLP and FNM administrations meant the Government had little choice but to force a heavy dose of fiscal medicine on the Bahamian people.

Pledging that "the era of fiscal irresponsibility has come to an end", and that the Government can no longer "kick the can down the road", Mr Turnquest portrayed the VAT increase as unavoidable if it is to achieve both the Fiscal Responsibility Bill's consolidation targets and pay off some $360 million in presently unfunded public spending commitments.

The Government's projection of a $400 million revenue increase from the VAT rate rise is central to projected $629 million, or 31.1 per cent, revenue growth for the 2018-2019 fiscal year - a target that many are already sceptical of.

Perhaps anticipating a reduction in economic activity, and business turnover, as a result of the VAT increase, the Government is predicting Business Licence fee income will drop from the $150 million forecast in 2017-2018 to just $101.207 million in the upcoming Budget year - a fall of 32.5 per cent.

Sir Franklyn, meanwhile, said it was ironic that the Bahamas now appeared to be following the same path as the high-tax European states responsible for much of the current pressure facing the country's financial services industry.

"This is precisely why so many people found the Bahamas useful [for tax planning purposes] because their home countries kept doing stuff like this," he said. "Europe has proven that high rates and exemptions create incentives for people to exploit loopholes."

Turning to other perceived anomalies with the 2018-2019 Budget, Sir Franklyn said the increased 'personal travel exemption' and import duty waiver for clothing and footwear retailers highlighted its 'give on one hand, take away with the other' feel.

"Think about this," he told Tribune Business. "You got more exemption to go to Miami, or go online. Why go into the retail business in this country? What impact is that going to have on Business Licence revenues if sales drop?"

Sir Franklyn added that the Budget "has raised a lot of questions" on both the Government's spending and economic growth. "What is this? What is the logic behind this? I do not know a school of thought, any creditable school of thought, where you do something like this and maintain the economic growth in the same Budget," he asked.

"I'm waiting and anxious to see how the Minister explains this in terms of why we should not believe this will not have significant repercussions in terms of the impact on the economy. I'm waiting to see, when he speaks next time, why we should not see this as being really, really bad news.

"On the surface, I do not see how this can possibly be anticipated to trigger economic growth. On the surface these seem to be some seriously wrong policy moves. He [Mr Turnquest] now has to explain why this is a good move. Why go down this road of increasing the rate, increasing expenditure, when all data from credible sources said this was not the right policy move."

The Deputy Prime Minister last week admitted that the Government's annual wage bill has increased by $226 million, or 40 per cent, in the seven fiscal years to 2018-2019, and Sir Franklyn argued that not enough was being done to restrain, or cut, its growth.

Budget figures show the Government attempting to hold public sector wages, described as "personal emoluments", relatively flat year-over-year at $738.476 million for 2018-2019 - a slight decline on the prior year's $741.759 million.

However, this still represents 28 per cent of the Government's total recurrent spending for the next fiscal year. And the salary bill is expected to grow further over the next two years, rising to $757.478 million in 2019-2020 and $790.941 million in 2020-2021.

"There's so much in this Budget that makes me wonder what is going on," Sir Franklyn told Tribune Business. "How could personal emoluments be going up when the whole thrust of what was being said was to drive personal emoluments down long-term.

"How is that? The biggest single discretionary thing the Government can do to reduce expenditure is personal emoluments. How could that be going up? When you cut away the politics, how could that be happening?"

He added: "I am hoping and praying that the next time the Minister speaks he will address issues like this, and give people a degree of confidence the Government does, in fact, have a plan. Otherwise people will think the Government is making things up on the fly, and that could shake up confidence in a lot of ways."