The Tribune

EDITOR, The Tribune.

Milton Friedman was a Nobel prize winning economist famous for repeating a truism of life: there ain’t no such thing as a free lunch.

For decades, we gorged ourselves on hand-outs, waste, corruption and slackness at the public Treasury. When we lived within our means this could have been excused as youthful exuberance. But when we started borrowing money to finance the fête, surely we had to know that a day of reckoning would come.

That day is now. We spend more than we earn and up to last year were doing a giddy dance towards a debt trap…a state of desperation where debt is bigger than GDP and lenders force countries to draw their economic belt so tight it cuts off their circulation.

With our national credit rating hovering near junk-status, the global rating agencies are watching with beady eyes to see how we get out of our financial mess.

The Minister of Finance was faced with two budget choices – austerity or growth. He elected to create a third lane in an effort to try and have it both ways. He proposed an austerity programme led by public sector rationalization and fiscal constraint. Then in a move to head off dire financial consequences, he proposed a 4.5 percent increase in the VAT rate.

Because he is a politician, he crammed into the budget a virtual smorgasbord of waivers and favours intended to sugar-coat the bile of the austerity pill we are being forced to swallow. Economic growth is the promised reward for our national sacrifice.

All governments must tax to give us the kind of society we want to live in. Protective and health services cost money as do defence, education, infrastructure and heritage parks.

Every day, Bahamians are forced to divvy up their own family budget to manage the trade-off between utility bills, mortgage and eating out. The mortgage is fixed, the light bill is variable. Dining out becomes the extravagance.

While we understand this principle at home, some of us don’t think they should shoulder the burden of paying our national bills.

That said, the central issue for our economy is not VAT at 12 percent. We are comparatively one of the lowest taxed jurisdictions in the region. However, we tend to favour regressive taxes that hit the poor and the middle classes hard. Customs duties, VAT, and property taxes are a necessary inconvenience for the rich but a burden for those not so well off. Coming up with a fairer, more progressive tax system, like income tax, is a far more important debate than VAT alone.

If you listen very carefully to what the Prime Minister has said in the last 12 months it is clear while not immediately solving the problem he is trying to mitigate the burden of regressive taxes on poor people.

Removing VAT from breadbasket items, medicines and some necessities like shoes and clothing is an attempt to insulate the poor from this burden.

But while Bahamians who shop at Payless shoe stores in the US will pay no VAT on their $15 pair of shoes, the well-to-do will enjoy the same exemption on their $500 Prada slip-ons purchased at Neiman Marcus. Such is the regressive nature of this waiver.

The government’s problem is mostly messaging. If they can ever get their PR game straight, the government could hammer home that their strategy is built on sound economic reasoning and has both rhyme and rhythm.

The Minister wants to use some of his VAT haul to spur growth by investing in public goods like infrastructure, business incubation and start-ups.

The first step to generating more revenue without raising taxes is to improve the tax collection system, eliminate fraud and waste in the public Treasury and tackle corruption. The Prime Minister made this his mission from day one in office but his government’s messaging doesn’t drive home these positives.

Bahamians are notorious and ingenious in thinking up ways to avoid paying taxes. We will “tip” a public official $100 if said official can get us out of a $50 duty, ticket, fee or fine. We dispense with economic logic in our tax aversion.

For sure, there are alternatives to VAT to raise revenue for the government. But the FNM has flipped the PLP economic script which was to substitute borrowing for taxes. That only got us a mountain of debt.

The evolving Minnis economic doctrine is a healthy mix of consumption, public and private investment and prudent government spending. This will grow the economy enabling us to earn our way out of this fiscal purgatory.

Instead of piling blows on the Minister of Finance we should appreciate the rationality of his policy. Alongside austerity he intends to continue making wise investments to stimulate the economy.

Government spending has a multiplier effect. Every $100m in increased government spending could trigger $150m in total output throughout the economy.

While the debate in the House of Assembly will rightly be contentious, we need a policy discussion on how to create employment and increase real wages so that the pain of the VAT increase is minimal and more importantly is shared equally.

Aggressive government action is what we need (and voted for). The tourism golden goose is finally sputtering back to life. Tourism is what we know and are pretty good at. We should build on this growth and spread the opportunities throughout the Family Islands and not just limit it to Cable Beach and Paradise Island.

We can create our own Pirates of the Caribbean themed Fantasy Island on Grand Bahama to get them back in the game big time.

Let us reinvent the Irish model of financial services that the Minister alluded to when he slashed VAT on aircraft. There are thousands of corporate aircraft registered in the Cayman Islands and Bermuda but very few here. We tax, they don’t.

Although 99 percent of these jets never land in Cayman or Bermuda they employ an army of locals in high paying jobs that make substantial contributions.

The government should coax the private sector and our Lyford Cay friends and friendly development partners like China to establish a $1 billion Venture Capital Fund to get Bahamians into industries like agriculture and fisheries that offer import substitution potential as well as lucrative export opportunities that earn foreign exchange.

The fund can help young Bahamian entrepreneurs in renewable energies and in areas that generate goods and services we can export.

As to our current fiscal crisis, how about selling 30 percent of our stock in BTC to Bahamians. BTC’s revenues exceed that of the government. One third of BTC must be worth at least as much as the $400m the Minister expects to raise from the VAT increase.

Despite hard times the offering will be oversubscribed.

THE GRADUATE

Nassau,

June 7, 2018