The Tribune

The governing party under the leadership of Prime Minister Dr Hubert Minnis presented its proposed budget in the House of Assembly yesterday. Deputy Prime Minister and Minister of Finance Peter Turnquest delivered the 111-page, nearly 14,000-word document that sets taxation and expenditure for the fiscal year July 1, 2018-June 30, 2019. Those are the straightforward facts. But the budget itself was anything but straightforward. What it gave with one hand, it took away with another. From our perspective, we believe what it took away was greater than what it gave, it levied taxes that will stifle instead of opportunities that will stimulate and the economic repercussions, we fear, will be widespread.

Most notable was the dramatic increase in Value Added Tax (VAT) from 7.5 percent to 12 percent and we have no doubt the national conversation over the next days will focus on this action. Even in the most prosperous of economies, increasing the cost of living by nearly five percent in one jump is hard to digest. But doing so in an economy that is anaemic, when many businesses are struggling to keep their doors open, individuals struggling to keep their lights on and families trying to keep their children in school, in untenable.

We fully appreciate the government has massive expenses and, in plain language, is broke. The current administration inherited a financial mess. But increasing the cost of consumer goods and services by 4.5 percent at one go is a heart-thumper triggering a knee-jerk reaction and predictions that this was the end of The People’s Time and the PLP Opposition would be back in power next election. We believe that line of thinking is too simplistic, ignoring the fact that if the FNM wanted to increase taxes at any time this would be the time to do it.

People have short memories and tend to be forgiving. If the current administration is able to achieve even some of the goals it outlined, the higher rate of VAT will be absorbed and, if not liked, borne with quiet resignation.

Our problem with raising the VAT rate is not that it spells a political doomsday for the FNM, but that it discourages rather than encourages growth. The less money people have to spend, the harder it is to grow the economy. When people feel pinched, they hesitate to invest. That goes for everything from buying a home to going out to dinner and a movie. Businesses do not hire, they do not expand when they sense lack of consumer confidence. Nearly 80% percent of the Bahamian economy is service-based, many of those from professional services to dry cleaning representing non-essential services that can be curtailed, further shrinking a struggling economy.

We worry more about the message that the government is in financial trouble so we will tax, instead of one that says we will do better when the economy is better so our focus is on expansion, not contraction.

The way the Minister of Finance introduced the increase was also of great interest. He preceded it with all the sugary ingredients of the proposed budget that would be well-received – removal of fat on bread basket items likes butter, cooking oil, grits, cheese, corned beef, rice, flour, soaps, and more. Customs duties, he announced, would be eliminated on clothes and shoes.

The City of Nassau Revitalization Act and the Family Island Development Encouragement Act would be extended for one year, the first-time homeowner’s stamp tax exemption for five years and construction materials exemption for repair of dilapidated buildings for two years.

Customs duties would be eliminated on helicopters and jets, paving the way for The Bahamas to become a long-sought-after international aircraft registry. Duties would also be eliminated on certain food products including whole salmon, frozen fish fillets and more. There would be reduced Customs duties on materials used for printing and on floor tiles and fabric softener.

The sweetest part of the “what they gave” portion of the budget for consumers was an increase in duty exemption from $300 to $500 per person for accompanied personal goods twice a year. Smaller hotels would get a break in business licence fees.

Mr Turnquest outlined positive steps – reduced expenditure on government’s wages and purchases of goods and services by $120m, or 10 percent, promised that the long-term plans would be to create a balanced budget within three years, clear up “the mountain of arrears and unbudgeted commitments left behind” that total $360m, establish legally-binding Fiscal Responsibility legislation and reduce debt to no more than 50 percent of GDP. He pledged to stop under-budgeting and to provide accurate, transparent accounts, to develop the Blue Economy based on the resources of the ocean while preserving the marine environment and to continue the government’s commitment to its socio-economic growth agenda.

And then the hammer fell – the increase in VAT. It is not the average consumer alone who was slapped on the smiling face with a slab of frozen fish (soon to be Customs duty free does not make it feel any better). Web shops, thought by many to be among the most successful businesses in the country, were hit especially hard. Gaming houses with revenue of $20m or less will pay 20 percent, a sliding scale rate that reaches 50 percent of earnings at $100m or more. Patrons at gaming houses will also be taxed at a rate of five percent.

While those businesses were singled out, thousands of other persons and companies, foreign and local, will also be paying the piper for past playing that left the country burdened by debt. Immigration fees, already high, will be increased and new port fees introduced. The government says it is all about the bottom line to “pay off the massive backlog of arrears, judiciously finance our policy agenda, meet our deficit targets and set the stage for the pending reductions in Customs duties. That is a most daunting fiscal policy challenge indeed that requires decisive, though difficult, policy action”.

We believe what we need are incentives to promote small and medium size businesses, to develop skills training for at risk youth and others participating in an increasingly digital world and we believe the country needs facilitation of entrepreneurial opportunities.

The government would be in a far better position to accomplish its worthy goals by looking at ways to stimulate rather than stifle the economy. Taxation or imagination? That is the question. There is still time. We recommend a review, a reduction from 12 percent to a maximum 10 percent and a new look at how to stimulate growth through additional economic zones and other options that countries and economies far less bountiful than ours have discovered.