The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The government's 60 percent VAT rate rise was yesterday labelled "a death wish", amid fears it will plunge The Bahamas into recession by sucking an extra $400m from the economy.

Private sector leaders told Tribune Business they were stunned by the decision to increase the VAT rate to 12 percent for the 2018-2019 budget year, and warned that The Bahamas "cannot tax itself to success".

Robert Myers, the Organisation for Responsible Governance's (ORG) principal, said the government's revenue-focused fiscal consolidation measures were unlikely to succeed unless accompanied by matching "austerity" that reduced public spending.

He added that the VAT rate increase, coming just three years after the tax was first introduced at 7.5 percent, had "whacked economic growth in the knees" just as The Bahamas appeared poised to generate its highest annual GDP expansion for a decade.

Mr Myers also warned the Government against "doing stuff in a vacuum", and questioned whether it had done sufficient economic modelling to determine whether a 12 percent VAT rate rise was the best option for achieving its goals.

"That's what scares me," he told Tribune Business. "The negative backlash really scares me with the increased VAT and taking another $400m out of the economy. There is, without a doubt, going to be a negative backlash to that.

"You can't take $400m out of the economy, increase costs to the economy, and not have a GDP backlash. The last thing we need to do is put the country back into recession. There's no doubt that it's going to slow economic growth and create an inflationary aspect. That's going to have a negative effect on GDP, disposable income and poverty levels as well."

Mr Myers warned that "increasing taxes taxes without fiscal austerity is just a death wish", adding that the Government and Bahamians had "to stop fooling themselves" about the need for spending cuts.

"You can't tax yourself into success," he told Tribune Business. "Many governments have tried and all have failed. The rising ride that floats all boats is economic growth, and you've just whacked that in the knees. I don't understand how they think they're going to tax themselves into success."

Given that VAT is a tax paid by the end-consumer, the Budget rise threatens to reduce disposable incomes and living standards, thereby further squeezing the middle and lower income classes. This, in turn, threatens to reduce the projected 2.5 per cent GDP growth for 2018 upon which the Government is relying to drive its revenues.

But K P Turnquest, Deputy Prime Minister and minister of finance, argued that the Government had little choice but to seek a major revenue hike as he revealed that the fiscal equivalent of 'Judgment Day' had arrived.

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.

"Moving to significantly enhance the revenue yield of our tax system was not done capriciously but, rather, out of a deep sense of responsibility for righting the ship of state and restoring the fiscal health of the people's Government. This day of fiscal reckoning inevitably had to come," he told the House of Assembly yesterday.

The Minnis administration's message is that Bahamian people will now pay a high price for the sins of past governments, and their reckless spending and borrowing habits. Its projection of a $400 million revenue increase from the VAT rate rise is central to a projected $629 million, or 31.1 per cent, revenue rise for the 2018-2019 fiscal year.

The Budget communication was relatively silent on spending measures, with Mr Turnquest stating that "close to one-half of the Budget Heads have been allocated either virtually the same or even smaller" sums than in the 2017-2018 fiscal year.

However, the Budget data shows a $489 million or 23.3 per cent rise in total recurrent (fixed cost) spending to $2.589 billion - showing that the size of government continues to increase. Mr Turnquest blamed the 2018-2019 rise on the need to pay off some $172 million, or nearly half, the Government's unfunded spending commitments.

Interest payments to service the Government's debt are set to increase to $108 million year-over-year, while a further $76 million is needed to fill 'the hole' created by persistent under-budgeting for line items known to cost considerably more.

Michael Maura, the Bahamas Chamber of Commerce and Employers Confederation's (BCCEC) chairman, told Tribune Business yesterday that he was "shocked and disappointed" by the VAT rate increase to 12 per cent.

Mr Maura, who had issued an 11th hour plea for the Minnis administration to hold-off on any new and/or increased taxes, likened yesterday's hike to the Government "kicking the private sector while we're down".

He added that the private sector was now effectively being asked to drive economic growth and job creation "with one arm behind our back", and expressed concern that the VAT increase will lead to "a contraction in the market".

The Chamber chair, who had previously warned that tax increases would undermine still-fragile business and consumer confidence, said a 1-1.5 percentage point VAT rate rise "would have been a bit easier" to process in the absence of any consultation with the Government.

He acknowledged that "nobody would have been happy" with any increase, and said: "I think the word is shocked and disappointed.... Obviously the Government feels our fiscal circumstance is extremely dire, and this is why they had to introduce a 60 per cent increase in the VAT rate.

"In our situation, I believe we will see a contraction in the market when there's already so much uncertainty around WTO, businesses wondering if they will continue to invest in their business, manufacturers wondering if their tariffs will come down. We have oil prices on the rise, and the financial services sector under assault from the EU 'blacklist' and other international processes, and then we have a 60 per cent increase on the VAT rate."

The proposed increase revived memory of the slowdown produced by VAT's initial introduction in 2015, and Mr Maura expressed concern over the narrow 30-day window for businesses and consumers to adjust to the 12 per cent rate.

"You have businesses in the construction sector where bids have been issued," the Chamber chief said. "People make business decisions around the total cost of a project, and only have an 30-day opportunity to contemplate this. Thirty days does not provide an opportunity to contemplate. Thirty days is open up and swallow. It didn't have to be like this.

"There's going to be unintended consequences. I appreciate the fact the Budget speaks to fiscal reform, and speaks to placing the Bahamas on an appropriate footing and stable ground, but the way and degree to which it is being implemented is going to have unintended consequences. Those consequences are not good for business.

"With these other factors we're being influenced by, I hope we don't find business slowing down on hiring and pulling back on investment, but it is very possible we will see that."

Mr Maura said the strong US economy, and 2018 first half tourism rebound, were factors in the Bahamas' favour. The Government appears to be hoping that such external forces will offset the domestic impact of VAT, and ensure GDP growth projections of 2.5 per cent and 2.2 per cent for 2018 and 2019, respectively, are met.

But, with reduced consumer spending likely to be one consequence of the VAT increase, the Chamber chief said: "That will manifest itself in smaller grocery carts and smaller baskets of goods. There will be fewer meals in restaurants and probably fewer trips to the doctor.

Pointing out the private sector and consumer are now being urged to "feel more pain", Mr Maura told Tribune Business: "We're the ones expected to grow the economy and create jobs, and are being told we now have to do it with an arm tied behind our back.

"Government should be incentivising us, establishing opportunities. Increasing VAT by 60 per cent at a time when it's still very difficult and expensive to do business in the Bahamas, they're kicking us while we're down. That's what it feels like, notwithstanding our fiscal issues."