The Tribune

By YOURI KEMP

Tribune Business Reporter

ykemp@tribunemedia.net

The Opposition’s deputy leader yesterday blasted that a Cabinet minister “has no idea what he’s talking about” as the two sides continued battle over his proposal to slash the VAT rate to 10 percent.

Chester Cooper, who is also the Progressive Liberal Party’s (PLP) finance spokesman, responded to assertions by Kwasi Thompson, minister of state for finance, that the party's one-year rate cut would destabilise the economy and cost the Public Treasury some $100m in revenue by saying: “We suggest that he acquaint himself with the volumes of studies on the shelves at his office.

"We are satisfied that our comprehensive plan will increase overall government revenues, and is progressive and people-centred. We invite the junior minister to also acquaint himself with the Fiscal Responsibility Act he touts, and the legally-required reports from the Fiscal Responsibility Council and the requirement to report and debate by a specific time.

“A modest VAT decrease, coupled with an increase in minimum wage, means consumer spending increases as those on that end of the spectrum usually put extra money back into the economy to meet their everyday needs," Mr Cooper argued.

"This, along with revenue enhancement measures, would offset any VAT decrease which, in the next 12 months, would be nowhere near the $100m figure the junior minister apparently pulled out of thin air.”

However, Mr Cooper and the PLP have similarly provided no evidence to back his assertion on a Monday radio broadcast that cutting the VAT rate to 10 percent for one year would increase the Government's revenues by $200m through stimulating economic activity and tax-attracting transactions.

And, in an indication that the issue has not been comprehensively studied, Mr Cooper said the one-year rate cut would "give us enough time and enough empirical evidence" to determine whether a 10 percent VAT should be held in place for longer.

Mr Cooper yesterday said the party's VAT proposal should be considered as just one element in a broader economic plan. “We did not offer a singular proposal, in case that is misunderstood. The VAT proposal is only one element of a much larger economic plan with dozens of policies which will work together to provide relief, increase revenues and grow the economy," he said.

He was backed by Opposition leader Philip Davis, who echoed much of the same arguments in responding to Mr Thompson. "It is revealing that the minister of state for finance has chosen to focus solely on the issue of VAT, ignoring the dozens of other proposals in the [PLP] economic plan," he added.

"What’s more, he appears not to understand the basic economics underlying consumption taxes on which VAT is based. Consumption taxes rely on consumer spending in order to generate tax revenue. When the Government imposed the shock increase in the VAT rate by 60 percent in 2018, consumers cut back on their spending.

"Since then, the Government has failed to meet a single one of its revenue projections. This is what happens when you don’t understand basic economics. If you set consumption taxes too high, the economy slows down. These are the facts. This is the economic reality."

Consumer spending has only become more depressed due to COVID-19's economic devastation, and it is unclear whether a VAT cut will unleash the buoyancy the PLP appears to be assuming. It is also focusing heavily on social assistance, and minimum wage increases, and its plan contains little that is new or has not been tried before when it comes to growing the economy.

However, Mr Davis said: "Our proposal to cut VAT to 10 percent represents a modest decrease which will bring some relief to thousands of Bahamian families and help inject cash into an economy that desperately needs it.

"Once again, this reduction in VAT was not offered as a standalone proposal. Bahamians will see that we also propose a significant number of revenue-enhancing measures. VAT is not the only tax-raising mechanism available to the Government, but it is one that disproportionately affects ordinary Bahamians.

"The junior minister argues that this modest decrease in VAT will lead to a reduction in revenue for the Government. He is wrong. In fact, there will be an overall increase in revenue. Again, back to basic economic principles: The lower the price, the higher the demand," Mr Davis added.

"Lowering prices drive an increase in economic activity. Further, against the advice of the IMF as well as government consultants, they have bastardised the VAT model left in place by the former administration."

Even if Mr Thompson's prediction of a $100m revenue loss came true, Mr Davis argued that the Ministry of Finance had numerous measures at its disposal to make up the just over $8m per month revenue shortfall, although he did not specify which mechanism an administration he leads would use.

Mr Thompson had previously said: “The Opposition’s plan would lead to a dramatic fall-off in revenue likely in excess of $100m during their proposed 12-month period, at a time when the country’s fiscal resources are under tremendous strain and the needs for government to support social and economic programmes are even more pronounced.

“The Government cannot operate by trial and error. The 12-month period will only destabilise the economy, causing the PLP to have no choice but to return VAT to 12 percent the following year or increase it to 15 percent. The country needs stability and consistency.”

Mr Thompson argued that the Opposition will “compound their folly” by increasing government spending on social assistance and relief initiatives, as they have pledged to do, “while they gut the revenue base on a short-term political adventure”.

He added: “A 2 percentage point cut in VAT does not guarantee that additional spending needed, and will not be sufficient to achieve the amount of economic activity to replace the loss in revenue. It would be impossible for the Government to maintain its spending levels with that level of loss in revenue. It is completely irresponsible.

“Which existing programmes will be cut to make up for this $100m revenue loss? Will they cut back on the free tuition to University of The Bahamas and BTVI students? Will they cut back on the extension of free private school pre-school grants for Bahamian mothers? Will they cut back on the benefits under NHI? Will they cut back on critical Family Island infrastructure? Will they cut civil servant salaries and benefits?”