The Tribune

• UoB study warns on fiscal impact but says ‘pursue’

• Super Value chief backs 10%; impact to ‘balance out’

• Economy needs to grow 5% annually in next decade

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Cutting the VAT rate to 10 percent will cause “only slight improvement” in job creation and economic growth, a University of the Bahamas (UoB) study asserts, while advocating it still “be pursued’.

The report, prepared by the university’s Public Policy Institute for the Ministry of Finance, also warned that the two percentage point cut planned by the Davis administration would worsen key fiscal indicators such as the fiscal deficit and debt-to-GDP ratio.

Adding that the tax cut would have no impact on reducing income inequality in Bahamian society, it called for “compensating tax revenue initiatives” to offset the reduction in VAT revenue caused by slashing the rate from the existing 12 percent to 10 percent. However, no such measures have been announced by the new government. 

“Following a special request by the Ministry of Finance, a simulation exercise was carried out for changing the VAT rate,” the UoB report, part of the former administration’s Bahamas Recovery and Sustainable Growth Project, said. “The simulations advanced a reduction of the VAT rate from 12 percent to 10 percent (scenario 19), and a VAT rate increase from 12 percent to 14 percent (scenario 20).

“The objective of the simulation exercise was to estimate the implications for the economy, specifically the value-added real GDP, fiscal surplus/deficit, debt-to-GDP, current account, inflation, unemployment, poverty level and GINI index.”

The latter measures income and wealth inequality, and the study continued: “It was found that reducing the VAT rate by two percentage points, from 12 percent to 10 percent, shows only slight improvements in the real GDP, unemployment rates, prices and poverty levels.

“There is, however, a worsening of the current account, the fiscal deficit and the debt-to-GDP ratio. There is no change to the GINI ratio. If the priority is to benefit the economy, if only slightly, the VAT reduction should be pursued. 

“However, and at the same time, there must be compensating tax revenue initiatives to address the rise in the deficit and debt-to-GDP ratio.” While the UoB study thus gives cautious backing for a VAT rate cut that will likely be welcomed by many Bahamian businesses and consumers, it indicates that the economic impact will largely be modest - and negative for the Government’s finances.

However, neither “scenario 19” nor “scenario 20” were seemingly attached to the report, which was posted to the Government’s website. As a result, it is unclear whether the UoB study’s VAT cut modelling accounts for the multiple exemption and zero-rating eliminations planned by the Davis administration, making it impossible to judge whether the exact 10 percent structure was assessed.

The Davis administration believes that returning to a lower-rate, broad-based VAT will make the tax much simpler to administer and enforce, thereby enhancing compliance and reducing the scope for revenue leakage, fraud, evasion and mis-reporting.

And it also hopes that reducing the multiple exemptions and zero-ratings introduced by its predecessor will further boost revenue collections, thereby ensuring the Public Treasury is no worse off with a 10 percent VAT rate than at 12 percent.

The reversion to a lower-rate, broad-based VAT was backed by Super Value’s principal, Rupert Roberts, who told Tribune Business it was a mistake for the Minnis administration to “unravel” that model. And he argued that the impact from making so-called breadbasket food items VAT-able would be offset by the two percentage point VAT reduction on non-food spending.

“The controversial VAT [elimination] on bread basket items was a mistake originally. The New Zealanders warned the FNM and DNA if they ever came to power not to do anything to unravel VAT,” Mr Roberts said. “We were involved in the negotiations. It was the first thing that the FNM did with an election promise, which reduced Government’s revenue and left the system open to fraud.

Most families spend an average of 20 percent of their income on food. Therefore they will have a 10 percent increase on 20 percent of their income, and a 2 percent reduction on 80 percent, which will balance out.

“Our calculations indicate that government will collect the same revenue. We are not surprised at government’s actions as we expected the problem would be reversed if a new government came to power.”

Breadbasket foods that are presently VAT-free include baby foods and cereals; rice; butter; corn beef; flour; and fresh milk. And current VAT-free medicines also include those for heartburn and indigestion; aspirin; cough, cold and allergy medications; and those that deal with pain and fever.

Rather than rely on zero-ratings and exemptions to minimise VAT’s impact on lower income Bahamian families like its predecessor, the Davis administration plans to do this via social security payments - something it believes will be more efficient. The report’s contents indicate that it was compiled, and completed, in the months following May’s 2021-2022 original Budget. 

Meanwhile, the UoB study warned that The Bahamas needs to achieve an average 5 percent annual gross domestic product (GDP) growth rate over the next decade to return the Government’s finances and the economy to “a healthy state of affairs”.

To achieve this, it added that the country needed to attract “significant” investment in multiple industries at levels far higher than it has traditionally done so, while recommending that there be a major focus on renewable energy to reduce electricity costs and thus keep inflation under control.

It revealed that, based on an August 12, 2021, note from outgoing BPL chairman, Dr Donovan Moxey, the state-owned energy monopoly has estimated a $451m investment is required if it is to generate 33 percent of its energy from renewable sources by 2030. 

“To reverse its current economic and fiscal trajectories, and achieve targets that represent a healthy state of affairs for the country, The Bahamas must generate economic growth levels averaging about 5 percent over the next ten years,” the UoB study said, while conceding “that this has not been achieved previously but must be targeted moving forward.

“To achieve such high levels of growth, the country must attract significant direct investment over multiple economic sectors. Of the five economic sectors under review, the highest yields come from investments in the “transformation and trade” sectors while the largest impact on GDP comes from the tourism sector.

“Reducing inflationary pressures from high levels of investments that generate a significant number of jobs, and therefore tightens the job market, a significant investment in renewable energy is necessary to curtail price increases,” the report continued.

“To optimise the benefits of a growing economy to the country’s fiscal outcomes, reducing government tax expenditures, i.e.concessions, is necessary. And in alternative scenarios where there is no direct investment, increased dependency on non-renewable energy, and increases in tax expenditures occur, the economic and fiscal circumstances of the country deteriorate below the baseline.”