The Tribune

• Bahamas losing sight of original rationale

• Fears tax’s purpose could be ‘subverted’ 

• Reformer urges proper legal structure

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Governance reformers yesterday voiced fears The Bahamas is losing sight of VAT’s central debt-reduction purpose amid the fevered political debate over the 10 percent rate cut.

Matt Aubry, the Organisation for Responsible Governance’s (ORG) executive director, told Tribune Business the original reason for introducing VAT back in 2015 is being further buried amid the back-and-forth between the political parties on how lower income families will be impacted by making so-called “breadbasket” food items taxable once again.

Reiterating that VAT’s main goal was to eliminate the Government’s chronic annual fiscal deficits, then start paying down a national debt that has now reached $10.356bn, he warned that The Bahamas’ main revenue source “can be subverted for other purposes” such as continually expanding the size of government.

Given that supporting legislation such as the Freedom of Information Act is still “not fully in place”, Mr Aubry warned that The Bahamas lacks the necessary “structure” to ensure VAT revenues remain focused on reducing the debt rather than supporting increased public spending year after year.

“We point out that the legislation recommended by the experts at that time to ensure that the VAT funds were used to their original intent - to pay down the debt - is still not fully in place,” he wrote in a note to Tribune Business.

“These include the Fiscal Responsibility Act, Public Financial and Public Debt Management Acts, and Freedom of Information Act. This needs to be a priority to allow for the VAT programme to fully achieve its goals.”

Expanding on this theme in a subsequent interview with Tribune Business, Mr Aubry said: “The legislative structure is still not fully in place. To address the numbers but not the legislation, it again leaves open the possibility of the VAT not achieving its goals. The goal was not to drive future government expenditure, but to pay down and contribute to a reduction in the national debt.

“The legislation established how the monies were applied, and how it would contribute to the reduction of the national debt, which was the original point for why we took on the VAT. Don’t lose sight of that. As we look at making changes, it’s important these aspects are considered and dealt with as a priority.

“As we change the VAT rate, we need to make sure we have a long-standing legislative structure in place that carries on through administrations and crises.”

Pointing out that this structure was recommended amid the advice The Bahamas received from New Zealand consultants and others prior to VAT’s 2015 introduction, Mr Aubry added: “We need to make sure now that we’ve done this move [rate cut to 10 percent], it is not done so in a way that can be subverted for other purposes when the goal was to reduce the national debt.”

Pointing to “immeasurable” benefits that would accrue to The Bahamas from digging itself out of its current fiscal crisis, and reducing the national debt to more manageable levels, he added that such advantages would include an improved credit rating, lower borrowing and debt servicing costs, and the freeing up of taxpayer dollars for greater investments in public services.

“Once the debt is reduced to a more manageable state, the opportunities that come along with that are immeasurable,” Mr Aubry said. “The Bahamas would have greater control over its debt, greater capacity to invest in different areas, and less of each dollar going to service debt.

“As we address the immediate issues, we have to focus attention on the long-term and how to improve this. We need a long-term strategic plan that sets out a long-term path to put us in a more sustainable state.”

Many in the private sector sought to obtain a commitment from the last Christie administration, which introduced VAT in 2015, that the extra revenue raised would be used to pay down the national debt and eventually eliminate annual fiscal deficits.

However, no such commitment was forthcoming, and VAT monies were used by that administration to increase spending and expand government’s size. Its Minnis administration then hiked the VAT rate from 7.5 percent to 12 percent on the basis that it needed extra financing to pay off some $360m in unpaid bills for which no Budget funding had been allocated.

Around $300m of that sum had been paid off by the time the Minnis administration was voted out of office on September 16 this year. The Davis administration’s supplemental Budget is projecting that the deficit for 2021-2022 will drop from the original $951.8m to $858.6m almost entirely due to first quarter revenues exceeding target by some $92.336m.

Of that latter sum, $80.58m came from VAT. The Davis administration is holding total spending constant against its predecessor’s Budget, with a $53.291m rise in recurrent spending offset by a more than $54m cut in capital expenditure.

While calling for the Government to provide consumers with clarity on which items will now become VAT-able, and no longer zero-rated or exempt, Mr Aubry said the rate reduction from 12 percent to 10 percent would achieve better buy-in, and the model potentially much improved, if the Government consulted with the private sector like it did in 2015 ahead of implementation by January 1.

“The Government referenced the original model of VAT implemented in 2015 that was informed from the New Zealand model. This model was adopted in great part through the efforts, funding and advocacy from the private and civil society-driven Coalition for Responsible Taxation,” he added.

“It is positive that the Government has have worked with University of the Bahamas, but they would do well to engage the past leaders and modelling of the Coalition, and foster private sector and civil society input.

“There can be further education and consultation with the public as to the implications of the VAT changes. This kind of broad-based consultation can support sustainable policy development.” Mr Aubry also urged that all modelling and analysis supporting the 10 percent VAT rate be publicly released, something the Government has pledged to do.