The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The proposed Value-Added Tax (VAT) rate should be “no more” than 7.5 per cent, a former finance minister argued yesterday, telling Tribune Business it would be “impossible” to properly implement the new tax by the July 1 target date.

Sir William Allen, also an ex-Central Bank governor, told Tribune Business that the Christie administration’s fiscal/tax reform plans were “too aggressive”, as the planned $400-$500 million wealth transfer from the private sector to the Government would undoubtedly cut economic growth.

Suggesting that the Government needed to adopt a more balanced approach to fiscal reform, Sir William said that he would not leave the burden “entirely on the revenue side” if he were still in office.

The former finance minister in the 1997-2002 Ingraham administration implied that increased revenues must also be accompanied by a reduction in government spending, something that the Coalition for Responsible Taxation and others in the private sector have also demanded.

Still, Sir William said the Bahamas could not afford to delay fiscal reform, warning the national debt burden could rapidly increase to unsustainable levels the longer this nation waited.

He said the Government “should be doing something by July 1” in an ideal world, but added that the Christie administration also likely realised that its original VAT implementation and deficit reduction timetables were now too tight to be successful.

“Quite frankly, they should be doing it by July 1,” Sir William told Tribune Business of VAT, “but I think it should be a much lower rate, not 15 per cent.

“I wouldn’t go more than half that. I don’t think it could happen, but if they could do it by July 1, I would not do more than half that.”

Sir William’s recommendation of a 7.5 per cent VAT rate will strike a chord with many in the private sector, and matches the suggestion of another former finance minister, James Smith.

Prime Minister Perry Christie recently hinted that the Government might be open to introducing VAT at a lower rate, disclosing in the Mid-Year Budget debate that the Inter-American Development Bank (IDB) had suggested 10 per cent.

Well-known businessman Dionisio D’Aguilar, attempting to read the Government’s intentions, recently told Tribune Business that ministers and officials seemed to be sending subtle signals that, while still committed to VAT as their tax reform centrepiece, they would likely bring it in at a lower rate and after July 1.

Sir William’s comments will likely add to the pressure for the Government to do just that, and he also agreed yesterday that it was impossible to meet the original VAT launch date from a practical standpoint.

“I don’t think it’s possible,” he said of the original July 1 deadline. “I do wish them [the Government] well, because they need to.

“But I don’t think it’s possible to roll it out on July 1 as you would wish it be rolled out.” With the VAT Bill and regulations yet to be finalised and passed into law with less than four months to go, and a draft Tariff Schedule yet to be even released, the new tax would be unlikely to operate efficiently and effectively come July 1.

And Sir William also told Tribune Business that the pace and depth of the fiscal correction the Government is seeking to pull-off is too ambitious, with the proposed ‘wealth transfer’ from the private to public sectors set to negatively impact economic growth.

The Government is aiming to move its recurrent balance into surplus by the 2015-2016 fiscal year, and achieve a balanced Budget that same period, with a surplus coming in the 2016-2017 fiscal year.

To achieve this, the Government is aiming for a $500 million net revenue increase, with $200 million coming from VAT and an equivalent sum generated by other tax measures. The final $100 million is forecast to come from economic growth.

“I think the targets set for 2015, 2016 and 2017 are too aggressive, and that tax [VAT] calls for a shift from the private sector to the public sector; from the rest of us to the Government,” Sir William said.

“That will have some economic impact; some impact on growth..... I would not seek to transfer $500 million from the private sector to the public sector to balance that deficit.

“It may be less than that sum, it may be more than that, but that kind of transfer from the private sector to the public sector would have some impact for the economy and its growth.”

Sir William said he would “more demonstrably” link increased taxes and revenues with reductions in government spending.

“I would seek to balance this, so it’s not entirely on the revenue side,” he told this newspaper.

Sir William’s comments came as the Bahamas Hotel and Tourism Association (BHTA) again expressed concern that VAT would produce price increases that undermined the Bahamas’ competitiveness in its largest industry, threatening a $2.4 billion visitor spend and 97,000 jobs.

Stuart Bowe, the BHTA’s president, said the industry’s initial estimates were that VAT will increase the cost of a family vacation in the Bahamas by “at least $500”, adding to this nation’s reputation as an already high cost destination.

“In its current form the VAT tax threatens to affect our competitiveness, business viability and the more than 97,000 direct and indirect Bahamian jobs created by a growing tourism industry,” Mr Bowe said in an editorial piece.

“The Government’s current VAT proposal would have an unintended cost, impacting all of us by slowing the recovery of the tourism industry, shrinking the economy and reducing the amount of the nation’s foreign currency reserves.

“Initial estimates show VAT as proposed raises the cost of a family vacation to The Bahamas by at least $500. Faced with this, potential visitors would opt to go to less expensive destinations, as many already do. We would all suffer the consequences.”

Sir William yesterday suggested the Government would be well aware of such cries. He added: “I think the Government pretty much knows what we know, and in the end I think they will be more measured.

“I believe, at the end of the day, the Government will take into account that this roll-out time is too short, the deficit elimination time is too short, and their policy will be moderated to take that into account.”

Still, Sir William warned against leaving fiscal reform for too long. “I wouldn’t push it that far out,” he said of proposals to delay tax reform until July 2015.

“I believe that will have some unfortunate implications if we push it far out. The longer you take to roll it out, the larger the gap you will have to close.”