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Bahamas On ‘Slippery Slope’ Without Vat

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas would “be on a really slippery slope” without Value-Added Tax (VAT), a former finance minister believes, because government’s costs will continue to increase on an annual basis.

James Smith, also a former Central Bank governor, told Tribune Business that VAT’s implementation had given the Bahamas an opportunity to avoid going down Greece’s road to a debt default, provided it consolidated the benefits of fiscal reform.

He warned, though, that the Government would have to be “eternally vigilant” in ensuring it met its increased revenue/reduced deficit targets, given that it was “so easy” to relax and fall back into a debt spiral.

“We won’t see it now, but one of the most impactful things the Bahamas has done is actually the introduction of VAT,” Mr Smith told Tribune Business, “and being able to broaden its tax base to include the services sector.

“I think the cost of running the Government is going to escalate year in, year out, and unless we have an increase in the tax base, these deficits will continue to pile up and we will be on a really slippery slope.”

Mr Smith’s comments will likely be opposed by fiscal hawks, who believe the size of government in the Bahamas is too big, and that recurrent expenditure can be reduced - not increased.

However, the Christie government’s ‘like-for-like’ spending in 2015-2016 is forecast to increase by $100 million year-over-year to $1.944 billion. The addition of $100 million that has been reclassified from the ‘capital’ to the ‘recurrent’ budget has taken the Government’s total fixed-cost spend for the current Budget year to $2.044 billion.

The Prime Minister, in his Budget speech, touted a $90 million reduction in the GFS fiscal deficit projection for 2014-2015 as a sign that the Government was making progress in its plans for fiscal consolidation by eliminating that ‘red ink’.

But, warning that it could not relent and ease up, Mr Smith told Tribune Business: “We have taken that [VAT] move, and have to ensure we consolidate.

“Now there’s breathing space, we have to move a bit more prudently in managing the fiscal affairs. My fear is it’s so easy to slip into these things.

“You’ve got to be eternally vigilant and not relent on these targets for the next three-four years, as you’re not running a terrible deficit,” the ex-minister of state for finance added.

“There are other things going on, and we have to move forward with fiscal reforms and use our resources much more efficiently.”

Mr Smith, meanwhile, warned that Greece’s economic crisis, and debt default, had the potential to “trigger a second stage” global recession.

The southern European country, labouring under a 340 billion euro debt burden, voted at the weekend to reject the latest European Union (EU) and creditor proposals to solve the crisis. That vote raises questions over whether Greece will remain in the EU.

Mr Smith suggested there would be “a lag” in terms of the Greek crisis’s impact here, and there was unlikely to be an “immediate effect” on the Bahamas.

He warned, though, that the global economy’s interconnected nature meant any fall-out in Europe would find its way across the Atlantic eventually, possibly manifesting itself in reduced trade with the US that resulted in unemployment and an economic slowdown in the latter nation.

“If it happens at all, we may not see it for another year or so,” Mr Smith said, adding that the Bahamian shipping registry, which contains numerous Greek-owned ships, would suffer no ill effects.

“The lesson for any country is that you’ve got to cut the sail according to the cloth available,” he added.

Comments

proudloudandfnm 5 years, 5 months ago

VAT will be 100% irrelevant if unemployment continues to rise......

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shortpants 5 years, 5 months ago

It would be better if all the Thieves and the rest would pay their way . Only the small man keep this country moving and that soon stop ,because when the fat cows in the pasture don't let them eat watch what is going to happen in short order .People will stop talking and take drastic measures ain't long now.

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Well_mudda_take_sic 5 years, 5 months ago

James Smith is forever nothing more than a mouth piece for whomever will throw a financial bone his way in the mistaken belief that he still has political sway or a voice of authority in anything at all to do with our economy today. In recent years only Christie and the Greek have been stupid enough to bother tossing him a bone and everyone knows it! In fact, it is commonly known that James Smith ranks among the top five spineless pathetic individuals who didn't do his job when he served as Governor of The Central Bank and later as Minister of State for Finance to keep our country out of the financial mess that it is in today. He simply kowtowed to Christie and the PLP party line no matter what may have been in the best interest of the Bahamian people. The Greek has usually received the short end of the stick but is too fool to even know it! The good Lord though has seen fit to make Smith pay dearly in more ways than one for his transgressions!

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Reality_Check 5 years, 5 months ago

Both Christie and the Greek too, are paying (or will eventually pay) for their own transgressions in one way or another. What goes around, always comes around!

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John 5 years, 4 months ago

While VAT may create some activity that looks good in the short run, James smith knows a country cannot tax itself to prosperity. There must be some real economic growth else taxes will canabalise the money supply and cause all economic activity to dry up. Businesses that pay taxes will see their own incomes and activities decrease if there is no growth and eventually their demise.

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duppyVAT 5 years, 4 months ago

Now this VAT is my pet peeve ............... it did not improve our tax regime, it just added more burden to the bottom two thirds of the population .............. we need to either collect what preVAT taxes we had without fear or favor OR put in place a simple 3-tier income tax structure (eliminating those making less than $20,000 per annum.

But it doesn't matter how much VAT is collected if corruption, graft, bad debts, public utility subsidies and mismanagement of the public finances continue (as it is right now)

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