By NEIL HARTNELL
Tribune Business Editor
The VAT rate hike will force 30-40 percent of Bahamian contractors out of business, the government was warned yesterday, while reducing this nation to "a tourism-only economy".
Leonard Sands, the Bahamian Contractors Association's (BCA) president, told Tribune Business that the 60 percent VAT rate hike would likely slash construction sector activity by 70 percent compared to when the tax was first introduced in 2015.
Warning that a 12 percent VAT would undermine an industry he described as the Bahamian economy's "third pillar", Mr Sands said the proposed increase threatens to have "a negative ripple effect" by increasing costs throughout the length of the construction industry's supply chain.
Given that VAT is a regressive tax ultimately paid by the end-consumer, the BCA chief said increased construction costs would further reduce the number of qualifying buyers in an already-compressed mortgage market where banks remain reluctant to lend.
Pointing out that the Association had "charted" VAT's impact since its arrival on New Year's Day 2015, Mr Sands warned of a "chain reaction" from increased construction costs reducing mortgage access and real estate affordability - especially for new builds - and leading to a further slowdown in economic activity.
"The significant negative impact it will have is so much concerning," the BCA president told Tribune Business of the proposed 60 percent VAT hike. "It will have a ripple effect. Going to 12 percent is going to reduce the number of people qualifying for mortgages to such a small number we could probably see 30-40 percent of contractors in the construction sector shut their doors because they don't have enough activity to keep them in business."
Mr Sands estimated that eight out of every ten persons in The Bahamas was "touched" by each dollar spent in the construction industry. "When you constrict that, that dollar will circulate to less than half of those people," he said of a 12 percent VAT, "because it is no longer being spent as much. Less than half the people will be touched by that money.
"If we do this we can look forward to a really concerning situation where we have a level of inflation, less economic activity related to construction, and you will see more unoccupied homes on the landscape.... The landscape is going to look different because the level of construction is not going to be 65 per cent of what it was before the advent of 7.5 per cent VAT," the BCA chief continued.
"VAT at 7.5 per cent pushed some people beyond the capability to get a mortgage. Now it's going to 12 per cent, that group is going to expand. We're going to get to a place where the level of construction activity in the country is as low as 30 per cent" compared to pre-VAT days.
Describing projections of such a decline as "real", Mr Sands said higher construction costs would impact other key sectors - including real estate and foreign direct investment (FDI) - in what is already a high-cost economy.
Residential housing construction is the 'bread and butter' for most smaller Bahamian contractors and their sub-contractors, and the BCA president warned that the VAT hike's impact on his industry alone may be enough to "stall" the economy given its importance as "the third pillar".
"A lot of things ripple from that," Mr Sands reiterated. "The only thing we'll go back to is the 1980s when we were a tourism-only economy. That's what we're going to be staring at; a tourism-only economy."
The Minnis administration came to office facing a difficult balancing act between trying to facilitate economic growth while, at the same time, eliminating annual fiscal deficits of more than $300 million. While many Bahamians, especially in the private sector, back the 2018-2019 Budget's objectives, they feel the pendulum has shifted too much towards fiscal consolidation
Mr Sands' concerns illustrate the extent of individual industry concerns over the proposed VAT rate rise, which is projected to suck an additional $400 million out of the economy in the upcoming fiscal year.
VAT is a regressive consumer tax, imposing a disproportionate burden on lower income Bahamians who spend a higher percentage of their income on consumption. Increasing the rate to 12 per cent has produced fears of a reduction in consumer demand, as persons adjust to higher prices and lower living standards and disposable incomes, resulting in lower economic growth - and possibly a new recession.
The Government, though, believes it has little choice but to increase VAT if it is to end 45 years of post-independence deficit spending in every Budget year. With the national debt now near $8 billion, it is caught between the 'rock' of $360 million in unfunded arrears and trying to meet the Fiscal Responsibility Bill's target of a 0.5 per cent GFS deficit by 2020-2021.
Amid private sector concerns that the magnitude of the fiscal correction is too much for the economy to bear, the Government appears to be banking on the Bahamas' key external drivers - higher tourism numbers and the foreign direct investment (FDI) pipeline - combined with Baha Mar's opening to keep the economy moving forward and offset the VAT rise.
Mr Sands, meanwhile, told Tribune Business that the Government was threatening to undermine its very own low-cost housing initiative, designed to enable more Bahamians to 'own a piece of the rock', with a 12 per cent VAT.
"I think it will have an extremely negative impact on the Government's housing initiative," he told Tribune Business. "With the cost of everything relating to construction going up. you can't afford to get a lot of the materials and services.
"At 12 per cent you're paying an additional 4.5 percentage points more. It doesn't put you in a better position. This taxation, while grabbing more of the Bahamian people's money, doesn't bring more in."
Mr Sands, who initially was the FNM's Bain and Grant's Town candidate for the 2017 general election before withdrawing, expressed scepticism that the VAT increase will deliver the $400 million revenue rise that the Government is seeking.
"More of your money is being diverted to pay taxes," he explained. "This constricts your economy. It gets smaller. It doesn't expand. The same thing that you're trying to avoid you could achieve the wrong way by over-taxing."