The Tribune

IT IS said that the job of political leaders is to balance conflicting priorities and goals and make decisions based on the welfare and best interests of the people. That looks to be a sensible and laudable ideal. But it may be seen here in The Bahamas as hollow, if not risible, following the announcement in the Budget last week of a huge increase of 60 per cent in Value Added Tax, a move which will have predictably negative consequences for our nation across-the board.

While the Prime Minister and his colleagues can be commended for biting the bullet and addressing the nation’s unsustainable fiscal deficits and unprecedented levels of debt resulting from economic mismanagement, including reckless spending and borrowing, by successive governments for many years, it is also clear that their approach about VAT is not only flawed economically but is likely to turn out to be politically inept.

Clearly, the poor state of our public finances requires firm remedial action. But, even with underfunded government pension liabilities and spending commitments amounting to $360m, the Government has stunned the business community by the size of its VAT increase. As a form of taxation, VAT is claimed to be fair because it applies to all and is based on consumption that is deemed to be discretionary. In reality, however, this increase will hit the poor hardest despite the product exemptions.

Such an increase is likely to stifle growth, undermine business and investor confidence and affect consumer spending since disposable incomes will be reduced; and the experts contend that a recession may follow. Moreover, to many critics the timing could not be worse when there are signs of an economic turnaround.

It is also strange to impose such a swingeing increase when there has been a substantial upturn in tourism during the first quarter of this year resulting in higher VAT receipts. The Government seems also to have ignored the fact that an economic downturn with consumers buying less will mean a decrease in tax revenue. This then begs the question why the Government would not prefer to bring in a VAT increase more gradually while paying down debt at a similar pace and thus improve the likelihood of balancing fiscal consolidation with the creation of wealth and economic growth.

While higher taxes on web shop casinos will be widely welcomed, a striking omission in the Budget was the absence of measures to improve the ease of doing business. This includes bringing pressure on the banks, if necessary through legislation, to improve their procedures that are beset by excessive bureaucracy. There was no mention of Business Licence reform and adjustment of fees and little real recognition of the effect of increased VAT on the productive sector of the economy despite the Government itself predicting that the economy overall will slow down. Another alarming factor was the lack of consultation on such an important issue even with FNM Members of Parliament. Mr Turnquest’s explanation of the reasons for not discussing the issue with the private sector were unconvincing.

All this is attracting much criticism, not least because the effects of higher VAT will be felt throughout the land. Many are now urging the Government to look at alternative ways to raise extra revenue; among others, for example, privatisation of Bahamasair and selling its $70m majority ownership of the mobile operator Aliv.

Amidst this growing controversy, it has become clear that the Government must now seek to reduce recurrent public spending in accordance with the recent recommendations of the International Monetary Fund. A significant revelation in the Budget was provision for its extra spending showing that, far from shrinking, the size of the Government continues to grow. This is no longer sustainable. In addition to tackling the national debt, overall government spending and the number of workers on the public sector payroll have to be reduced.

With its huge majority and only one year in to its five-year electoral term, the FNM Government is in a strong position to push through its policies. We believe the Minister of Finance is right to tackle the nation’s economic problems head-on and not, in his own words, “kick the can down the road”. It is also the case that governments are elected to take decisions. But a 60 per cent VAT hike all at once is too high for our small economy. By stifling economic growth and precipitating a recession, it may also turn out to be counterproductive. We consider, therefore, that it should be looked at again.

There is surely anyway no need for our current political leaders to put their futures on the line in this way that is bound to be deeply unpopular when there is no compulsion to do so. We urge those concerned to be mindful of the bigger picture.