By NEIL HARTNELL
Tribune Business Editor
Harsh fiscal austerity measures in the 2018-2019 budget were inevitable, the Grand Bahama Chamber of Commerce’s president arguing yesterday: “Something had to be done.”
Mick Holding, pictured, told Tribune Business that The Bahamas’ “very precarious position” meant the government had little choice but to act, although questions remained over whether there were better alternatives to its preferred solution - the “controversial” 60 percent VAT rate hike.
Conceding that many in the private sector were blindsided by the proposed 12 percent VAT rate, Mr Holding said Grand Bahama residents would likely feel the impact more due to the island’s higher unemployment rate.
He added that the Chamber was now developing a “consensus”, based on feedback from its members and the wider business community, on budget-related concerns that it plans to take up with the Government “possibly as early as this week”.
Mr Holding said the narrow 30-day window provided to businesses to adjust their pricing, and software and point-of-sale systems, for the higher 12 per cent VAT was “one of the specifics” the Chamber was examining.
Yet he backed the Minnis administration’s tax grab on the basis it was better to “address the problem now”, rather than keep pushing the day of fiscal reckoning further out for future Bahamian generations to address when it will be “a lot worse”.
The GB Chamber chief also credited the Government for seeking to minimise the higher VAT rate’s impact on lower income Bahamians through ‘zero rating’ breadbasket food items and treating Bahamas Power & Light (BPL) bills under $200 as ‘exempt’.
“The increase in VAT has obviously been controversial, but I think one has to look at it in the total context of the state of the economy and the huge debt the country has,” Mr Holding told Tribune Business.
“There is also the context of concessions that will benefit some of the less well off in our society with the breadbasket items and the utility bill concessions.”
Mr Holding added that the Budget’s contents, and likely impact, had generated a “mixed” reaction among the private sector, many of whom had been caught off-guard by both the VAT rate increase and its magnitude.
“It caught many people by surprise; we didn’t expect it,” he conceded, “but the views are somewhat mixed on what it means for them as business people in terms of administration of the changes. That’s one issue for the business community, and they are also members of the wider community, so it affects them personally.
“We are in discussions with our members to get a consensus on what the concerns are and, in turn, we will be speaking to the Government about those issues and concerns very soon; possibly as early as this week.”
Mr Holding said the July 1 deadline for the private sector to implement the new VAT rate, which is due to rise some 4.5 percentage points, was among the major concerns from both an administrative and compliance perspective.
And he suggested that Grand Bahama, with a higher unemployment rate than islands such as New Providence, will be affected more by the VAT hike given that it is a regressive, consumption-based tax that results in lower income Bahamians spending disproportionately more of their income on taxes.
Yet the GB Chamber president backed the Minnis administration’s decision to implement its fiscal correction now, given that the pain from such measures will be even greater if the Bahamas further delays efforts to eliminate $300 million-plus deficits and arrest the growth rate for its near-$8 billion debt.
“Something had to be done,” Mr Holding told Tribune Business. “I think that is understood. The country is in a very precarious position. Regrettably, from time to time, these decisions have to be taken.
“I think it was right the problem is addressed now, and not leave it until later, because it only gets worse. If one looks at the debt and annual interest bill, if the solution gets delayed it only gets worse.
“Is this the best solution? That’s what’s controversial at the moment, but something has to be done,” the Chamber chief continued. “There’s no way around the problem. There may be alternatives to the solution, but there’s no getting around the problem.
“We are where we are as a country. We don’t want to end up in the same position as countries like Barbados. We’ve got to avoid that.”
Mr Holding cited Greece as another country that sank under the weight of unsustainable debt and, as a result, lost control of its fiscal affairs. The International Monetary Fund (IMF) and European Union (EU) imposed harsh austerity measures on Greece in return for a bail-out, which led to a deep recession, massive public and private sector lay-offs, and cuts to social benefits.
Barbados, following its recent election, was forced to seek IMF assistance as its debt-to-GDP ratio spiralled to more than 170 per cent, with foreign currency reserves standing at just $220 million and likely to be drained further. Debt payments to external creditors have been suspended.
While the Bahamas is some way from falling into the same trap, there are several factors/pressures that appear to have convinced the Minnis administration it has to act now in paying down $360 million worth of unfunded arrears within the next three years.
One is the need to meet the targets set out in the Fiscal Responsibility Bill, which require the Government to slash the fiscal deficit from $310 million this fiscal year to a sum equal to 1.8 per cent of GDP ($237 million) in 2018-2019, and then to 1 per cent in 2019-2020 before reaching 0.5 per cent (around $50 million) in 2020-2021.
This helps explain both the magnitude of the VAT hike, and the Government’s bid to close its present $400 million ‘funding gap’ within three years - a timeline that many have questioned. The Bahamas’ impending World Trade Organisation (WTO) accession, and tax restructuring that will be driven by the elimination of Customs tariffs, will also enter the equation.
The Government will also want to ‘clean up’ its finances, and eliminate the arrears, prior to moving the public sector to accrual-based accounting by 2022. It is also likely to be looking longer term, and targeting completion of its own fiscal clean-up first before tackling fundamental civil service pension and National Insurance Board (NIB) reform - the latter of which is likely to involve a major contribution rate increase.
Mr Holding yesterday agreed that the Government needed to look at both revenue increases and spending curbs, but warned that reducing the latter “has consequences” for the economy and consumer demand as civil servant lay-offs translate into an increase in social security outlays.
He added that the projected $400 million increase in VAT revenues will “not necessarily” cause the Bahamian economy to nosedive back into recession, and said: “Time will tell. Whatever, something has to be done. Something has to be done.”
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