The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Private sector leaders yesterday warned the government against taking “the easy road” of a VAT rate increase and seeking a budget “bail out” from consumers and businesses.

Michael Maura, the Bahamas Chamber of Commerce’s chairman, told Tribune Business he was “very concerned” that the 2018-2019 budget will unveil VAT and other tax increases when it is presented to the House of Assembly this morning.

Describing this as “the wrong approach” should the Minnis administration choose to take it, Mr Maura said new and/or increased taxes would undermine still-fragile business confidence and prospects for higher GDP growth just as signs of renewed economic optimism were beginning to emerge.

He added that such a move would be especially ill-timed given the multiple risks posed by rising oil prices, and uncertainty over The Bahamas’ impending World Trade Organisation (WTO) accession and threats to its financial services industry.

Branding Bahamian energy prices “criminal”, the Chamber chairman said the size of government “must align with what the country needs and can afford” after doubling over the past decade.

Mr Maura argued that the government needed to follow struggling businesses by “looking within and fixing your house to remain viable and competitive”, rather than sucking more money out of the economy.

“We are very concerned that this budget might speak to an increase in taxes for both the consumer and businesses,” he told Tribune Business.

“We feel that in light of the fact the central government has doubled in size in the last ten years, and the fiscal deficit has tripled as a percentage of GDP in the last ten years, and the fact VAT has added $700m in incremental revenue in a year, that consumers and businesses - which are essential to the economy - cannot be looked at for a bail-out.

“We feel that at a time when the government is too big and inefficient, and has all these projects on its desk to introduce e-government, and bring transparency we, the taxpayer - the consumers and the businesses - should not be the ones to bail government out.

“The Government should get itself restructured. Every dollar they take from the private sector.... must be used for fertilizer, not sand for potholes. The size of government must align with what the economy needs and can afford.”

Mr Maura’s comments came amid growing speculation that the Government may increase the 7.5 per cent VAT rate, and/or other taxes, in this morning’s Budget as it bids to dramatically slash a fiscal deficit projected to come in above $300 million for 2017-2018.

Philip Davis, the Progressive Liberal Party (PLP) leader, made such a prediction at the weekend, suggesting the Minnis administration had little choice but to enact revenue-enhancing measures if it is to deliver on its pre-election promises.

And K P Turnquest, the Deputy Prime Minister, last week appeared to prepare the Bahamian public for a combination of new and/or increased taxes, and spending cuts, when he told the Institute of Internal Auditors that the 2018-2019 Budget will make the “hard choices” to get a near-$8 billion national debt under control.

He added that the Budget will embrace the principles set out in the draft Fiscal Responsibility Bill, and implied expenditure controls and restraint by pledging “no runaway spending” in the upcoming fiscal year.

Rather than its campaign promises, the major pressure facing the Minnis administration is the extent of the ‘fiscal adjustment’ required to meet the targets set in the Fiscal Responsibility Bill. The International Monetary Fund (IMF) estimated this as equivalent to 2.25 per cent of GDP - some $240 million.

The Fund, in its latest Article IV report, said this was required to hit a fiscal deficit equal to 0.5 per cent of gross domestic product (GDP) by 2021 - the goal set by the Bill. The legislation sets out a ‘glide path’ or ‘road map’ for achieving this, calling for 2018-2019 and 2019-2020 deficits that “shall not exceed” 1.8 per cent and 1 per cent of GDP, respectively.

With the 2017-2018 deficit thought to be close to the Government’s $323 million goal, achieving the 2018-2019 target set by the Bill - based on current real GDP numbers - would require that the ‘red ink’ be cut to around $200 million.

This, in turn, will likely require a $120-$150 million year-over-year deficit reduction that can only be achieved by revenue increases, spending cuts or a combination of both.

While he had “not been advised” of any VAT rate increase by the Government, Mr Maura yesterday said such action remained his and the Chamber’s primary concern.

“The easy road is to increase VAT. That is not the right approach,” he told Tribune Business. “If you are a business, and find yourself needing to restructure because of inefficiencies and competitive pressures, you don’t have the luxury of raising prices because your customers can go some place else.

“You have to look within and fix your house to remain viable and competitive. The Government has to do the same thing, It cannot look at the private sector and say: ‘We have to hit this metric’, and to do so we have to increase taxes’.

“Our economy stalled at the time VAT was introduced. If you increase taxes at the same time as we have this uncertainty with WTO, have this uncertainty with the financial services sector, you are cultivating an environment of uncertainty and people are going to back off,” Mr Maura continued.

“Right now, I think people are optimistic with the reports coming out of the IMF with predictions of GDP growth. But there is a very real problem if we see an increase in taxes with these other things, and we will see a slow down to some degree.”

Mr Maura praised the Minnis administration for recognising the issues with the Government’s “size, inefficiency and cost of operations”, but emphasised that “more is needed”.

He warned that any tax increases would threaten to exacerbate the headwinds facing the Bahamian economy from rising oil prices, as well as the inability of many companies to access the near-$2 billion liquidity within the commercial banking system.

“Businesses and consumers have all these challenges in front of them, and have faced them for the last several years,” Mr Maura said. “I say that to say we cannot afford to tax the private sector more. It cannot be the ‘go to’ for a bailout.

“In light of the WTO accession, in light of the EU ‘blacklisting’, there’s a tremendous amount of uncertainty in the investment community. I’ve personally met Bahamian companies are unsure if they should be investing in their businesses because they don’t know what tomorrow will bring.

“When you have certainty, predictability, that’s when you invest and hire. That’s why we strongly caution the Government against any new taxes.... I don’t have a silver bullet, and don’t have an easy answer for government,” the Chamber chairman continued.

“Using our taxes, increasing our taxes at a time when the Government is inefficient and expensive..... when the Government is not taking a loan out; they’re taxing us and taking our money. Once they increase the taxes, they’ve added a hurdle to economic growth by adding that tax.”

Mr Maura’s concerns were echoed by Rick Lowe, an executive with the Nassau Institute ‘think tank’, who said: “Speculation is that VAT is going to go up, and I don’t think that is the answer.

“We predicted that VAT would be ratcheted up, even though we were promised it would help the Government eliminate the deficit and reduce the national debt. They’ve only gotten worse. It’s not revenue that’s the problem; it’s the spending.”

Mr Lowe referred to a quote by Dan Mitchell, a US ‘fiscal hawk’, who had likened the introduction of VAT to pouring gasoline on a fire. “It’s going to exacerbate rather than solve the problem, with government spending as they like,” he added.

“It hasn’t slowed government spending or reduced government spending. They haven’t shown us they’re able to control it. That’s the problem of government being the size it is. They’re not encouraging the private sector to grow by adding more taxes. Don’t keep adding taxes on and destroying the economy we do have. History has shown taxes slow economic growth.”

Mr Lowe added that VAT, as a tax paid by the end consumer, has already “changed the buying habits” of many Bahamians such that companies had suffered a reduction in revenues and profits.