By KHRISNA RUSSELL
Deputy Chief Reporter
Finance Minister K. Peter Turnquest delivered a stunning blow to consumers and businesses yesterday with a shock increase in the rate of Value Added Tax to 12 percent.
In his budget address to parliament Mr Turnquest had carefully laid the ground for a string of changes to the country’s tax regime which would benefit thousands of families and businesses.
Then came the price for paying for these measures: VAT nearly doubling from 7.5 percent to 12 and taking effect on July 1.
The government projects the VAT increase will help it reap $1,115,007,455 in revenue in the next fiscal year, a 60 percent increase compared with the forecasted VAT revenue for 2017-2018. Mr Turnquest said this was indicative of the government choosing not to wait until it is too late to shore up the economy, but opting to act now and act responsibly.
The decision attracted the fury of Opposition members in the House of Assembly who shouted “shameful” from their seats, while others asserted the government was “trying to kill the Bahamian people”. Later during a press conference, the Progressive Liberal Party warned the move would spark a recession as it poured scorn on Mr Turnquest’s economic growth projections.
Despite touting the Minnis administration’s lowering of the wage bill and the purchase of goods and services by a projected $120m - along with a $351m deficit reduction - the deputy prime minister dropped his VAT bombshell, justifying the hike by saying there was an urgent need to pay off a “mountain” of arrears and unbudgeted commitments totalling some $360m left behind by the former administration.
In his address Mr Turnquest said this fiscal irresponsibility of the Christie administration inflicted damage on the state of the economy, making the Minnis administration’s task all the more difficult.
The government also moved a resolution yesterday for a loan of $187,233,623 to defray expenditure in the 2018/2019 estimates of revenue and expenditure.
Mr Turnquest said: “Our government fully appreciates the sacrifice that the substantial increases in the VAT rate and other taxes will represent for our citizens. But as I have repeatedly said on record: this government was elected to do what is right for the welfare of the country and not to do what is politically expedient or politically popular. Facing the situation that we have, we could do as governments have done before – and simply present a misleading budget with under-budgeted allocations and hidden obligations.
“We could have kicked the can down the road and borrowed some more – delaying the inevitable day of reckoning. By playing this game we would have only made a bad situation worse. The country’s bond rating is at junk status. The reason for that is because others before us failed to act promptly and judiciously. But worse than the junk status, the penalty for inaction is a continued quickening crawl toward a fiscal point of no return. And as we have seen, when countries hit crisis mode, the path to correction is extraordinarily hard and painful.
“In the Budget, we could have pretended that this time, we could collect all the uncollected and under-collected taxes in a few weeks and months. But, we recognise that while we must improve our tax yield on existing taxes immediately – which is why we are institutionalising the Revenue Enhancement Unit – we understand that, to realistically improve our capacity to collect all of our taxes, is a multi-year project given the institutional weaknesses that prevail today. We will improve in this area. We must. And we will report on our progress regarding same.”
Mr Turnquest attempted to soften the blow of the higher VAT rate by unveiling VAT free breadbasket items, duty reductions and exemptions.
“Effective August 1, we are eliminating VAT on all breadbasket items, with the exception of sugar, as sugar will – for health reasons – be removed from the list of breadbasket items,” he said.
These items include butter, cooking oil, mayonnaise, grits, cheese, corned beef, evaporated milk, margarine, rice, flour, tomato paste, baby cereal, soups, broths, powdered detergents and mustard among other things.
VAT will also be eliminated on medicines and residential insurance.
The tax will also be waived on residential electricity bills at or under $100 and water bills at or under $50. For electricity customers, this would impact over 30,000 BPL households alone, he said. For water customers, 43,000 Water & Sewerage customers would be impacted.
The customs personal travel exemption will also be increased from $300 to $500 per person twice each year. Government is also eliminating duties on solar kits upon application to the Ministry of Finance.
The duty on aeroplanes and helicopters is also being eliminated. Mr Turnquest said this is in an effort to build an Aeroplane Registry Industry.
At a press conference after Mr Turnquest’s address Exuma MP Chester Cooper mocked the FNM’s election campaign slogan, saying the budget by the FNM is no ‘People’s budget’.
“(It) is a betrayal of the trust reposed in the Minnis administration by the people of the Bahamas,” said Mr Cooper.
“The PLP will oppose these tax increases and vigorously defend the Bahamian people against an FNM whose self-interest and political survival have caused them to abandon any pretence of this being ‘The People’s Time.”
Mr Cooper said the government’s removal of VAT from breadbasket items - an action opposed by the business community and institutions like the International Monetary Fund (IMF) - undermines the image of fiscal prudence the administration has cultivated.
“All the advice suggests that you think you are helping the poor but by the cost of administration being more expensive, you actually make it worse for the poor,” he said. “In the end you have to make up the loss of revenue with higher taxes on other items. This is a shameful exercise of smoke and mirrors.”
During his address to Parliament, Mr Turnquest said there a number of critical factors to be taken into account this fiscal year.
As he pinpointed the $360m arrears, the minister said the government has a plan to pay off the debt.
He said: “$172m in 2018/19; $106m in 2019/20; $75m in 2020/2021; and a small balance thereafter.”
“Second, the adoption of proper and factual budgeting for all known commitments across the breadth and scope of government expenditures, thus ending the past practise of under-budgeting for the sake of displaying unrealistically favourable fiscal outcomes during the budget exercises, but leaving large, unpaid arrears to be paid later. We refer to this as ‘right budgeting’,” Mr Turnquest also said.
“This government will not continue the sham of purposefully under-budgeting known commitments which only leads to another build up of arrears left for others to clean up.
“As a result, the ‘right budgeting’ approach has led to an increase in allocations of some $76m in 2018/19. Examples of some of the more significant such adjustments include having to increase provisions to meet core IT service contract obligations, pensions for public officials, and even the lunch school programme all of which were seemingly under-budgeted knowing full well that the allocations would be insufficient.”
The right budgeting he said would further allow for $48 million in financing for selected new initiatives, in respect of both recurrent and capital expenditure, which the government is implementing in the next fiscal year to advance its socio-economic policy agenda.
These include $13.5m for the digital government initiatives in the Ministry of Finance and Ministry of Education; $6m for the construction of a new school in New Providence, $5m for small and medium sized business support;$5m for the Over-the-Hill initiative; and $5m for LED street lighting.
Additionally he said $5m will be spent on a solar demonstration project on a family island, $4m for recruiting college graduates, $2.6m for Bahamas Technical and Vocational Institute scholarships, $1m for the prime minister’s cultural grant and $1m for the Freedom of Information.