The Tribune

• Govt warned VAT hike would be like ‘gas on fire’

• But likely to ‘sweeten the pot’ as election looms

• Civil service chief: No indication of cutbacks

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The government was yesterday urged not to increase the VAT rate as a cure for its fiscal ills in today’s budget, as the private sector revealed: “We’re praying for a magician, not Humpty Dumpty.”

Multiple businessmen, accountants and former Cabinet ministers spoken to by Tribune Business warned that raising the VAT rate from its present 12 percent would be “devastating” for businesses and consumers still struggling to recover from COVID-19’s ravages, with one likening the potential effects to “pouring gas on a fire”.

However, all admitted that no government would wish to be in the Minnis administration’s current position as it faces increasing pressures from all sides ahead of today’s 2021-2022 budget unveiling by the prime minister in the House of Assembly.

While new and/or increased taxes would threaten to derail any post-pandemic recovery by further burdening businesses and households still struggling to survive, in addition to endangering the government’s chances of retaining office in the upcoming general election, this has to be balanced with restoring The Bahamas’s fiscal health and the views from the rating agencies and IMF.

There has been no indication that a VAT rate hike is being considered for today’s budget, and Tribune Business understands that the government will likely opt for a package of focused revenue-raising measures targeted chiefly at those considered to have the ability to pay more - such as wealthy foreign homeowners and investors - without jeopardising the fragile economy.

The private sector, though, was yesterday on edge despite the Ministry of Finance seeking to reassure Bahamians that the Budget will unveil a road map for economic and fiscal recovery, pledging that the Government will continue social and business support that totalled $328m to end-March 2021 as well as unveiling “new and innovative initiatives” to drive growth.

Many were uncertain what to expect. Sir Franklyn Wilson, the Arawak Homes and Sunshine Holdings chairman, told this newspaper he was “hoping to see a magician” with the 2021-2022 Budget rather than the fictional nursery rhyme character that could not be pieced back together after falling off a wall.

“I was just in a conversation with a significant business person, an American with a lot of investments here, and said to me: ‘Tomorrow we’re either going to see a magician or we’re going to see Humpty Dumpty’. Let’s pray there’s a magician as opposed to Humpty Dumpty. Let’s hope we see a magician; that’s the choice I pray for.”

Sir Franklyn said he was hoping Cabinet ministers and policymakers outside the Ministry of Finance had “taken due note” of the Department of Statistics’ just-released gross domestic product (GDP) data, showing the economy contracted by 14.5 percent in real terms in 2020, together with the acting financial secretary’s acknowledgement that the economy is now in “a vastly different place”.

He added: “Choices have been made. We’re building a lot of sidewalks, and all that type of stuff. The way we’ve been spending money, choices have been made. Choices have been made on sidewalks and all those consultants and so forth.” The Government announced it was spending $20m on sidewalk improvements during the current fiscal year.

Branville McCartney, the former Cabinet minister who has businesses in the legal, pharmaceutical, education and real estate industries, told Tribune Business that today’s Budget “could be a bit scary” given the gravity of The Bahamas’ economic and fiscal position following COVID-19.

The Ministry of Finance’s last forecast projected the 2021-2022 fiscal deficit as being at around $950m, a slight decline from this year’s estimated $1.327bn. “I tell you what I’m not looking for is increased taxes, but that’s going to be far-fetched,” Mr McCartney said.

“I do think there’s going to be some increased taxes placed on the backs of the Bahamian people simply because of the state that the economy is in. Having said that, we’re one year out from the election. I think the Government is going to balance that with trying to sweeten the pot for the upcoming election. To tell the truth, it is a position not many governments would want to be in at this stage.”

Mr McCartney said “the simplest thing” for a revenue-hungry administration to accomplish will be to increase the VAT rate, yet he added: “That would be devastating. When this administration came in and increased VAT, that had a devastating effect on businesses and the average man.

“I would hasten to remind the Prime Minister that when the former administration introduced VAT, he indicated that was a lazy way to get revenue for the country. He ought to be reminded of that. The Government has to be very bold, they have to be imaginative and they have to think outside the box, and don’t just rely on what has happened over the past few years because it has not worked.”

Kendrick Christie, the Crowe Bahamas accountant and partner, told Tribune Business that there was no indication a VAT rate increase was coming in today’s Budget. “I’m hoping there’s no increase in VAT,” he said. “I’m not expecting any, but to increase VAT would be like pouring gasoline on a fire. I don’t see how it’s going to benefit the economy.”

Mr Christie said the Government was likely to steer clear of any overall VAT rate increase given the likely impact it would have on inflation and prices, plus the fact lower and middle class Bahamians will bear the brunt of any hike disproportionately in comparison to their wealthier counterparts.

Instead, he predicted that the Government will further slash its discretionary spending, as well as seek to cut back on subventions and grants to outside organisations. Subsidies to state-owned enterprises (SOEs) will also be potential targets for cuts, and Mr Christie said emoluments and benefits enjoyed by the “bloated” civil service may also be reduced.

However, Kimsley Ferguson, the Bahamas Public Services Union’s (BPSU) president, told Tribune Business that he had received no indication of any planned Budget cut backs to his members’ salaries, wages and other benefits by late afternoon.

Pointing out that such action was “not a favourable something” for the Government to do with a general election rapidly approaching, Mr Ferguson said he was presently negotiating a new industrial agreement with Brensil Rolle, minister of the public service, on the union’s behalf.

“We’ve finished all the non-financial aspects, and all we have to do is conclude the financial and that should be sorted,” he added. The Government last year elected to make no civil service cuts given that spending by public servants helped to keep the economy afloat, although it did freeze new hirings, promotions and salary increases.

That policy is likely to be maintained, with Mr Christie saying: “I think that there’s going to be an increase in user fees with some of the agencies and entities that charge fees for services. I would be surprised if that was not the approach. I think the Government is wanting to move to fiscal prudence especially with the decrease in revenue.”

The Government yesterday highlighted the benefits of its $327.7m in COVID-19 related spending to end-March 2021, which has gone on a combination of health and safety measures; tax credit and deferral payroll support; small business support; and food assistance.

The Ministry of Finance, in a statement, said 72,000 households had received food assistance, while 14,000 workers across 126 businesses had been sustained by the tax credits and deferrals. Some 1,020 small businesses had been approved for loans and grants, and 1,013 employees across 14 industries were retained or hired by 129 recipients of funding through the Small Business Development Centre’s ‘round three’ grant.

Dr Hubert Minnis said in a statement: “We have had a strategy to manage the twin crises of Hurricane Dorian and COVID-19 from the very beginning. Through the Resilient Bahamas Plan, we channelled significant social support to individuals and communities who needed it most and maintained the country’s economic stability despite the unprecedented challenges we faced.

“We planted the seeds for an accelerated recovery. This new Budget will build on the investments we have made over the last year by continuing our social support while implementing new and innovative initiatives that will drive economic growth that is resilient, dynamic and inclusive.

“We want Bahamians to not only see that we have a plan but to clearly understand what that plan has accomplished. This administration has been dedicated to making public finances more transparent by transforming public finance legislation, instituting critical governance structures, and leading on new ways to engage in public outreach. This Budget will be no different.”