• Slash will ‘not hold the line’ with rating agencies
• Gov’t warned election promises face ‘stark reality’
• Any initiatives ‘must protect Gov’t revenue base’
By NEIL HARTNELL
Tribune Business Editor
The Davis administration’s pledge to slash the VAT rate to 10 percent has been undermined by Moody’s downgrade of The Bahamas’ creditworthiness, Tribune Business was told yesterday.
Matt Aubry, the Organisation for Responsible Governance’s (ORG) executive director, said such a cut would “not hold the line with Moody’s and other rating agencies” that are watching very carefully to see how the new government tackles The Bahamas’ fiscal, economic and COVID-19 crises.
Agreeing that Moody’s action will at the very least complicate the Government’s efforts to deliver on a key pre-election pledge, he added that all such campaign promises now face “a very stark reality” when it comes to delivering and executing on them.
Mr Aubry said that while the Progressive Liberal Party (PLP) had placed “a lot of stock” in cutting the VAT rate by two percentage points, even if just for a year, The Bahamas’ dire fiscal circumstances combined with Moody’s warning meant any revenue foregone as a result needs to be “offset” by gains in other areas that have yet to be identified.
For the rating agency made clear its “negative outlook” on The Bahamas, which signals there could be another downgrade plunging the country’s creditworthiness further into non-investment grade or ‘junk’ status, is being heavily influenced by the sharp COVID-induced revenue contraction.
“The pace of the economic recovery, and particularly tourism activity, will directly affect the pace of fiscal consolidation and how quickly debt begins to decline,” Moody’s said of its “negative outlook” rationale. “The reliance on indirect taxation - VAT and excise taxes - makes government tax collection more sensitive to the speed of the economic recovery.
“A slower recovery would place downward pressure on revenue and limit the speed of fiscal consolidation and prospects for debt stabilisation. Larger-than-expected fiscal deficits in turn would increase reliance on external market borrowing and could create external liquidity pressure.”
This substantially reduces the Government’s space for a VAT cut. While virtually all Bahamian businesses and consumers would like nothing more than such a rate reduction, even a temporary one for 12 months, there are substantial pressures from the outside via the likes of the International Monetary Fund (IMF), Moody’s and Standard & Poor’s (S&P), the multilateral institutions, lenders and creditors against one.
They are all placing The Bahamas under increasingly intense scrutiny over its $10.356bn national debt and projected $951.3m deficit, waiting for austerity measures and a detailed debt management plan for setting this nation’s public finances back on a more sustainable path.
Mr Aubry, meanwhile, was backed by Gowon Bowe, Fidelity Bank (Bahamas) chief executive, who argued that the Government should instead focus on eliminating all the VAT exemptions introduced by the Minnis administration so that The Bahamas could revert to the “broad-based” taxation model it was initially praised for.
Besides taking the tax exemption away from higher income-earning Bahamians that did not need, Mr Bowe explained that the revenues generated could be re-directed to assist lower income persons. He also called for the conditional cash transfer (CCT) initiative, featuring pre-paid and debit cards, to be relaunched as a means of distributing these funds to those in need.
“That will not hold the line with Moody’s and other rating agencies. That’s where we are now,” Mr Aubry told Tribune Business of the 10 percent VAT proposal. “All these promises have to be brought forward in a very stark reality. We’re over-borrowed with very little discretionary funding, and dependent on foreign currency borrowing.
“It puts us in a very vulnerable place. If we think about meeting the promise of a reduction of VAT, it has the implications of where we make up for that and from what sources. This government is putting a lot of stock in that, and whether we’re able to offset what we’d lose from a two percentage point VAT reduction is something that’s going to have to be looked at.”
Mr Bowe, meanwhile, warned that the proposed VAT rate cut needed to be backed up by economic analysis, modelling and projections that show it will have “zero impact” on the Government’s revenue intake given the austerity pressures from outside The Bahamas.
“You cannot reduce the rate without ensuring you protect the revenue base,” he told Tribune Business. “We need to make it not a campaign promise, but make it a net positive or net neutral position. I look at 10 percent not disparagingly, but to say it had better be well-modelled and have specific objectives around it to show it is net positive or net neutral” on revenue.
The PLP, while in Opposition, did not produce any economic modelling or analysis to show whether the proposed cut would reduce or boost government VAT revenue. Chester Cooper, now deputy prime minister and minister responsible for tourism, investments and Immigration, suggested the lower rate would boost economic activity and increase revenues by $200m annually.
This, though, was immediately countered by then-Senator Kwasi Thompson, former minister of state for finance, who countered that the one-year VAT rate cut will “destabilise the economy” and government finances by costing the Public Treasury $100m in revenue.
Now-prime minister, Philip Davis QC, hit back by arguing that the VAT decrease will help hard-hit families and businesses while also helping to stimulate the economy by incentivising more consumer spending and a higher transaction count.
Mr Bowe, though, challenged the latter theory given COVID-19’s devastating impact on jobs, incomes, purchasing power and living standards. “There’s the theoretical argument that when you lower the rate, people consume more, but you have to bear in mind that people today are not working, and their buying power and consumption has taken a significant hit,” he added.
The Fidelity Bank (Bahamas) chief added that, before focusing on a VAT rate cut, the Government should instead abolish the exemptions introduced by the Minnis administration and thus lower the prices of numerous items apart from those in the so-called “breadbasket”.
To minimise the effect on lower income Bahamians, Mr Bowe said the Davis administration needs to have as “a high priority” the reinstatement of the conditional cash transfer (CCT) initiative so that extra social security funds can be directed to persons who “need that support for the dignity of their lifestyle”.
This would be funded via the extra VAT generated from higher income earners, and be consistent with the recommendations given by the New Zealand consultants prior to the initial implementation of a low-rate, broad-based VAT of 7.5 percent on January 1, 2015.
Mr Davis at the weekend sought to give his administration some flexibility on when the promised VAT rate cut would be implemented, suggesting that an announcement will be made “in the coming weeks” once a minister of finance has been appointed. That post was not filled as of last night.