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Moody’s throws wrench into PLP’s VAT cut plan

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MATT AUBRY

• 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

nhartnell@tribunemedia.net

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.

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Gowon Bowe

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.

Comments

Proguing 9 months, 1 week ago

If Davis lowers VAT to 10%, he will be able to claim his own Moody's downgrade, and they won't wait until the next election!

VAT is not only the largest source of income for the government, but it is also the most reliable as it is collected by the private sector. Davis knows this very well, since VAT was implemented by the PLP. The new PM must already be regretting his campaign promise.

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Millennial242 9 months, 1 week ago

This is true about VAT. However, (in my personal opinion from dealing with the process) VAT is not being collected properly from stakeholders. The amount that the government receives probably represents 60% of what is truly due. A major factor for this is the slack practices regarding collection and inspection. If this is cleaned up, along with the reduction, then they can see better returns.

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tribanon 9 months, 1 week ago

The new Davis-led PLP administration would be wise to use Bowe and any others like him as a resourceful sounding board on proposed significant policy changes pertaining to our country's finances.

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ohdrap4 9 months, 1 week ago

Cut to 10% but make it across the board. No more vat free things.

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Proguing 9 months, 1 week ago

I would not be surprised, but the re-introducing VAT on breadbasket items would hurt the poor most.

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themessenger 9 months, 1 week ago

Agreed, otherwise those election promises will be collapsing faster than a house of cards in the path of the Moody's Hurricane.

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rodentos 9 months, 1 week ago

Would Bahamas be UPGRADED instead if they raised the VAT to lets say 20%?

Do you realize at all what is going on?

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licks2 9 months, 1 week ago

Moody had nothing to do with the fact that there will be no VAT cut. . .IT JUST COULD NOT BE DONE!! Mind you. . .if DAVIS IS WISE "ONLY FOR HIS BASE" nah. . .Moody gave him a good out from his unrealistic promise!! But as we can see from previous elections in this country, the masses don't reason that well. . .they will hold you to "what come outta ya mouth". . .not what the reality of the matter currently stands!!

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Bobsyeruncle 9 months, 1 week ago

Now he's got his first an excuse for going back on his campaign promise. Same old $hit, different day

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bahamianson 9 months, 1 week ago

To hell with that, i want what i was.promised otherwise, Davis's entire cabinet must resign for apparently misleading the electorate. Far too long politicians have not been held accountable for promises . This woild be an outright deception.

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BMW 9 months, 1 week ago

Damn calling for Brave to resign already.

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birdiestrachan 9 months, 1 week ago

What Mr: Bowe says is gospel to me 10% across the board is much simpler.

The Bahamas need all the brainpower available. Please see what you can do to help the Government.

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baclarke 9 months, 1 week ago

Why can't we completely overhaul the tax system? Why are we still paying 45-60% (maybe more) duty on anything brought into this country? Personally, i rather pay 15-20% duty across the board and 10-12% VAT across the board.

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rodentos 9 months, 1 week ago

very simple: because then lot of customs "officials" will be fired, if the system becomes simpler! Complex rules create government "jobs"

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OMG 9 months, 1 week ago

It really is simple maths>The Bahamas is deep deep in debt with $80 out of every $100 going to repay external debt. With the further downgrading any further loans may attract higher interest rates. To reduce government revenue by even 2% may please a few loyal supporters but will contribute to an already sick economy. Collect all due revenues and make property taxes payable every year unlike many expats who simply do not pay until the property is sold. Add 10c to every bottle of liquor or beer sold, reduce the number of meaningless flights by various officials to the islands, clamp down on the few corrupt employees who steal and sell government property. Stop all these useless seminars especially on the family islands where a few officials dressed to the nines fly in ,have breakfast, hire a car, have a meeting , have lunch and fly back-especially true in education. Like any business cost cutting, reducing waste is a first step. As for all the wild PLP plans only comparable with Minnis wild offerings many unpleasant policies will and must be taken and taken now.

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DDK 9 months, 1 week ago

I believe we are the only country in the world that charges value added tax on customs duty. There should have been more than enough coming in to run TWO Bahamases from customs duty if only governments and civil servants had not been so slack and so corrupt. Customs duty was to have been eliminated with the advent of the dreaded VAT. DId that happen? No. VAT was increased and the majority of duty has been left in place. Stupid exemptions here and there were only an attempt to hoodwink voters into believing government actually cared about the cost of the largely unhealthy bread basket items.

I firmly believe we should have one duty and one duty only, either customs at one rate across the board or a reasonable VAT if we must have this horrible tax, if, and only if, customs duty is eliminated. Further the current duty processing format used by Bahamas Customs is ridiculously cumbersome and most surely the result of some over paid software designer and ministerial 'finder's fee'.

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DEDDIE 9 months, 1 week ago

The Bahamian populace didn't give Minnis a break with his two hellava excuse (Dorian and COVID) what make you'll believe Brave will get a break with a Moody excuse. Bahamians are not in the mood for excuses.

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tribanon 9 months, 1 week ago

Administrations don't simply get breaks for crises that have occurred. They get breaks for how well they have handled them. And truth be told, both the Dorian and COVID-19 crises could not have been handled any worse than what was done by the grossly incompetent and failed Minnis-led FNM administration.

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