A budget of consequence
The 2008 financial crisis and subsequent Great Recession were catastrophic for The Bahamas. Thousands of jobs were lost; loan defaults skyrocketed; the government was forced to borrow vast sums to prop up the economy.
The crisis and recession precipitated a lost decade.
The growth we experienced last year (1.4 percent) and what is projected this year (2.5 percent) and next (2.25 percent) are the first real signs The Bahamas may finally be out of the mess that claimed so much wealth and caused so much hardship.
The problem we face is that in order to keep the economy afloat the last decade we borrowed billions. We used up much of the headroom we had from running low debt-to-GDP ratios.
This government thinks now is the time to cut borrowing and to begin paying our own way. The other choice would be risking a debt crisis through continuous large-scale borrowing.
The key plank in this plan for the Minnis administration is an increase in value-added tax (VAT).
Deputy Prime Minister and Minister of Finance Peter Turnquest revealed yesterday in the budget communication that VAT will increase from 7.5 percent to 12 percent effective July 1.
The increase is expected to bring in an additional $400 million in revenue.
The VAT hike is part of a three-year strategy.
Turnquest said: “The incremental revenue gains will permit execution of the government’s three-year fiscal plan as follows: In year one, we will pay off over $170 million in old bills and finally budget properly for current known commitments; in year two, we will pay off over $100 million in additional arrears and begin to implement reductions in customs and excise duties to rebalance the tax burden between the provision of goods and services and reduce the attendant distortionary impacts; and in year three, we will substantially complete the payment of arrears and make further significant reductions in customs and excise duties.”
Tax increases are never popular. Governments always lose support when they make the people pay more. But there are times when a fiscal house must be put in order. While we could argue if VAT needed to be increased as high as 12 percent, we all should agree that the government of The Bahamas could no longer continue borrowing $600 million or $700 million per year in such as small economy.
Bahamians have never experienced a debt crisis. We should pray we never do. Some countries spend decades after as zombies. Chronic high unemployment, recession, high taxes and devaluation are part of the situation. People leave their homelands as financial refugees to find lives elsewhere.
For this tax increase to eventually be accepted, strong growth is needed. The Minnis administration must redouble its efforts to find investment. If people are working and able to save, they will calm down. If growth stalls and unemployment remains in the double digits, anger will increase.
While reducing the need to borrow is a major part of the VAT hike, there is another reason. The government is preparing for accession to the World Trade Organization (WTO). It thinks joining the rules-based regime will attract more investment. For that to happen we have to move away from tariffs.
Whereas customs duties were the core of the tax system, they will be either radically reduced or phased out. VAT will be depended upon increasingly as the main revenue-getter for the country.
In this budget duties were removed for shoe and clothing retailers. That was a smart. The reason Bahamians go to Florida to shop so much is because of the significant difference in the cost of goods. To take the around 30 percent duty away from clothes helps local retailers be more competitive.
We hope the government takes the same position with vehicles in the near future. While duties were reduced in some categories, it would make more sense to eliminate them so new cars are affordable. The more affordable they are here, the less likely people are to go abroad to buy one. We’d keep the money on-island.
Also, if people could afford new cars and bought them, there would be fewer junk vehicles imported. They break down quickly and pollute the environment.
The Minnis administration made an aggressive move in increasing VAT. It will have to be aggressive in explaining to Bahamians why it did so.
The key for the government is trust. If the people trust this is being done for their long-term benefit, while they would still be upset, they would understand the plan. If there were no fight to explain, to dialogue with Bahamians, opposition forces would exploit the people’s anger and weaponize it at the party in power.