With the government still facing criticisms over the roll-out of its new, highly contentious budget, Prime Minister Dr. Hubert Minnis has started touring the Family Islands in an effort to convince more Bahamians that his administration has made the right decision in raising value-added tax (VAT) from 7.5 percent to 12 percent.
In making his pitch in Andros on Monday, Minnis made an interesting statement.
“I do not believe you can tax yourself out of a problem,” he said.
“I am not a believer in that. The only way you can get out of a problem is you must grow your economy.”
Minnis may have been making a play on a popular Winston Churchill quote: “I contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle.”
The prime minister was right: The astute economic minds among us have repeatedly pointed out that you don’t tax yourself out of a problem, you grow yourself out of a problem.
What exactly is this government doing in a major way to grow the economy? Right now it is riding off the success of Baha Mar and other Chinese investments in The Bahamas.
Minnis’ declaration in Andros was attention-grabbing because it contradicts the very decision the government of The Bahamas has made to tax its way out of a problem.
It contends that is the best option.
The problem has been widely stated over the last several weeks since Finance Minister Peter Turnquest delivered the budget communication in Parliament on May 30 and revealed the plan to hike VAT to 12 percent.
The problem, as identified by the government, is that The Bahamas has been piling on the debt at significant levels.
At the end of 2017/2018 it is projected to be just over $7 billion.
The government says the VAT rise to 12 percent is a painful but appropriate response.
When he spoke with us not long after the budget communication, former Minister of Finance Sir William Allen said, while he commends the Minnis administration’s determination to approach fiscal deterioration head-on, the planned increase in VAT is “worrisome” and could have a “diminishing effect” on the national economy.
“In other words, it may do exactly what they don’t want to happen,” Sir William said.
“They are seeking to increase the revenue from a growing economy, and if this discourages growth in the economy, that’s not what they want.”
After stating on Monday that he does not believe a country can be taxed out of a problem, the prime minister then pointed out that, under the Christie administration, the economy failed to grow.
“We came in office in 2017, and in 2017 your economy grew by 1.4 percent,” said Minnis, triggering applause from the crowd.
Of course, what the prime minister failed to tell his audience is that the economic growth experienced was significantly attributable to actions taken by his predecessors in office.
In its 2018 Article IV consultation with The Bahamas, the International Monetary Fund (IMF) reported: “Real GDP is estimated to have expanded by 1.3 percent in 2017.
“Economic activity has been supported by the completion of Baha Mar, new FDI-financed projects, and post-hurricane reconstruction activity,” the IMF said.
We are also benefiting from a stronger U.S. economy, that report noted.
The statement also noted, “Baha Mar created about 4,000 jobs by March 2018 and helped reduce the unemployment rate to 10.1 percent in November 2017, from 11.6 percent one year earlier.”
According to the IMF, real GDP growth is projected at 2.5 percent this year, and 2.25 percent in 2019 “on the back of stronger growth in the United States, the phased opening of Baha Mar and a pick-up in foreign direct investment”.
“Medium-term growth is projected to remain at 1.5 percent, reflecting significant structural impediments,” the IMF stated.
In the recent budget exercise, Turnquest said the government has been steadfast in its commitment to boosting the rate of growth of the economy.
He pointed to improving the ease of doing business, promoting the development of micro, small and medium-size enterprises; economic diversification through the digital and blue economies and the Commercial Enterprises Act as important elements of the plan.
The act, which was controversial at the time it was in Parliament last year, liberalizes the granting of work permits to any enterprise (with an investment of at least $250,000) that seeks to establish itself in the Bahamian economy and requires permits for its management team and key personnel.
But it is the sharp increase in VAT that is at the heart of the government’s plan to address the fiscal challenges faced by the country.
While stating that he does not believe in taxing the country out of a problem, Minnis, in the same breath, sought to make the case for why the government is imposing the 60 percent VAT increase.
He spoke of a kind of doomsday situation that likely caused fear among some.
“Imagine you [are] placed in a situation where a foreign entity gonna come and say ‘No; there can be no pay increase; cut their pay by 20 percent’, and you can’t do anything,” the prime minister said.
“They control it. Imagine, they’re going to say ‘Cut back the support. You cannot support Andros. Cut the support to Bahamasair, so the plane fares go up. Cut the support to BPL, to Water and Sewerage so that your light bills go up’; they say, ‘Cut the support to local government’.
“That’s what they will do. They will determine your destiny, not you.
“And, therefore, we had to make a decision, do we want, as Bahamians, to pave the direction for The Bahamas, or do we want someone else to come in?
“That’s a difficult decision. I will say repeatedly, and I will say it again: I would prefer to lose an election than lose a country. I was put here to make decisions to protect the future, not decisions for me.
“So we made the decision to increase the VAT to 12 percent so that we can decide how our country must run, not some other agency to run our country.
“You don’t want an external agency coming in here and telling you that your child can’t go to college because we don’t have the money for that.”
The prime minister added: “So, there are several ways that you can solve your problem.
“You can borrow more, but that don’t solve the problem; [it would put us] deeper in debt.”
He pointed to the increase in VAT as the best option.
Yesterday, Sir William noted IMF assistance in restructuring of public debt and finances is not now imminent.
“I don’t think we are at the point of having to go to the IMF, but we do have to take some corrective measures,” he said.
“We do have to give some things to give a clear signal that we are addressing our fiscal problems. There’s no question about that. You have to give a clear signal that you’re addressing it.”
Again, his concern is the sharp rise in VAT may have unintended consequences for the economy.
Today, the prime minister is scheduled to make his sales pitch to Exuma.
He will likely continue sewing fear as he seeks to convince residents that the government acted in their best interest.
Whether the residents buy into what the government is doing might be important to Minnis politically.
The poor will bear the brunt of the regressive tax.
It is unclear whether the strategy of fear is working to bring more onboard with the VAT plan.
But fear has often been regarded as the most powerful stimulus for compliance.
The government’s target of balancing the budget in three years was no doubt set – if only in part – with political considerations in mind.
If that is achieved, the FNM gets to use it in its political campaign for reelection.
There is no telling at this point whether the government will succeed in taxing us out of our problem, despite the prime minister’s stated belief that he does not believe in solving a problem through taxing.
There is also no telling what mood the tax-weary electorate will be in or whether the stated plans for the economy will bear fruit.
About the only clear thing in this situation at the moment is that, in a few days, 12 percent VAT will be a full-blown reality.