The Davis administration’s plan to lower value-added tax (VAT) from 12 percent to 10 percent “does not sound like a wise move”, noted Caribbean economist Marla Dukharan said last week, explaining that government must have a plan to make up the shortfall in revenue somewhere else if it carries out this promise made on the campaign trail.
Dukharan made her remarks while appearing as a guest on the Guardian Radio 96.9 FM talk show “The Essentials” with host Hubert Edwards.
According to Dukharan, whether the government was motivated to make the promise to lower VAT because it was politically expedient or to genuinely assist the Bahamian people in the midst of the country’s social and economic crises, additional revenue sources must be sought at the same time.
“What motivated that type of announcement, apart from the political motivation, might be that they know that Bahamians are suffering because of this twin crisis that you’re facing, and they see this as a way of putting money back in the hands of the average Bahamian,” Dukharan said.
“The thing about it is that kind of policy in and of itself, all other things remaining the same, will cause a reduction in revenue. However, unless they announced some revenue measure or measures… perhaps that’s the tradeoff they had calculated.
“To me, it does not sound like a wise move.”
In March, while in opposition, then-shadow minister for finance, Chester Cooper, said a Progressive Liberal Party (PLP) government would reduce VAT to 10 percent for one year.
Cooper acknowledged that the 10 percent rate “is not a huge difference, but it will put consumers in a position to afford a little more of what they need”.
He added that a PLP government would reassess the new VAT rate after one year.
Then-Opposition Leader Philip Brave Davis said at the time, “We believe that by what we have outlined…by lowering the rate itself, will spur spending and will give people more funds,” he said.
“And more spending means the economy grows likewise.”
Dukharan lauded the country’s VAT regime, explaining that it has proven to be the most efficient in the region in terms of its administration.
She said the new government should use VAT to shore up the government’s coffers as tourism continues to gain its footing after a dismal performance in 2020 as a result of the pandemic.
She also predicted that cruise tourism will not return to its 2019 numbers in the near term.
“I would look at that tax to help me raise revenue and not the opposite,” she said.
“Just on the surface, I don’t know that I would agree with the policy of reducing the VAT….”
The Christie administration introduced VAT in 2015 at a rate of 7.5 percent, while Davis served as deputy prime minister.
Ahead of the introduction of VAT, Free National Movement Leader Dr. Hubert Minnis, who was then-opposition leader, declared that it would “harm and diminish the quality of life of every Bahamian”.
In 2018, the Minnis administration increased the VAT rate to 12 percent, saying the move was necessary as it had met public finances in a critical state upon coming to office.
Dukharan said government must remain cognizant of the size of the country’s deficit and plan accordingly.