Perspective

VAT illusion

The promise of VAT was a fantasy that never came close to becoming reality

The government of The Bahamas has collected billions in value-added tax (VAT) revenue since its introduction by the Christie administration in January 2015.

When VAT was first introduced, the promise was that it would be primarily used to reduce the country’s debt and debt burden, thereby freeing up the country to expand its fiscal horizons for the benefit of the Bahamian people.

An instant cash cow making up the largest segment of government’s recurrent revenue each fiscal year, it was not difficult to see how hundreds of millions in new money from VAT would invariably provide an easy avenue for governments to come up with new ways to spend, spend, spend.

And that is precisely what took place since VAT’s introduction over six years ago, wherein the country has not only seen a close to 90 percent growth in government debt, but sharp increases in recurrent expenditure – with inadequate accountability and transparency on how the revenue has been spent.

According to the 2015/2016 fiscal budget, government debt was estimated at $5.497 billion; government debt to gross domestic product (GDP) – which is the size of government debt as a percentage of the size of the economy – was estimated at 59.6 percent, and recurrent expenditure was estimated to come in at $1.946 billion.

Interest payments were budgeted at $266.4 million.

Six budget cycles and billions in VAT dollars later, the 2021/2022 fiscal budget passed by the Minnis administration posted estimated government debt at $10.386 billion – an 89 percent increase in government debt since the introduction of VAT.

Government debt-to-GDP in the current fiscal year is presently budgeted to come in at 84.3 percent, compared to 59.6 percent when VAT was first introduced.

Regard being had to the crises of Hurricane Dorian and COVID-19, recurrent expenditure in the current fiscal year is budgeted at $2.826 billion – an increase of approximately $880 million or 45 percent compared to the 2015/2016 budget.

Whereas interest payments in VAT’s first year were budgeted at over a quarter of a billion, higher debt levels have brought about higher budgeted interest payments to the tune of a staggering $512.5 million in the current fiscal year – over a half-billion dollars.

The public sector wage bill in the 2015/2016 budget stood at an estimated $650.7 million, and after six years of VAT, is currently estimated at $670.9 million.

Public sector pensions and gratuities in cash in the current fiscal year are budgeted at $150.9 million.

Now that the new administration led by Prime Minister and Minister of Finance Philip Brave Davis has had the opportunity to view the books, it has presented a supplementary budget for the remainder of the fiscal period, wherein it projects the country’s debt burden this fiscal year to be worse than previously estimated.

The supplementary budget now estimates government debt-to-GDP to come in at 93.3 percent of GDP in 2021/2022, with debt-to-GDP projected at 89.5 percent in the upcoming fiscal year.

When our governments brag about how successfully VAT is performing, the reality is that this success results in billions being transferred from the taxpayer’s wallet to the public treasury, with legitimate debate on how much value the Bahamian people are receiving for their billions in VAT revenue collected.

WHAT VAT CHANGES COULD MEAN 

When in opposition, the governing Progressive Liberal Party (PLP) promised a decrease of VAT from 12 to 10 percent, and it argued that the anticipated falloff in VAT revenue from the decrease would be made up through the economic stimulus the VAT decrease would generate.

When the Bahamian people were told that VAT was being decreased to 10 percent, they took the PLP exactly at its word, and naturally believed such a reduction meant that current zero-ratings and exemptions would remain, and that the VAT burden on all other goods and services would be reduced by the level promised.

What was announced by Davis and by state minister for Economic Affairs Michael Halkitis last week, however, is not what the Bahamian people were led to believe would occur with the reduction of VAT to 10 percent.

Much debate has ensued since Davis’ communication to Parliament last Wednesday, wherein he foreshadowed an elimination of zero ratings on taxable goods and services under the VAT Act, indicating that, “The VAT exemption for electricity bills and the special economic zones are untouched.”

The following day during the Office of the Prime Minister’s weekly press briefing, Halkitis went further, stating, “I think we are getting rid of all zero ratings and exemptions except for education and electricity.”

In the act, zero-rated goods and services include breadbasket items; medicines and biological products; categories of exports; certain transfers of real property; the acquisition of a home for first-time homeowners where the value does not exceed $500,000; water bills not exceeding $50 per billing cycle; transfers of home mortgages and home mortgages combined with domestic loans; and a supply of services comprising fund-raising events and activities undertaken by registered charities and non-profits.

Exempted supplies of services include insurance services in or from The Bahamas such as life insurance, annuities, savings products and home insurance; tuition; domestic financial services that do not attract a fee; medical services provided by public health to specified categories of patients; the sale or rental of a dwelling; the transfer of vacant land; services provided by care facilities for the aged, indigent, infirmed, handicapped or disabled; religious services; certain services by a recognized charity; and services rendered by a daycare business, including the provision of after-school care.

Exempted supplies of services also include the import of unconditional, not-for-resale gifts to approved charities.

If the Davis administration, in fact, plans to “get rid of all zero ratings and exemptions except for education and electricity”, this would mean that numerous services which have never attracted VAT would become taxable, putting the implications thereof well beyond the cost of breadbasket items and medications.

As the nation was told during the last Christie administration, it is being told again, which is that the Davis administration’s intentions for VAT are informed by advice from experts both foreign and domestic.

Advisors from New Zealand guided the Christie administration’s implementation of VAT, with government assurances that a VAT system based on little to no exemptions would be most efficient.

What is important to note, is countries worldwide including New Zealand, provide for a wide array of zero-rated and VAT exempted goods and services in line with the specific needs and socioeconomic realities of these countries.

Countries that adopt zero ratings do so on goods and services deemed essential such as food and beverages, medication and sanitary products, and products for the elderly and disabled.

The Davis administration did itself no favors by making pronouncements regarding what would be controversial amendments to the VAT act, without simultaneously providing the models it used to develop its proposals, and explaining to the Bahamian people what the models show in a way that the average citizen can readily grasp..

Meantime, what works on paper in terms of VAT efficiency does not necessarily translate into what is best for the people at a time of high unemployment and homelessness, mounting consumer debt, and financial insecurity for thousands of Bahamian households across economic classes.

DEFINING ‘THE VULNERABLE’ 

The Bahamas has not had a household expenditure survey report published since 2013, and its 2001 living conditions survey – both of which produced by the Department of Statistics – was published in 2004 and is the latest report of its kind available in an online search.

The country is working with official census data more than 10 years old, and its last standard labor force survey was conducted in November 2018.

In other words, current discussions on who are the most vulnerable in our country, how households are spending their money, and what the financial realities are for the middle class which bears the brunt of the country’s tax burden, could be based on outdated information.

Without current and accurate data, government deliberations on how its fiscal policies will impact various groups within the country run a potent risk of missing the mark and, in effect, underestimating or overestimating the impact on those groups.

Though public discussion on VAT for breadbasket items has focused primarily on the impact for the poor, residents who do not classically fall into the “poor” category are also struggling to make ends meet, and purchase breadbasket items in large proportion as well, since healthier food options are too expensive even for many middle-class families.

The breadbasket not only consists of staples such as rice, milk, corn beef and eggs, but baby formula and baby food, powdered detegent and soap.

As was proposed under the Christie administration, the Davis administration plans to add to the social services budget to account for the reintroduction of VAT to breadbasket items, but the question must be asked of just how many Bahamians we are wanting to continue to push on to the social services line because of taxes that are supposed to improve their standard of living?

And what about those who do not necessarily qualify for social assistance, but who will have the added struggle of paying VAT on medications, breadbasket items, and a host of other services if, in fact, almost all zero-ratings and VAT exemptions will be eliminated as Halkitis indicated?

Growing numbers of middle-class households are becoming increasingly vulnerable, but their plight is often overlooked in the discussion on who suffers most when taxes are either added or increased.

The debt spiral for thousands of households is evident by the high rates of loan defaults in the wake of COVID-19, with many middle-class families unable to keep their children in private school, keep up with their bills and liabilities, and see the fire for the smoke.

One cannot simply look at a person’s salary or employment and assume what he or she can afford, and the more disposable income earmarked for the essentials, the further away go opportunities for building wealth.

As inflation continues to eat into one’s spending power, insufficient national focus is being placed on the extent to which the country’s inarguably weakened middle class, weakens prospects for socioeconomic advancement.

Even with health insurance, many who are not considered poor are struggling to obtain all of their necessary medications, and a reintroduction of VAT on medicines could further erode the quality of health nationwide, as those fighting to manage a myriad of expenses make the decision to forego their medication for other items.

This is particularly true for old-age pensioners, who, unlike public service pensioners, are not immediately earmarked for an increase in pension payments.

Bahamians were urged to insure their homes in the aftermath of Dorian, and those with home insurance took a steep hit in premiums due to Dorian’s damage.

A reintroduction of VAT to home insurance could discourage individuals from purchasing new insurance policies, and encourage those currently insured to drop their policies.

The same could hold true if VAT exemptions are eliminated on life insurance, and homelessness brought about by Dorian and COVID-19 certainly would not be helped if the current VAT exemption on rent is eliminated.

While there is talk of strengthening price control to protect consumers of breadbasket items, it must be remembered that global food costs have soared to record highs this year, pushing up purchase costs for wholesale and retail vendors which in turn increases costs to consumers even with margin limits in place.

Observers might argue that a remediation to these dilemmas would be economic growth that puts people back to work, and puts more money in the pockets of the average Bahamian.

In his communication, Davis said, “Both the IMF (International Monetary Fund) and the technical experts at the Ministry of Finance forecast a return to positive real growth of roughly 2.0 percent in 2021, increasing to 8.0 percent in 2022 with a return to trend growth of 1.5 percent by 2026.

“While this forecast is in line with the one presented in the May budget, we believe it does not represent a significant enough increase in growth to sufficiently reduce unemployment, enhance living standards, and return the burden of public debt to more sustainable levels.”

What this says, notwithstanding the promising gains currently occurring in the tourism sector on islands except Grand Bahama, is that economic gains might not be appreciably felt for a large segment of Bahamians for some time to come.

We question, therefore, where the evidence lies for the PLP’s indications that its VAT decrease would result in an economic boost.

Though Halkitis said the administration “does not believe” it will need to once again increase the VAT rate, beliefs as it pertains to fiscal policies in office, can change.

Because a change in the VAT structure or rate can provide instant revenue for the government, it is an easy option should the need arise; and, therefore, Halkitis’ statement cannot be taken as representing a certainty that the VAT rate will not be increased again this term.

Bahamians were promised an answer to the country’s debt problems with VAT, and were promised national advancement via their billions in VAT dollars.

But taxpayers are left to accept the reality that VAT has instead served as a fountain of cash for unchecked government spending, a ballooning public service, and government inefficiency and waste.

That VAT would be the answer to our debt problems was an illusion, and uncertainty across successive administrations about how VAT will ultimately impact our wallets and the economy threatens to lead to a further state of disillusionment for Bahamians.

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