By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The government's rush to pay-off its $360m arrears is "not in The Bahamas' best interest", a former finance minister yesterday warning of the VAT hike: "The timing couldn't be worse."

James Smith, who held the post from 2002-2007, told Tribune Business that present incumbent, KP Turnquest, cannot present himself as "the good guy" with his austerity measures when he could have "saved taxpayers" from the full brunt 60 percent VAT rate hike.

Citing numerous reasons why a 12 percent VAT rate is unnecessary, Mr Smith said the government needed to pursue monies owed to it - especially the $400-$500m in allegedly outstanding real property tax - with the same vigour as it is implementing new and increased taxes.

He argued that the VAT increase was "premature" given the "dampening effect" it was likely to have on signs of a Bahamian economic turnaround and reviving investor confidence - indicators he had previously been optimistic about.

Mr Smith also echoed Sir Franklyn Wilson's concerns that the 60 percent VAT rate hike will translate into a revenue increase of the same magnitude, as projected by the government's own 2018-2019 budget forecasts.

He warned that this could again lead to revenue under-performance and an overshooting of the $237m GFS fiscal deficit projected for the upcoming fiscal year, especially since the government's commitment to paying off $172m in unfunded arrears would make it hard to adjust spending.

"The quick answer to that would be no," Mr Smith replied, when asked by Tribune Business whether he believed a 60 percent VAT rate hike was warranted. "I think the timing couldn't have been worse. I really don't think jumping right in to pay off all those payables at this time is in The Bahamas' best interests."

The government's budget projections show gross VAT revenues rising by $400m year-over-year, from the $663.562m forecast in 2017-2018 to $1.062bn in the upcoming 2018-2019 fiscal year. This sum is forecast to increase further to $1.115bn in 2018-2019, and $1.54bn in 2019-2020.

Mr Smith, though, argued that the scale of the revenue increase far exceeded the $360m in unfunded arrears that the Minnis administration plans to pay off over the next three years. He said the narrow timetable was too short, and would impose unnecessary stress that could throw the Bahamian economy back into recession by undermining consumer demand.

Collectively, if the government hits its targets, Mr Smith suggested that it will raise at least $1.1bn in net new money in the period to end-2021, even after accounting for the $100m in Customs and Excise Tax reductions that Mr Turnquest pledged to make once this period ends.

The deputy prime minister, though, is also factoring in a $76m increase to end the "sham" or "fudge" of persistent under-budgeting for known costs, plus $89m for extra debt interest payments and an additional $19m in recurrent spending. Coupled with the $172m in first-year arrears payments, this takes the additional 2018-2019 expenditure to $356m, thus absorbing most of the extra VAT money.

Still, Mr Smith argued that the government should not focus solely on the "payables" side of its balance sheet. "Let me put it this way," he told Tribune Business. "Logic would dictate one ought to apply the same attention to the Government's receivables.

"We know the Government has receivables, particularly on real property taxes, some Business Licence fees and Customs duties, where people are allowed to carry the items, pay later and never do.

"I recall four to five years ago there was a ball park figure of $400-$500 million in outstanding real property taxes. If you're going to borrow money to settle government payables you should first, or at the same time, try and get the Government's receivables."

Mr Smith said the Real Property Tax Act provided the perfect enforcement mechanism for this, given that it allows the Government to seize the very real estate assets owned by delinquent taxpayers. But successive governments, including the one where he was a Cabinet minister, have refused to employ this tool.

"I'm not impressed with wanting to settle these bills and be a good guy," he said of Mr Turnquest, "but you don't want to exercise your rights and save the taxpayer the increase in VAT."

Mr Turnquest, in unveiling the 2018-2019 Budget, pledged a revived crackdown by the Government's Revenue Enhancement Unit, which has been set an "above run rate" $80 million target for collecting a mixture of outstanding Customs, Excise and real property taxes.

He argued, though, that the benefits of enhanced administration and enforcement will not come through quickly enough to alleviate the need for a VAT rate increase. The Deputy Prime Minister indicated that added impetus for the rise had come from 2017-2018 revenues falling some $130 million below projections.

Mr Smith, though, agreed that the 60 per cent VAT hike was spectacularly ill-timed given that the Bahamian economy was showing signs it may achieve the projected GDP growth for 2018 - its highest rate in a decade.

"The economy had bottomed out and turned around," he told Tribune Business, pointing to factors such as Baha Mar's opening, an 18 per cent first quarter stopover visitor increase, and an improving US economy.

"It seemed to me the timing is a bit premature," Mr Smith added of the Government's move. "I would have waited six months to a year to see if this turnaround became an upward trend. I would have waited to see if that was happening.

"The country is going to pay a big price for this if we don't have a quick turnaround, which was on the way, but the increase in prices because of VAT is going to have a dampening effect on this.

"I was really positive about the turnaround. I had been looking at some of the indicators, and I could see something was happening. I had done a piece for one of the companies here and, after the VAT rise came out, I had to call it back and put in a paragraph saying all these things are trending upwards but it was difficult to see this continuing with the tax increase."

Mr Smith also warned that "you don't get a linear relationship" between the magnitude of a tax increase and the corresponding amount of revenue raised. VAT, as a regressive tax borne primarily by consumers, was likely to produce reduced spending as persons adjusted consumption to higher prices and reduced living standards.

"You can't raise VAT by 4.5 percentage points and get $400 million from it. It's non-linear, and causes a compression of the economy," he told Tribune Business. "You might get a reduction in receipts. With an increase in prices, other things being equal, you depress revenue.

"With the rise in the price level you stop employment opportunities and investment decisions. The local investor has to think twice as to whether, because of the state of the economy, he wants to further invest. It takes confidence out of the economy, and has a deleterious effect.

"I would argue that until a further analysis is done, it's going to bring in substantially less revenue than expected, which is the beginning of deficits. I suspect they're not going to get what they're projecting."

Mr Smith added that the Government, by creating numerous VAT exemptions, was "weakening their own projections" because it was opening up "loopholes" that could be exploited for tax evasion and avoidance.