By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The deputy prime minister yesterday said a 12 percent VAT was the only way to avoid "a double whammy" for the Bahamian people in closing a $400m budget "gap".

KP Turnquest, kicking-off the budget debate in the House of Assembly, said the Government's analyses showed that a VAT rate anywhere between the current 7.5 per cent and the chosen benchmark would be inadequate for hitting its short-term fiscal consolidation targets.

He portrayed a 12 per cent VAT as the only option available to the Minnis administration if it wanted to avoid borrowing "significant sums" to fill the hole, and escape saddling the Bahamian taxpayer with increased debt and associated interest costs as well as a 60 per cent tax hike.

"In considering what the VAT rate should be, we considered options ranging all the way from 8 per cent, 9 per cent to 12 per cent," Mr Turnquest told MPs. "What would fix the problem rather than mask the problem?

"When we did the analysis on those other rates, we quickly realised that although it would close the gap, with those other rates we would still have to go out and borrow significant sums to close it."

Taking this course of action, the Deputy Prime Minister explained, would have "burdened the Bahamian people with another significant loan" and associated interest payments on top of a VAT rate increase.

Effectively, the Government would have been taking at both ends, and Mr Turnquest said: "We would have given the Bahamian people a double whammy."

He added that it ultimately decided that a 60 per cent VAT rate hike "makes the most sense in the long-term", as it would enable the Government to pay-off $360 million in unfunded spending arrears over a three-year period plus "right size the Budget" to ensure the Fiscal Responsibility Bill's 0.5 deficit target was hit by 2020-2021.

Besides paying off $172 million of the identified 'arrears' during the upcoming 2018-2019 fiscal year, the extra $400 million forecast to be generated by the VAT rate rise will also cover $76 million in expenses never properly Budgeted for previously; $89 million in extra interest payments; and $19 million in new government spending initiatives.

Mr Turnquest said that as the arrears were paid-off, and the fiscal deficit fell towards the Fiscal Responsibility targets, the Government will seek to reduce the tax burden on Bahamians through Customs and Excise Tax reductions.

In truth, though, the VAT rate was always likely to rise at some point given the Government's intention for the Bahamas to become a full World Trade Organisation (WTO) member by end-2019. Joining global trade's rules-setting body will require the elimination of Customs duties, which are viewed as trade barriers, resulting in a revenue loss that has to be compensated for.

Still, Mr Turnquest said: "That's how we came to the rate of 12 per cent in the face of the challenges we have. It's the most reasonable, responsible thing we can do."

Suggesting that the Government faced no good policy options in addressing its $400 million 'funding gap', Mr Turnquest said increased borrowing and/or a continuation of over-budgeting, over-optimistic projections and 'kicking the can down the road' were never "contenders".

As for significant cuts to government spending, he added that the Minnis administration had little room for short-term manoevere. He pointed out that interest payments on the Government's near-$8 billion debt and subsidies to state-owned enterprises (SOEs) both accounted for 15 per cent of recurrent spending.

Acknowledging that the Government's wage bill, standing at $793 million in 2018-2019, accounted for just over 30 per cent of its fixed cost spending, Mr Turnquest said it was "neither feasible nor desirable" to send hundreds of workers home.

"With a fiscal gap of some $400 million that needed to be bridged, securing even one-half of that out of the wage bill would have implied the drastic elimination of programmes and services, and the termination of thousands of Government employees," he explained.

"Again the Government judged that such an option was simply not feasible nor desirable in the near term. Over time, however, we will want to assess the appropriateness of our wage bill as we move forward with our in-depth examination of all areas of Government expenditure."

Mr Turnquest, illustrating the Bahamas' debt spiral, said interest costs had doubled over the past seven years, rising from $191 million in 2011-2012 to $381 million in the upcoming fiscal year.

He also challenged the private sector, in particular the Chamber of Commerce and Gowon Bowe, the Bahamas Institute of Chartered Accountants (BICA) president, to come up with viable alternatives.

"I asked them: Give me your solution. Tell me what to do. I'm still waiting," Mr Turnquest said.