Don't 'continually' hike VAT for fiscal escape

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The government “cannot continually” use VAT hikes to solve its fiscal woes, a top accountant is warning, describing its rising debt servicing and unfunded pension costs as “worrisome”.

Raymond Winder, pictured, Deloitte & Touche (Bahamas) managing partner, told Tribune Business that encouraging private sector growth should be as big a priority as increasing revenues when it came to tax reform.

Warning the Minnis administration that its predictions of a “soft” economic landing following the 60 percent VAT rate hike had better be correct, he said hitting its fiscal targets - and delivering benefits the Bahamian people can feel - will be vital to maintaining the government’s credibility.

Mr Winder described The Bahamas’ current debt servicing costs, where 18 percent of all government revenues go towards interest payments, as a “red line” that could not be allowed to increase given the sums it sucks from essential public services.

And he warned that the sums allocated to paying civil service pensions, pegged at $100m in the 2018-2019 budget, appeared to be growing at a faster rate than the rest of the budget.

“It’s important that the government demonstrate to the Bahamian people that with this increase in taxation you are going to get an improvement in the fiscal position,” Mr Winder told Tribune Business.

“We cannot continually raise taxes and allow the fiscal condition to deteriorate... Obviously the government is hoping there is some reduction in the public sector, some increase in taxation and some limited growth in the economy, and I hope they’re correct that we will have a reasonable landing at the end of the day.

“The government needs to constantly reassess the various taxes to ensure we are not only considering raising revenue when we put new taxes on the books, but are considering the creation and encouragement of industries in The Bahamas. That means we must continually look at all other forms of taxation,” he continued.

“VAT is not an area we can continually look to to meet Government’s revenue needs in the future. While VAT is better than Customs duties in terms of social needs, it affects those at the lower end far more than the upper end.”

Fears that the Government will continually hike the VAT rate have already spooked some in the Bahamian private sector, given that it is relatively easy to do and has now been achieved for the first time.

Ben Albury, Bahamas Bus & Truck’s general manager, told Tribune Business: “Where’s this going to end? It’s going to go to 15 per cent, 17.5 per cent, 20 per cent. When they rein in things on their end, show they’re being fiscally responsible and are collecting taxes, people will be a lot more receptive.”

The 2018-2019 Budget’s VAT hike abandons the low-rate, broad-based structure employed when VAT was first introduced on January 1, 2015. The 4.5 percentage point, or 60 per cent, increase brings the Bahamas’ VAT rate closer to the likes of Barbados, at 17.5 per cent, and the UK, where it is 20 per cent.

Mr Albury suggested the 12 per cent VAT, and the manner in which the increase was effected, will prove a similar “Achilles heel” for the Minnis administration as it did its PLP predecessor.

Suggesting that the rate should not change so quickly, or by this magnitude, Mr Albury said: “For us it’s a software change, but what about Kelly’s and other places that have thousands of items on their shelves priced at 7.5 per cent?

“Just as the introduction of 7.5 per cent VAT was one of the achilles heels for the PLP, making this 12 per cent change the way they have, it’s going to be a death blow for them.”

While much attention has focused on the 2018-2019 Budget’s $738.475 million civil service salary bill, a closer study shows the public sector workforce’s true cost - when all benefits are factored in - stands at over $900 million. The Ministry of Public Service’s Budget includes $70 million for medical insurance payments, and $100 million for civil service pensions.

Together, these two ‘line items’ represent 58.6 per cent of that ministry’s total Budget. And, when these costs are added to the wage bill, civil service personnel costs jump to $908.475 million - a sum equivalent to 35 per cent or more than one-third of the Government’s $2.589 billion fixed-cost spending.

Mr Winder expressed particular concern over the $100 million civil service pension bill, which represents a $5 million increase from the $95 million allocated the previous year. Civil servants contribute nothing to their retirement income, with this being funded 100 per cent by the taxpayer, and even the Government has acknowledged the ‘ticking timebomb’ this represents for its already-precarious finances.

“One of the things that is a major challenge for the Government in this Budget is the amount that is due to pensioners, which seems to be increasing at $5 million a year and is now estimated to be $100 million,” Mr Winder told Tribune Business.

“This is a major concern the Government has to consider. That is one of the items that appears to be growing and accelerating. I don’t think any of the other items are growing as fast at around 6 per cent a year.

“The number is growing at a pretty hefty pace because every time the Government retires someone, a portion of that person’s salary remains on the books because their pensions are funded by recurrent expenditure.

“It’s not going to stop. It’s going to grow faster unless the Government finds ways to reduce the number of persons going on to that scheme. If not, that’s going to be a worrisome number for the Government to plan and Budget for.”

The Government’s unfunded public sector pension liabilities are projected to hit $3.7 billion by 2030 unless corrective action is taken to protect Bahamian taxpayers from this unsustainable fiscal burden.

K P Turnquest, Deputy Prime Minister, told Tribune Business last week that pension reform is among the Government’s medium-term fiscal goals. This helps explain why the Government is so eager to deal with its $360 million arrears within a narrow three-year window, and eliminate the deficit so quickly, as this will enable it to then focus on this pressing matter and NIB reforms.

With subsidies to state-owned enterprises (SOEs) consuming $398.294 million of taxpayer monies, and $709.413 million allocated to debt principal repayments and interest ($381 million), these two figures alone - combined with civil service salary and benefit costs - show how little room for manoevere the Government has with the 2018-2019 Budget.

These three ‘items’ alone account for $2.016 billion, or 77.9 per cent, of the Government’s total recurrent spending for 2018-2919, with Mr Winder expressing concern that the Bahamas’ cannot “allow this situation to deteriorate” further if it is to continue accessing the international capital markets.

“The other challenge the Government has is the percentage of the Budget that has to go towards interest payments,” he told Tribune Business. “This is just repayment of debt that does nothing for the economy. It’s money that has already been spent.

“That is a worrisome number that the Government has to pay attention to. Eighteen cents out of every dollar is a significant portion of government revenue that goes to the retiring of interest and principal on the debt.

“The 18 per cent of revenue going to interest is clearly a red line, and we cannot afford this percentage going towards the payment of debt. At this rate the Government will have less funding available for health, education and other important areas of our economy.”