Don't 'continually' hike VAT for fiscal escape


Tribune Business Editor

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.”


Well_mudda_take_sic says...

More scare tactics......this time of the same PLP kind we heard when VAT was first introduced. But note how you don't ever hear this D&T accountant proposing or discussing a detailed plan by which the government can implement desperately needed serious austerity measures to sensibly go about significantly reducing the grossly over-bloated size of our largely non-productive public services sector in the shortest period of time possible. No ladies and will never hear that kind of much needed advice coming from the lips of Winder...a well known PLP supporter.

Posted 11 June 2018, 2:02 p.m. Suggest removal

DDK says...

It's what they did with NIB, fuel surcharge, "sin" taxes on booze and tobacco, and, for years prior, on customs duties, as well as any other tax that they jump on. Maybe Cabinet puts tax tags on a board and throws darts! Once they implement a tax, its increase is theirs for the picking! They continue to spend like drunken sailors and now they blame WTO, also IMF, ECB and all the other institutions they have borrowed from in order to keep spending and living large. The Ponzi scheme is crashing and now, more than ever, its The People's Time.

Posted 11 June 2018, 2:11 p.m. Suggest removal

birdiestrachan says...

Mr; Winder is talking sense which to many can not digest. That is why the FNM
Government is the Government. A vision less crew, Without Vision the people [perish
and many in the Bahamas are perishing today/

Posted 11 June 2018, 7:18 p.m. Suggest removal

DaGoobs says...

As the Bahamas pursues WTO ascension, we can expect and look forward to increased VAT rates and other forms of direct and indirect taxation to eventually replace customs duties as principal means of raising government revenue. It's either do something now or do it in 5 years but it has to be done. We've had a nice long run with the Pindling model of socialist style government where the government foots the bill for a wide range of services and the citizens pay little or nothing for it while doing their best to evade paying any form of taxes superimposed on the Stafford Sands economic model of a shrinking offshore financial services sector and a tourism sector that gives millions away for cruise ship passengers most of whom never get off the boat in Nassau because there's so little to do. So all these doomsayers who prattle on that the Bahamas will fail at 12% VAT and up to 50% webshop taxes need to point us to one country in the world that increased to double digit VAT and its economy had failed. What ourvgovernment needs to improve is value for money. I pay almost $5 pet gallon of gas but the roads are full of potholes, dips and uneven surfaces. I call a government agency at all of the phone numbers listed in the phonebook but all they do is ring without being answered. I go to a government office and during my 4 hour wait try to use their guest Wi-Fi portal only to be told that it's for employees and if they give out the password then the public will overload the Wi-Fi. You sit on the stop light waiting for the light to turn green and after it turns green 2 cars and a jitney pass through the intersection across your path. You get involved in a traffic accident and after calling them then wait an hour or more for the police to arrive. Time for a change (BTW that was the FNM's very first slogan).

Posted 11 June 2018, 10:21 p.m. Suggest removal

DDK says...

Big sigh!

Posted 12 June 2018, 10:40 a.m. Suggest removal

TheMadHatter says...

Mr. Winder should be aware that many average Bahamian dominoes player want their
VAT to be 19. :-)

Posted 12 June 2018, 12:57 p.m. Suggest removal

killemwitdakno says...

Do they ever talk of earning the millions elsewhere?!!

Posted 15 June 2018, 12:33 p.m. Suggest removal

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