The Solution to VAT

(4 Minute Read)

Tings tough. For mother of two, Ruth Ferguson, the food store has transformed over the past five years from a place of solace to one of anxiety. Her kids have become numb to asking for things, as they know that a tight budget and high bills mean there’s only enough for the bare necessities. Ruth, who makes minimum wage as a cleaning lady, has seen rising prices caused by VAT fill her will anxiety and put her family’s financial future in jeopardy. She is in the same boat as many other Bahamians, as the financial realities of life are a very real burden.

But does it have to be this way? Although our country’s debt crisis demanded a large-scale solution, of which I believe Value-Added Tax (VAT) was the best option, there are available offsets to mitigate its harsh effects on low-income individuals that we must employ for the good of the people. For the good of Ruth’s family. For the good of you.

New Government, New Problems

The FNM came into power faced with  a multitude of unpaid invoices, arrears and bills from the PLP’s tenure. In addition, pressure from international financial institutions, a decrease in our credit rating and fears of rising debt gave our elected officials the truly difficult challenge of saving the country’s fiscal status and its ability to continue borrowing at favorable rates. In the government’s eyes, using a short-term contractionary fiscal model, a.k.a., austerity, to address the country’s fiscal constraints seemed logical This was revealed at the announcement of the 2018/19 federal budget with the introduction of a 60% VAT hike-from 7.5% to 12%-along with serious cuts to wages and government spending. This austere strategy came with a promise that despite the difficult times for the average Bahamian, our deficit will be paid off, our debt will be lowered, and economic stability restored.

I give this administration credit for their boldness and vision to enact such a proactive plan. However, I believe there are some systemic flaws to the proposal which could have negative effects on the economy. Most people believe that the issue with the plan is VAT itself, but there is ample reasoning to suggest that VAT was the most logical revenue stream amongst the available options. The key benefit to VAT is that is collects a massive amount of revenue very easily. Additionally, it is comparatively easier to administer, capitalizes on tourism and commerce and, at worst, disincentivizes spending whilst prioritizing individual saving.

My issue is that this fiscal plan unfairly targets the most vulnerable populations. Although VAT is a phenomenal revenue collection method, when it is paired with significant spending cuts and a lack of offsets for low-income individuals, there are many negative repercussions, some of which we have already witnessed:

  1. People will have less money in their pocket and the cost of living will increase.
  2. Inequality will increase. A flat consumption tax like a VAT is much less painful to the wealthy, as it has little impact on their consumption.
  3. Absolute poverty will likely increase as more people are taxed into poverty and deep poverty
  4. Businesses will also see a decrease in sales as people will have less disposable income to spend

Alternative Plan

Despite these effects, there are practical fiscal solutions to mitigate losses. Currently, the government has deployed a 3-year fiscal consolidation plan that involves paying off the $321 million-dollar deficit, so that by 2020/21 we will be in a budget surplus. My alternative plan, which takes into consideration the need for spending, stretches the deficit reduction from 3 years to 4 years.

My model would free up $76 million dollars in cap space by lowering deficit payouts from $331 million over 3 years to $255 million over the same time span and adding a 4th year for payments. Under these projections, an average of $85 million would be designated per year for deficit reduction, which at 2020/2021 would leave us at a deficit of $66 million dollars and a debt to GDP ratio of only 53% (1% change from previous strategy). The cost would be delaying a budget surplus to the year 2021/2022, but there is no systematic rush to balance our budget in 3 years, as the 4-year plan is still fiscally responsible.

The government would be positioned to spend the $76 million to tackle poverty alleviation directly. That includes starting new progressive safety net initiatives; appropriating more funds to already existing programs like the Over the Hill CDPI and the Affordable Housing Program, or setting aside money in a fund that is used to address urgent concerns expressed by the working class.

The Prime Minister has expressed his commitment to sticking to his fiscal strategy, but by adopting my model we would still recoup our credit rating, act in a fiscally responsible way, help low-income individuals and have the adaptability to address the spontaneous concerns of society.

Why it Works

Some may suggest that by stalling the fiscal goals by an extra year, you punt both the risk and reward to the next administration. In theory, you might also lose a vital campaign rhetoric to run on (fixing our deficit crisis). However, I believe these concerns are unwarranted. Firstly, the administration has already shown that their focus is on doing what they believe is the right thing, regardless of public resentment. Secondly, by adjusting the plan and targeting low-income issues with the freed cap space, you can provide something with much more political weight and have the chance to win back public opinion. And thirdly, with the present and forthcoming fiscal responsibility legislation, you can put in place measures to ensure good future budgeting, regardless of who is in power.

What this plan represents is having flexibility to adjust and address issues as they arise. We cannot let our commitment to a plan neuter us of any adaptability and ruin our commitment to the people. Our macroeconomic projections look good, but we need to address the concerns of low-income individuals, like Ruth, in order to have inclusive, and equitable growth. And that $76 million could do just that.

 

 

 

 

 

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