Raising VAT through the back door
It was no doubt a high point of the recent Press conference held by Minister of Tourism Richard Sealyand Minister of FinanceChris Sinckler when the latter stated unequivocally that there would no increase in VAT in the coming Budget Speech, expectednext month.
Clearly, austerity will be a major portion of the coming package, aswe have already been told that Government will have to cut its spending this financial year bynearly $300 million, according tothe draft MGDS, the Medium-Term Growth And DevelopmentStrategy document.
“During the first year of thestrategy the main adjustmentswill be on the expenditure sidewhere it is estimated that a $295.3 million reduction in spending withhave to be made. To achieve this,the bulk of the cuts will have tocome from non-interest recurrent expenditure to the tune of anestimated $233.7 million . . . . (This) includes personnel emoluments, goods and services, and subsidies and transfer.” (MGDS, Page 32.)
As I have noted in a previouscolumn, Table 6 on Page 33 of the MGDS gives us the ‘front-loaded’ spending cuts that must take place, including $66.4 million from Personnel Emoluments (Government wagesand salaries); $87 million fromGoods & Services; and $80.3 million from Subsidies & Transfers.
Therefore, assuming thesecuts are made “one time” and not reneged on later, the impact willbe there for us to enjoy every yearuntil 2020, reaping a saving of over$1.8 billion during the comingseven years.
There is no way our economycan move forward – I would evenstand on a limb and say “survive” – without these cuts, and I supportthe Government as long as it reallydoes go ahead with them.
That they will be painful is notin doubt but, coupled with meaningful incentives to grow the economy, the private sector will absorb the lossof employment or revenue streamsin a year or two.
But while Mr Sinckler made his“no VAT increase” position clear, hedid not say what his Government’s policy would be on another VAT-related option outlined in the MGDS document, and that is, cutting VAT-waivers by a quarter. I am expecting it to happen, because the MGDS document states that the expected revenue yield from it, totalling over $50 million a year, is already part of the totalrecovery scenario.
“Based on an ongoing work to broaden the tax base due to falling revenues, an alternative scenario featuring a 25 per cent cut in discretionary VAT waivers is builtin to the above analysis.” (MGDS,Page 32.)
Built in. Basing its predictionon an analysis done by the Inter-American Development Bank, statesthe MGDS: “It is shown that Government could be losing up to $206.27 million owing to such waivers; hence, given a 25 per cent cut, it is estimated that Government can saveup to $51.6 million in revenues each year, starting from the 2014/15 period.” (Page 32.)
So to achieve that slight fiscal surplus of a half of a per cent bythe end of the strategy period, the populace would have had to payin over $300 million in VAT on items that are presently exempted fromthe tax.
That is an austerity measurewhich I can’t support. If our recentVAT performance is any indicator, it will only slow the recovery because people will spend according to how much they have in their pockets and buy fewer items if you raise their prices. This is not the time to put another $50 million in tax on consumers when you have just reduced your own spendingby $300 million a year.
This move will also affect the most vulnerable in the society, as it was for their benefit that most of these items were waived from paying VAT in the first place.
Instead, I would fully support the Government abolishing the ReverseTax Credit, which to me is not a proper response to assisting lower income earners as it comes once a year. It is not, as they say, “matched” with the day-to-day paying of VAT and is therefore probably used only for additional consumption. If this istoo politically incendiary, then youcould give each recipient the equivalent in Treasury bills or governmentbonds, thus inculcating the spirit of investment, and removing the burdenof that cash outlay.
For the present, it seems to methat adding a greater VAT burdenfrom the inside out still adds up toa VAT increase, especially for the less well-off, and Mr Sinckler should not remove those VAT waivers in his upcoming Budget.
It would amount to a back door price hike that will do more harm than good.
• Pat Hoyos is a publisher and business writer.Email [email protected]