U.S. economists hired by the government to provide a final study on value-added tax (VAT) have advised that it should implement a "fiscal rule" legislating a maximum debt-to-GDP ratio as part of its fiscal reforms, but the prime minister has rejected this advice.
Providing the most detailed insight thus far into the findings of the study on VAT undertaken by Compass Lexecon, a group of U.S. fiscal experts, Christie suggested that while the government accepted the economists' position on VAT, it found the recommendations that the government introduce "a new, permanent so-called fiscal rule to enhance the sustainability of our fiscal plan and to strengthen the government's credibility" less appealing.
The prime minister said that he felt such a fiscal rule is not the best approach to addressing the government's debt levels.
The legislation of a fiscal rule has been recommended by the International Monetary Fund (IMF), as well as the Inter-American Development Bank (IDB) in more recent times, as the best way forward in achieving successful fiscal consolidation in The Bahamas - that is, debt reduction. The Coalition for Responsible Taxation, representing the Bahamian private sector in the VAT debate, has also expressed its support for such a rule, given continuous slippage in the government's plans to reduce expenditure and debt.
Fiscal rules entail legislated and long-term numerical limits on budgetary aggregates pertaining to debts, deficits, expenditures and revenues.
Referring to the consultants' recommendation, Christie said: "Under such a fiscal rule, we would set two targets: one, a maximum target for the debt-to-GDP ratio and two, a target for the minimum annual reduction in that ratio, which would be waivable under emergency circumstances such as economic downturns and natural disasters.
"The key point in this recommendation is that, should we fail to meet our fiscal debt target, the VAT rate would automatically be increased by law.
Christie said that while a rule of this kind, legislating fiscal consolidation, can be seen to have "theoretical appeal", it is "lacking from a practical policymaking point of view".
'Adaptable'
He said the government needs an approach to reducing the debt that can be adjusted based on circumstances that may arise.
"I firmly believe that both success on the fiscal front and solid credibility rest on the transparency of our plans and the concrete results of our actions. Over the last two years, we have committed ourselves to a detailed medium-term fiscal plan and we have stayed the course on this plan. The virtue that we see in this plan is that it is balanced and adaptable to circumstances, allowing for adjustments not only on the revenue side of the ledger, but also in respect of government spending, whether recurrent or capital. As such, legislating automatic increases in the VAT rate, as the sole avenue for staying on track would not be appropriate nor desirable," said the prime minister.
While the Coalition for Responsible Taxation may be disappointed by Christie's decision to take this view on fiscal rules, one area which the group could feel more positive about is his comments with respect to another element of fiscal consolidation that is critical in their view: improvements in the budgeting process.
Christie said that the government recognizes the benefits of adopting internationally-recognized and accepted accounting principles for the public finances and is "making efforts to implement the IMF Government Finance Statistics (or GFS) framework, including accrual rather than cash accounting and the proper accounting for government assets".
Gowon Bowe, co-chair of the coalition, has repeatedly called for the government to move toward an accrual-based accounting system, in order to ensure a better representation of the government's fiscal position (at any given time) than the current cash-based system, and therefore, a better handle on spending and revenue.
New budgeting approach
Noting the focus that has been placed by the private sector on more "transparent and comprehensive budgeting", Christie said the government is making strides toward the introduction of program-based budgeting in government, with the assistance of the Caribbean Regional Technical Assistance Centre (CARTAC).
"This will allow us to have a much better idea of the resources dedicated to specific areas and the results that are being achieved. This, in turn, will permit government to better determine how and where resources should be allocated," said the prime minister.
The study found VAT "by far the superior new tax policy instrument for The Bahamas".
During the 2014/2015 Budget Communication in parliament, Christie revealed that the government intends to implement VAT at a flat rate of 7.5 percent on January 1, 2015. No "wide scale reductions" in duty will accompany the implementation, but they may be considered at a later date; tax exemptions will be "much fewer" than initially proposed, he added.
VAT findings 'consistent' with other studies
Compass Lexecon consultants, among whom is a former key member of U.S. President Bill Clinton's National Economic Council, noted Christie, told the government that its study on the matter showed that VAT "provides the best combination of revenue generation, enforceability, efficiency, fairness and compatibility with economic growth".
The prime minister added: "On the latter point this study is consistent with the vast international literature that ranks various instruments in respect to their so-called 'friendliness' to growth, with VAT being a much better choice than personal and corporate income taxes and payroll taxes.
"The study also suggests that a VAT is efficient at taxing wealth as it is consumed while a payroll tax does not even tax wealth. As well, it argues that a payroll tax is more susceptible to avoidance and evasion than a VAT, especially by those with higher levels of income. Business owners, for example, can characterize their own wages as business profits and therefore avoid the payroll tax altogether.
"However, in light of the current state of the economy, the study recommends a VAT rate below 15 percent, in the range of 5 to 10 percent in combination with other fiscal reforms to meet the government's fiscal targets," said Christie.

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