COINS IN YOUR POCKET: Davis admin targeting at least 3.5% growth per year, says Halkitis

Minister continues defense of VAT on breadbasket items

NASSAU, BAHAMAS — The Davis administration is targeting real economic growth of at least three percent per year for the next five years, according to Minister of Economic Affairs Michael Halkitis, who stressed that the administration’s value-added tax (VAT) rate cut will have a positive effect on consumer spending. 

During his contribution to the supplementary budget debate in the Senate yesterday, Halkitis said: “The government is targeting potential real economic growth of at least three percent per year for the next five years, rather than the low growth rate previously experienced for decades of roughly 1.5 percent per year.

“This growth level would result in lower levels of unemployment and higher revenues for government.”

He further noted that the government plans to boost capital expenditure to 3.5 percent of GDP on an ongoing basis as one of the key initiatives to underpin and enhance the potential growth of economic activity.

Recurrent revenue is expected to increase…due to increased immigration fee revenue, the proceeds of the Real Property Tax Amnesty and upticks in domestic activity ahead of original projections.

– Minister of Economic Affairs Michael Halkitis

According to Halkitis, the government has set a target of revenue-to-GDP target ratio of 25 percent by the end of this current term in office.

Halkitis also noted that in order to shore up revenue, the Davis administration has committed to the reestablishment of a fully resourced Revenue Enhancement Unit (REU), which will be expected to account for $200 million over the five-year period in additional taxes or about two percent of GDP at the current levels. 

“I want to reiterate that the purpose of this unit is not to hound individuals and businesses who are still struggling but to ensure that those who can afford to pay, do pay,” said Halkitis.

He added: “Based on initial estimates for the remainder of the FY2021/22, recurrent revenue is expected to increase by $92 million to $2,336.5 million ($2.3 billion) due to increased immigration fee revenue, the proceeds of the Real Property Tax Amnesty and upticks in domestic activity ahead of original projections.

“Recurrent expenditure is expected to increase by $53.3 million to $2,879.2 million ($2.9 billion) as compared to the original budget estimates, given the reallocation across ministries and increases in hardship support and social benefit allocations and provision for settling arrears in back pay and gratuities.”

Capital expenditure is expected to fall by $54.2 million to stand at $316.2 million as public-private partnerships and other forms of financing are pursued and budget provision for capital projects are aligned with the execution schedule, according to Halkitis.

The deficit is expected to improve to $858.9 million for fiscal year 2021/22 vis-à-vis $951.8 million in the original fiscal year 2021/22 budget estimates.

VAT changes an “emotional issue”

While addressing the government’s VAT rate slash from 12 percent to 10 percent, Halkitis said: “We believe that the VAT cut will have a positive effect on spending and we know that it will result in savings for consumers.”

He added: “Concerns have been raised about the elimination of the zero-rating on breadbasket items and a limited number of items that were zero-rated — that is, made VAT-free when the VAT was raised from 7.5 percent to 12 percent in 2018.

“To be clear, in order to have these items zero-rated, the administration at the time increased that VAT on everything else, goods and services, from 7.5 percent to 12 percent. In order to have the VAT-free items, the rate on everything else must be higher.

“Our view, supported by research, is that it is better, more effective, to have a lower rate with minimal exemptions and for those vulnerable in society, they be given direct cash assistance.

“So, in seeking to give relief to lower-income households by making an item VAT-free, you are giving that that same relief to higher-income households and businesses that do not need or want the relief.

“The best policy is to keep a flat, low rate and provide direct assistance to the most vulnerable.

“I know it is an emotional issue. I know it is a real issue. We in no way minimize it. But the best policy for effectiveness of assistance, effectiveness of the tax system and to strengthen government revenues so we can provide that relief is the policy that we are pursuing.”