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A Value Added Tax (VAT) is being introduced in The Bahamas, as part of a broader reform of our tax system.   That reform is necessary primarily to return the public finances to a sustainable and prudent state.
 

Tax reform is also important for a number of other reasons, including the following:

• The heavy reliance on customs duties on imported goods is less advantageous than in the distant past when services were less important in overall economic activity.
• Taxing goods and not services is unfair to the less advantaged in society who spend a significantly greater share of their incomes on goods.
• The current tax structure does not generate an adequate revenue stream for Government that keeps pace with growth in the economy. Meanwhile, the demands for Government services and amenities continue to grow more in line with the expansion in the population and economic activity.
• The Government must have access to revenues that adequately fund both the current and future needs of its citizens.
• A response to the increased integration at the international economic level has also become more relevant for The Bahamas, in order to preserve and enhance access to exports markets especially for services. The Bahamas is therefore joining the World Trade Organization (WTO). WTO membership will require a more liberalized customs tariff regime, primarily through lower import duties.
• The reduction in customs duty revenues must be replaced by an alternative source. Based on the experience in scores of other countries and for the other reasons set out above, the VAT is the ideal alternative revenue source.

The modern realities for The Bahamas

• Participation in trade liberalization makes economic sense -- hence government must reduce reliance on trade taxes.
• Tax base needs to be broader and better linked to the growing sectors of economy.
• Culture of tax compliance needs to be strengthened.
• Quantity and quality of government services provided needs to measure up more to the expectations of a populace of a high average income

Fiscal Reality

• Growth in debt must be arrested
• Requires both revenue and expenditure measures
  Bahamas Govt. Finances and Debt
   (% of GDP)
  

The Cost of in-action or lack of credibility

• Unchecked rise in debt
• Less capacity to borrow for emergencies
  
  - Increased vulnerability to shocks like hurricanes and sudden contractions in foreign economies on which we depend for tourists
  

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• Credit downgrade and eventual loss of access to credit markets
• Outcome: much higher tax increase, larger reductions in spending, and possible reduction in public sector employment

Should Government cut spending or raise taxes?

• The Government must continue to address cost efficiency issues, but the pace of expenditure adjustments must also be managed, given likely impacts on private businesses and private sector employment.
• A VAT would help to spread fiscal adjustment burden more equitably than an exclusive focus on spending cuts.

Not wise to reduce public investments

• A VAT would help to spread fiscal adjustment burden more equitably than an exclusive focus on spending cuts.
• Recurrent spending would have to be tackled
• One third of recurrent spending is on salaries
  • More than 70 percent of salaries go to deductions for obligations to banks, credit unions and insurance companies
  • Servicing of credit facilities would be severely impacted

Government subsidies are significant

• More than $200 million granted each year  private sector subsidies and incentives
• Reductions would imply greater private sector retrenchment, and less ability in the current environment to attract foreign investments

Fiscal Consolidation Strategy

By 2017:

• Grow annual revenue by at least $500 million relative to the current level of collections

- VAT  must provide at least $200M

- Other direct measures and reforms to give at least $200M

- Economic growth provides remainder

• Maintain tight control on spending

Does the Bahamas have a spending problem?

• The level of both expenditures and taxation are lower than in regional countries
• Debt levels and the share of government resources spend on interest payments are lower in comparison
• However, without comprehensive reforms the debt could continue to increase until The Bahamas finds itself in the same burdensome circumstances as some of its neighbors

Click here to view Graph of Fiscal Position