New Tax Increases Could Impact Tourism

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A FORMER Chamber president yesterday questioned whether the Government could "make the hard decisions" necessary to achieve its key objective of bringing the debt-to-GDP ratio down to 40 per cent in the medium term, and warned it was "in danger of killing the goose that laid the golden egg" through the sharp tax increases on the hotel and auto industry.

Dionisio D'Aguilar, who is also Superwash's president, told Tribune Business that the Government's own Budget projections indicated it was not confident about getting close to the 40 per cent threshold in the medium-term, with the debt-to-GDP ratios for the 2011-2o12 and 2012-2013 Budget years projected to be 49.2 per cent and 48.7 per cent respectively.

While praising the Government's recognition that it had an "operating deficit problem", and attempt to address that in the Budget by lowering the GFS fiscal deficit from $425 million this fiscal year to $227 million in 2010-2011, Mr D'Aguilar said: "The debt as a percentage of GDP remains in the high 40 per cents over the next three years."

Prime Minister Hubert Ingraham said the Government's short-term Budget objective was to contain the debt-to-GDP ratio's growth, then get it back to 40 per cent "as promptly as possible and as economic conditions permit".

Yet Mr D'Aguilar told Tribune Business: "I don't believe that. I don't believe they can make the hard decisions to get the debt back down to 40 per cent in the medium term."

The Government's budgetary data appears to lend weight to his argument, given that it is still projecting fiscal deficits - albeit less than the current 5.7 per cent, or $425 million, record - right through 2011-2012 and 2012-2013.

The GFS fiscal deficits (which strip out debt principal redemption costs) for those two years are projected to be 1.8 per cent and 1.6 per cent of GDP respectively, or $143 million and $136 million in monetary terms.

With the economy projected to start by growing again in 2011, by an estimated 2 per cent, it appears that the Government may once again be relying on its old trick of GDP growth to keep the fiscal deficit and debt-to-GDP ratio in check, rather than taking further action itself - through either new or increased taxes, or spending cuts.

Several observers have also questioned the GDP figures presented with the Government's Budget calculations, given that they appear to be using GDP based on current prices, rather than real or 'constant' prices, to determine key ratios such as the debt-to-GDP.

GDP in current prices is showing growth based on inflation, when everyone knows the Bahamian economy contracted by 4.3 per cent in 2009, and 1.7 per cent in 2008, with a further 1.8 per cent contraction expected in 2010. As a result, some analysts suggested that using GDP measured in current prices to calculate the debt-to-GDP ratio could be misleading, and keeping the latter lower than it actually is.

Meanwhile, Mr D'Aguilar said that while the overall Bahamian business community was likely to be happy that the Government left Customs Duty/Excise Tax rates unchanged in the Budget, the move to increase taxes on the hotel and motor industries was not a prudent one.

"I don't think that was a particularly wise move," Mr D'Aguilar said of the decision to raise taxes on those sectors. "It looks like that with the motor vehicle industry, you're killing off the goose that laid the golden egg. Those two industries cannot absorb another increase."

The former Chamber president said he did not "get" why the Government had chosen not to regularise the numbers business, something by its own admission could generate $30-$40 million in additional taxes per annum. He added that the players in this sector largely wanted to be legitimised, and many Bahamians supported this, but the opponents appeared to hold sway.

Mr D'Aguilar told Tribune Business that the 2010-2011 Budget had targeted four specific industries - banking, real estate, hotels and the auto industry.

He added that the real estate sector "appeared to be living with the 2 per cent increase" in Stamp Duty across the board on real estate transactions, apart from those for first-time buyers, while the commercial banks would be able to absorb the 50 per cent fee increase - an attempt to raise a further $5 million.

However, the banks were likely to "flow" the $0.15, or 60 per cent, increase in Stamp Duty on banking transactions directly through to the consumer. The same was set to happen with the restructured, and increased, duty regime for motor vehicles, Mr D'Aguilar said, while the cost of Bahamas stopover vacations was also set to rise as hotels passed the room tax increase on to visitors.

He added, though, that the Budget tax increases were unlikely to raise the cost of living for most Bahamians, unless they were embarking on auto or real estate purchases.

Adding that the Ingraham administration had attempted to "tackle a couple of businesses and industries that were significantly under-taxed", Mr D'Aguilar said: "I think they [the Government] made a specific effort not to dump significant additional taxes on the Bahamian business community generally.

"We have to be thankful that they did not simply tax Bahamian businesses more by increasing import duty rates, which would increase the cost of doing business across the board."

Source: The Tribune