St Lucia’s spiral to happy Vat reduction

By:Melanius Alphonse
In difficult financial times, the strategy of 20/20, tactfully employed, favours a methodical approach to delivering and implementing an economic plan, a chemistry to bridge the gap on matters of priorities or disappear as a static artifact.

Last week, Prime Minister Allen Chastanet referenced The Fiscal and Structural Reforms in Saint Lucia: Towards a comprehensive agenda prepared by the Caribbean Development Bank (CDB) as “very telling” and “gives a more detailed picture of what is taking place in the economy”.
“The report measured the collection of taxes as a percentage of Gross Domestic Product (GDP) for Saint Lucia and compared it to the rest of the Caribbean. Saint Lucia was in the range of 26 percent, while the entire Caribbean is around 21-22 percent, which in effect means that the island is collecting more money as a percentage of the GDP than any other Caribbean nation. We have been effective at collecting taxes or we are collecting way too many taxes, whichever way you want to be able to put it…we are overtaxed. But that is not the only problem … the fact that investment in the public sector in Saint Lucia is ranked the lowest in terms of the rate of return.

“It means the things that we were investing in, was generating a substantially lesser rate of return than other countries in the Caribbean. So here we are collecting the most taxes but at the same time, they were investing it poorly and as a result, we’ve had low growth, we have had increasing levels of debt, and basically the country is in a mess. The worst part is that the previous administration did not invest in the areas that needed the most support like: the judiciary, security, infrastructure, schools and health care.”

At a basic level the prime minister formulated views meant to reflect his best understanding of the CDB report and what precisely is his own formulation to deliver the expected reduction [and ultimate removal] of the dreaded value added tax (VAT) in a recession economy.
However, the prime minister’s political promise of a reduction of VAT, combined with CDB revenue reform to “reduce the list of VAT exempt and zero-rated goods”, points to double jeopardy.

CDB points to consider in relation to fiscal multipliers read:
“Notably, the study found that only government investment expenditure had a positive and significant fiscal multiplier (0.62). Multipliers associated with changes in tax revenue and government consumption were not found to be statistically different from zero.”
Over the years, the country’s tax systems haven’t raised enough money to pay for overall expenditure, contrary to the prime minister’s arbitrary conclusion that the people are “overtaxed”; nonetheless irresponsible for not taking into account new debt, government handicaps and ongoing increase in recurrent expenditures.

In Trinidad and Tobago, subsequent to 2.5 percent reduction in VAT and several zero-rated items removed from the food basket and becoming taxable meant that consumers paid more for food and beverage and other life essentials on a daily basis. And recently, petroleum dealers have taken the decision to accept only cash at gas stations to cut operating costs and survive. Central Bank money supply could lead to more adverse strain on the economy. Additionally, defying money laundering activities gives impetus to a disquieting crime environment and rule of law index global ranking of 48.

To some extent, Saint Lucia’s political rule is seemingly modeling Trinidad and Tobago. Could similar circumstances play-out in Saint Lucia [rule of law index global ranking 36] or is the marketplace better able to withstand headwinds now dominated by mega-monopolies?

CDB note stimulating consumption vs investment reads:
“The Saint Lucian economy is driven primarily by consumption, which accounts for approximately 82% of GDP, and with private final consumption accounting for 69% of national disposable income, it is likely that if there is a GDP response from adjustments to tax policy, it will come through the consumption channel from the income effect of the reduction. In a small, open economy where a significant portion of the goods consumed will be imported with attendant adverse implications for net international reserves, stimulating GDP growth through consumption is not sustainable.”
Forward guidance of objectives and policy substance are set by politicians; in terms of what could lie ahead to achieve growth through a combination of capital formation, local and foreign investments, increased export capacity, local production and consumption.

However visible, government seems lost with policy fixes, a symptom of a “Five to Stay Alive” fuzzy waffle to deliver an economic plan and clear strategy.

CDB conclusion 2.08 reads:
“Under the baseline scenario, the objectives that GOSL has set for itself will not be realised as fiscal balances and debt are set to become even more unsustainable. Taken on their own, the proposed measures to reduce taxation will exacerbate already unsustainable debt dynamics and, in so doing, impede GOSL’s ability to provide the enabling environment for growth and support to vulnerable groups.

“The implementation of mitigating measures will be necessary so that the functions of government are not compromised. Importantly, these measures can be viewed as an opportunity for GOSL to close revenue leakages and reduce inefficiencies which, under normal circumstances, should have been addressed to ensure fiscal and debt sustainability.”
CDB concluding remarks 5.02 reads:
“As a critical first step towards accelerating and sustaining economic growth, it is necessary that GOSL get its fiscal house in order. Currently, debt dynamics are on an unsustainable path due to the confluence of an inadequate primary surplus, slow growth, and high interest rates. Over time, this could result in critical spending being compromised, such as those for capital investments and social protection. In the current circumstances, implementation of the proposed tax measures in the absence of mitigating measures will exacerbate an already unsustainable situation. The decision to reduce VAT and other tax reducing measures provides an opportunity for GOSL to tackle other revenue and expenditure inefficiencies that have been weighing on finances. It also provides an opportunity to address much-needed structural reforms which could propel growth. Measures to improve productivity are central, but must take place in a facilitative environment inclusive of sound governance structures and supportive institutions.”
And, conclusion 1.24 states:
“Notwithstanding the improvement in recent fiscal performance, public finances are still on an unsustainable path. An initial assessment of the fiscal situation shows that there is tremendous scope for improvement. On the revenue side, generous exemptions, incentives, deductions and allowances are undermining efficiency, and leading to reduced collections. Challenges on the expenditure side highlight the need for greater strategic planning to ensure that resources are targeted to their most productive uses, and is evident in both recurrent and capital spending. With respect to the debt situation, GOSL has managed to keep down interest rates thus far, however, risks abound with the high concentration of short-term debt. Given that the debt strategy speaks to the need to lengthen the maturity structure, and given the low cost of concessional resources, some consideration should also be given to multilateral support.”
Inevitably, government will need to:
• Meet the challenges of innovation and provide direction for a sustainable economy that is equitable in prioritizing and growing sectors of the economy to create fiscal space;
• Merge its priorities with reality and proceed to strengthen public finance to meet the environment in which it seeks to operate and leverage its strengths;
• Innovation is paramount to improve efficiency, closing the gap on trade deficit and borrowing hypocrisy.

Meanwhile, in Barbados, former prime minister and minister of finance, Owen Arthur says government is out of options. “Government’s fiscal policy is inflicting damage on the country and the time has arrived for the Freundel Stuart administration to implement tough measures to stem the current tide of economic decline. Sometimes if you refrain from doing what you must do it inflicts more damage than doing the things that you have to do no matter how painful those things may be. That situation has been reached in Barbados.”
Dr DeLisle Worrell, Governor of the Central Bank, stated that the bank had printed $114 million between April and September to facilitate government’s financing needs.

In September Standard & Poor’s downgraded the country from B to B-, following the April downgrade by Moody’s from to Caa1 from B3, concerned that the island’s fiscal adjustment programme had again fallen short of stemming another increase in an already high debt to GDP ratio.

Of note, Canada’s Finance Minister Bill Morneau says:
“Canadians should get used to so-called ‘job churn’ – short-term employment and a number of career changes in a person’s life” and that “high employee turnover and short-term contract work will continue in young people’s lives, and the government has to focus on preparing for it. We also need to think about, how do we train and retrain people as they move from job to job to job? Because it’s going to happen. We have to accept that. We have to accept that. Some people will see their jobs disappear in the years to come – truck drivers and receptionists, for instance. Government has to look at helping out with the ‘things underneath’ disappearing or precarious work.”
The recession in Saint Lucia has been made more complex by a culture of patronage-based politics, mixed with fear, and now, demanding respect, leaving the majority of people behind.

Most persons with assets have not increased their wealth portfolio, [compounded by the non passage of insolvency legislation] mortgages have gone, ruined with increasing debt, while savings have depleted, except for the select few with a mutually beneficial affiliation with successive ruling administrations and decision makers in government.

By most accounts, the government’s predicament is how to prioritize an economic plan in a very systematic way, and lead a new wave of prosperity for a population inflamed by apprehension and broken in many ways.

If not done correctly, this will cause havoc in an existential crisis mired in “happy VAT reduction” over an extended period.


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