On the 29th September 2019, at the 41st convention of the opposition New Democratic Party (NDP), Opposition Leader Dr Godwin Friday proposed, among other fiscal policy measures, a reduction in VAT by 3% which will be implemented should the party win the next general elections.
Members of the Unity Labour Party (ULP) administration including the Prime Minister and other supporters have since taken to the airwaves in feeble, attempts to dismiss those proposals as unrealistic and mare political gamesmanship. Before explaining why a reduction in VAT is a positive strategy for fiscal expansion, while at the same time relieving some of the tax burden borne by virtually every Vincentian, one must ask the question: Does a reduction in VAT make the average consumer in this country better or worse off?
The VAT is, by its very nature and application a regressive tax. This means that consumers in the lowest income bracket bear a proportionately higher tax burden as a percentage of their income when they purchase goods and services. Reducing the VAT as a Fiscal expansionary measure will transfer some revenue from government coffers to the pockets of consumers which they in turn will spend in the local economy. This creates increased business activity and profits for the private firms from whom government gets increased tax revenues. Private sector investment is also stimulated as firms seek to expand while creating more jobs.
Firms will also benefit from a 3% reduction on the VAT paid upfront on production or value-added activities. This provides the firms with well needed cash flow which would otherwise be tied up until goods are actually produced and sold after which a claim is made for a VAT refund.
This revenue loss to government from the reduction in VAT which amounts to approximately $30m annually, based on 2017 actual figures, can also be replaced partly by improved monitoring and strengthening of tax systems for increased efficiency in revenue collection. Curtailing governments’ excessive spending and general fiscal indiscipline should also result in significant savings which can also be transferred to assist in offsetting revenue losses. These adjustments, though, will form part of a broader fiscal reform strategy which seeks to address government expenditure and approaches to revenue generation.
The NDP has already indicated that it will seek to ease the tax burden on Vincentians by broadening the tax base so as to more evenly distribute this shared responsibility of taxation. An NDP government will find alternative sources of revenue to supplement those which currently exist. The Citizenship by Investment is one such program. These types of programs though, are not expected to magically solve all the revenue problems currently faced by government, overnight. Once properly administered however, they can generate the revenues necessary for economic transformation through targeted interventions and implementation of projects, programs and strategies for economic growth.
The arguments put forward against the reduction in VAT essentially question how this fall-off in tax revenues will be replaced. This clearly indicates government’s position or mindset, that the only viable way to raise revenue is through increased taxation. The very fact that Dr Friday’s proposal appears so far-fetched and unreal to them, crystallizes how limited and bankrupt they are for ideas and strategies to grow and expand the Vincentian economy. Or is it that this government doesn’t want the average consumer and/or household to enjoy more disposable income which would provide them with increased purchasing power and access to a better quality of life?
Ever since its implementation, there have been cries throughout St Vincent and the Grenadines for the reduction in the VAT rate from its initial 15% and an increase in the list of zero-rated basic items. This would have at least allowed consumers to maintain reasonable consumption levels. The Honourable Arnhim Eustace is on record, inside and outside parliament stating repeatedly that the VAT should have started at a lower rate and that the zero-rated lists should have been longer. He has even presented a list of basic food items which he thought should be added.
St Vincent and the Grenadines remains among the countries of the region with the highest VAT rate. The government of St Lucia in 2017 reduced its VAT rate from 15% to 12.5% in an effort to revitalize and grow that country’s economy. Despite pronouncements by this country’s Prime Minister, boasting of our GDP growth rates being among the best in the ECCU, a similar approach to fiscal expansion as pursued by St Lucia has been rejected.
Instead of responding to the wailing of the poor and by extension the general citizenry, in a manner that is expected of a ‘Labour government’, they have instead increased the VAT to 16%. Even before this increase the ULP administration had continually altered the VAT list, resulting in a net increase in the VAT burden. Now the ULP government has the audacity to come to the people of this country in a ‘bold face’ attempt to convince us that a reduction in VAT is undesirable. ‘What ah poor people guvment’.
The NDP believes that the time has come to loosen the strangle-hold of VAT from the necks of the ordinary citizens of this country. We believe that for too long, there has been an over reliance on taxation as a source of government revenue. We can no longer simply seek to balance our budget by identifying new ways to tighten the tax noose as the ULP has done. The NDP has heard the cries of the poor of this nation and is ready to respond accordingly. This proposed reduction in VAT is merely a first step in a broader strategy aimed at creating an environment that fosters sustainable growth and prosperity for all Vincentians.