The following statement was received from Head of Management Studies Dr. Justin Robinson, UWI, Cave Hill
I want to state categorically that I did not call for an increase in VAT. The traditional media chose the sensational approach to the issues raised in a panel discussion titled, The Fiscal Deficit, Causes and Possible Solutions. In my presentation I outlined what I saw as the causes of the deficit and a number of possible ways to correct it. I outlined, economic growth, borrowing, revenue raising measures and expenditure cuts as possible solutions. Under the heading of revenue cuts I stated that if it got to the point that the government needed revenue raising measures then in my opinion the VAT would be the best approach. I stated that this should be an absolute last resort. The presentation was somehow reported as me calling for an increase in VAT.
The many issues which are swirling at this should serve to hone Barbadian sensitivity to the seriousness of the economic situation currently affecting the country. The current debate about whether the University of the West Indies, Cave Hill should reduce the inflow of Barbadian students, there is the recommendation by Minister of Economic Affairs David Estwick to Prime Minister Thompson that he should negotiate a wage freeze and finally the recent suggestion by Head of the Department of Management Studies at Cave Hill Dr. Justin Robinson that the government should consider a 1% hike in VAT to respond to the current cash flow worry. The pleasing aspect about two of the contentious issues being discussed is the involvement of University of the West Indies, Cave Hill lecturers. Cave Hill has attracted criticism over the years about the silence of its scholars.
Of the three suggestions the one floated by Dr. Justin Robinson is interesting. It is the one issue of the three which falls entirely within the control of government to change. Prime Minister Thompson in his recent press conference was quizzed by journalists about the more emotive issue of the wage freeze. Thompson in an attempt to deflate the issue rebranded Estwick’s suggestion a moratorium. He also was deliberate in pointing out that a moratorium on public sector salaries required the cooperation of the unions and the social partnership. Quietly mentioned by the PM was the option to reform the current tax system. While the wage freeze is getting a lot of airplay, the politically savvy Thompson is aware of the downside to freezing wages given the shadow of the Sandiford 8% cut which he has to live under.
The Value Added Tax (VAT) was implemented in 1997 by the Arthur administration and sold to Barbadians that by rationalizing the 11 taxes it replaced it would:
- lower overall tax rate
- broaden the tax base
- more efficiently collect revenue
- a more transparent tax
Interestingly the the VAT was contemplated by the DLP as far back as 1978.
The way the VAT works exposes a downside to Dr. Robinson’s suggestion if not efficiently managed should the government implement. VAT is described as a regressive tax. VAT is a consumption tax which is added to any value to the product or service along the production or supply chain. The reality that Barbadians at the lower end of the economic ladder spend more of their income than those above them does make it a regressive tax. If the government is to implement an increase in VAT, the suggestion by Dr. Robinson is 1% – to compensate, the exempt basket of goods and services would have to fairly contain those products and services routinely accessed by Barbadians at the lower end of the economic ladder. If the government can get the exempt basket right, the objective to increase VAT and generate needed cash flow, BU considers this the better option to a wage freeze at this time. It would mean those who can afford it would proportionately pay VAT.
The confidence level and the psyche of Barbadians are intangibles which the government has to weight at this difficult time. The public sector in 1991 had to carry the load with the 8% wage cut. Additionally, by reducing the circulation of cash a wage reduction would bring at this time has repercussions. Bear in mind the government is the largest employer in the economy.
The business of tax adjustment and reform is a complex matter, BU look forward to a solid national debate on Dr. Robinson’s suggestion.
The blogmaster invites you to join the discussion.