Notes From The Margin

September 15, 2007

Why The IMF Will Probably Get the VAT Reform It’s Asking For

Was reading an interesting article in the Nation today about the recently released IMF Article IV consultation. We’ve downloaded the actual document for closer reading (if you are interested you can find it HERE) The following paragraph caught my eye….

IF GOVERNMENT were to raise Value Added Tax (VAT) to 17 from 15 per cent, this would boost revenues by as much as 1.25 per cent of gross domestic product (GDP).

This comes from the International Monetary Fund (IMF) as it continues to encourage the Owen Arthur Administration to increase VAT in a bid to reduce Government’s growing debt gap.

 

The IMF further stated that additional savings could be generated if more goods and services were drawn into the VAT net.

Now at first glance this would appear to be the usual thing you find in Article IV’s “raise taxes, cut concessions” . This is not the first time that the IMF has called for VAT reform and we’d be willing to bet that it won’t be the last.

However…..

If you consider that Government is engaged in trade negotiations at the WTO, EU, US almost all of which call for the removal of tariff barriers, the above paragraph becomes far more interesting. A check of the Central Bank statistics (HERE) reveals that the Government of Barbados currently makes more than 200 million dollars a year from import duties. That ‘s a significant amount of revenue that Government will have to give up.

Now civil servants have to be paid, (and flyovers have to be paid for 😉 )so Government has to find a way either to cut expenditure, or to increase revenue. On the cost reduction side, government has been “quietly” shuffling major segments of government off into corporations (GAIA, QEH, Post Office etc.) One of the effects of corporatisation is that it reduces Government’s wage bill by abolishing Civil Servant posts and essentially making them private sector employees. It also removes the cost of running those entities from the Government tab. That’s the REAL reason why this government has been so quiet about the Departure Tax at the airport because they don’t want to pick up money to put into it, it looks as if they are serious about it being self supporting. (Ditto for the post office, and QEH).

Now despite Governments best efforts to shrink, there will always be stuff to spend money on (flyovers for example) so Government will have to raise revenue somehow. The long term strategy of the Owen Arthur administration has been to reduce taxes on income and revenue (he has even publicly stated that his long term goal is to have the same rate for the “onshore” and “offshore” sectors), so he can’t find it through income tax. This makes raising VAT the most attractive option, because of its widely distributed nature a small (read “politically defendable”) increase in the rate will result in a major boost of revenue to the treasury.

And so the IMF will more than likely get it’s VAT reform. (but not until after the election). The economic issues here apply whatever political party is in power so regardless of who wins the next election this is likely to happen.

Marginal

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1 Comment »

  1. It would be useful to explore the welfare effects of the change in composition in government expenditure and financing in the post above.

    Comment by Linchh — September 18, 2007 @ 6:09 pm | Reply


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