As food prices continue to skyrocket, coupled with high inflation, should T&T adopt similar measures as that of Barbados which saw the recent widening of its VAT-free basket of goods?
T&T-born regional economist Dr Justin Ram who resides in Barbados recommends that the T&T Government instead do away with Value Added Tax (VAT) altogether and implement a simple sales tax to not only alleviate the burden on citizens but stimulate economic growth.
Describing VAT as a “cumbersome tax” Ram explained, “Replace it (VAT) with a general, simpler sales tax at a lower rate than what VAT is right now. The bulk of income should really be coming from a sales tax and reduce the burden of income taxes particularly on PAYE (Pay As You Earn) and on corporation tax because, ultimately, you need to get investment going and give people the opportunity to get good paying jobs.”
Last month Prime Minister of Barbados Mia Mottley unveiled an $18 million package to provide much-needed relief, acknowledging the daily constraints Barbadians face in dealing with high prices for basic goods, energy, and gas.
The Barbadian Government has added 44 more home and food items to the list of things that are exempt from paying VAT as a result of the relief measures.
Some products had customs tariffs lifted, which allowed for price reductions for consumers which will last through January 31 next year.
The Business Guardian also reached out to Trade Minister Paula Gopee-Scoon on whether there should be more VAT-free goods on the local shelves.
She said, “There are thousands of VAT-free food items in T&T, and this is in addition to another 20 basic food items within most instances no duty.
“This Government has paid enormous attention to ensuring that basic food items are available through the provision of close to US $1 billion in FX support. There have been no empty shelves.”
But for T&T, Ram said, VAT has wider economic implications.
One of which is the Government continuing to owe millions in returns to businesses and these are often paid late and thus cripple operations.
“In effect, the Government is taking a loan via VAT payments and not repaying the rebates until much later on, sometimes years. That money is now out of the corporate hands and they can’t use that for investment.
“That’s not a good thing. Instead, implement a smaller sales tax on everything, maybe there could be some exemptions, but that simple sales tax could be about five per cent,” Ram further explained.
This would, therefore, would enable the business environment to be enhanced as there would now be revenue for reinvestment into the economy.
Ram also warned that Government should not be heading in the direction of short-term tax fixes given the present inflation but rather focus on transforming the economy; the bigger picture.
“Let’s face it. The economy needed transforming even before this high level of inflation. And what I keep hearing is we are going to wait. We are to make short-term fixes. Short-term fixes are not what we need.
“We are always going to be vulnerable to all these changes in the global market which, before were coming every few years but now seems to be coming every six months,” Ram noted.
Emphasising that the Government needs to make the economy much more resilient Ram suggested one measure must be private sector investment.
“Reducing corporation tax, reducing taxes on profit including dividends, including shareholdings is something you really need to consider,” Ram said, adding that for households to survive they cannot do so from Government handouts.
Rather, such survival depends on access to good-paying jobs, he maintained.
Barbados had also announced a cut to its VAT from 17.5 per cent to 7.5 per cent for the power charge up to the first 250 kilowatt hours of residential electricity bill to provide assistance for householders’ electricity costs.
“As a result, their cost will decrease from $204.46 to $187.06 for them. This will cost the Barbados government $1.527 million each month, or just $10.5 million in total, for the period from August 1 to January 31,” Mottley had said.
However, according to Ram this is not practical for T&T.
Mainly because this country already enjoys low electricity rates.
He said in Barbados the cost of electricity is around US 30 cents per kilowatt hour while locally it’s around US six cents per kilowatt hour.
“Electricity is already heavily subsidised in T&T. There’s no more room to subsidise that unless you say you’re giving away electricity. And anything that requires Government trying to control the prices stay away from it.
“Even that policy in Barbados, I really don’t agree with because it eventually comes back to bite the Government and the economy,” Ram warned.
Get rid of the TT $, reform Central Bank
Regarding other measures at reforming this country’s economy, Ram advised doing away with the TT dollar.
Like other currencies in the Caribbean, he said this only serves to drag economic activity.
Instead, replace these currencies with the US dollar, Ram suggested.
“Let everyone start understanding you are earning a US dollar and this would smooth so many transactions even at an international level.
“The use of national currencies has many more costs than benefits because you are still constrained by having foreign currency reserves to back that local currency.
“So why not just put that foreign currency reserve into the hands of ordinary people and into the corporation? Convert out the TT dollar into the reserves,” Ram explained.
That currency in circulation, therefore, will ultimately become the reserves which also means that trading on a global scale becomes much easier, he added.
“For me that’s a big topic which needs to be considered to help these countries move forward,” Ram reiterated.
Is getting rid of the TT$ easy?
According to Ram it’s a process which is not difficult.
For instance, the prices of goods and services can be both in TT and US currency which is a first step.
“So you already then say the US currency becomes legally accepted in the country for all transactions. It’s a parallel system happening at the same time.
“And over time, like over a year, transition to using only US currency. So you start to slowly roll back and get rid of the TT dollar while the US dollar becomes the main thing,” Ram said.
Additionally, he said TT dollar holding will also be replaced with the US dollar, making it more beneficial.
Ram also referenced a paper titled, “The Time Has Come to Permanently Retire All Our Caribbean Currencies” by former Governor of the Central Bank of Barbados DeLisle Worrell.
According to Worrell, the currencies of Caribbean countries have now outlived their usefulness, and have become a liability.
They were devised at a time when most payments were made using notes and coins, issued in distant metropolitan centres, Worrell outlined, saying scarcity of the means of payment was a severe hindrance to commerce.
“In response currency boards were set up, to issue local currency as needed in the colonies. The system worked well because the local currency issue was backed by an equivalent value of Sterling, in a global system of fixed exchange rates.
“In contrast, nowadays payments are made mostly by electronic communication, credit and debit cards, cheques and drafts, with settlement over digitized bank accounts,” Worrell explained.
However, he noted in today’s world an own currency has become a liability for small economies, limiting access to international goods and services, exposing residents to risks of currency devaluation and inflation, eroding the value of domestic savings, increasing economic inequalities, providing a tool for unproductive government spending, and diverting attention from the need to increase productivity and enhance international competitiveness.
Worrell said while retiring local currency is seen by uniformed observers as a surrender of economic sovereignty, exactly the opposite is true: exclusive use of the US dollar enhances the range of choice open to the country and its residents, in all international commerce, because such transactions are conducted in US dollars or in currencies that are convertible to US dollars.
“In contrast, with the Barbados dollars, you cannot buy or sell anything in nearby St Lucia, much less in the rest of the world.
“In a world where payments and settlements are digitised, with no need for notes and coins, there is no limit on the commercial and financial sovereignty of holders of the US dollar,” Worrell further explained.
Monetary reform also involves a country’s Central Bank.
According to Ram T&T’s Central Bank, just like its economy, is also in need of reform.
“I don’t see what’s the point of the Central Bank. There’s no point. That’s a real institutional burden with not much benefit,” Ram said.
He suggested it be redesigned to address important measures like monetary policy.
However, Ram noted that while T&T’s economy is “much more” advanced than Barbados this country still needs to continuously reform and improve its business environment to make it more enabling especially for entrepreneurs to bring their ideas to fruition.