During his marathon contribution to the budget debate in the House of Assembly Wednesday, former Prime Minister Hubert Ingraham warned the government that increasing the gross premium tax on insurance could result in cost increases in the industry.
While Prime Minister Perry Christie has repeatedly stressed that the new budget does not include any new taxes, the new spending plan calls for the tax on insurance to be increased by one percent from two to three percent.
In justifying the increase, Minister of State for Finance James Smith said the day after the budget communication that the premium rate has remained unchanged since the mid 1980s.
Mr. Ingraham said, however, that he hopes the new taxes do not lend disastrous results for the insurance industry. He said that the insurance industry cannot absorb enormous tax increases without structural adjustments taking place in the sector.
Mr. Christie during his budget communication noted that while the budget contains revenue enhancement measures, it does not contain any major taxation increases and only “very modest increases” in a small number of fees.
This, Mr. Ingraham stressed, must have been a play on words.
“That is why people become cynical of us in this place when taxes of an industry are increased by 50 percent – as in the case of the insurance industry, it seems rather cruel to refer to it as modest,” Mr. Ingraham said. “What is more, there is tax on gross premium of the insurance industry. As the premiums that insurance companies collect increase, the amount they pay increase.”
Mr. Ingraham pointed out that commercial banks on the other hand have no increase in payments and taxes even though their profits have increased over the years.
The disparity between commercial banks and insurance companies, he said, while already unfair is now “obscene.”
“I’m not advocating an increase in taxes on banks at this time,” Mr. Ingraham said. “This would be the wrong time and the wrong signal for the government to send at this time. When your hand is in the lion’s mouth, take your time. But it is very unlikely that the insurance industry can absorb this enormous increase without structural adjustment taking place in the sector.”
He suggested that the government revisit this issue.
“I’m surprised that a government which prides itself on consultation, didn’t consult more on this issue,” the former prime minister said. “We made this mistake once in 10 years, not having adequate consultation about a revenue measure.”
Meantime, Mr. Ingraham said he considers some of the recent recommendations by the International Monetary Fund to be unattainable for The Bahamas in light of the current economic circumstances.
He noted that Prime Minister Christie placed great stock in what was said by the IMF Mission to the Bahamas in April this year.
“Perhaps the Minister of Finance when winding up tomorrow will inform parliament as to the reason for accepting some of the IMF recommendations in full, some partly and others not at all. At least so far as is this budget is concerned,” he said.
During the recent visit to The Bahamas, the IMF team warned that “in the absence of further corrective action, the fiscal deficit would widen to $180 million in FY03/04.”
The IMF also said that “without fiscal correction international reserves are expected to decline to $370 million at the end of 2003.” But the prime minister has said he is confident that this will not be the case.
Mr. Ingraham said, “These consequences if they came about, would be undesirable and they would be burdensome to our country. And so the Mission I am told was of the view that the priority of the government ought to be to consolidate the fiscal position, to protect our international reserves and avoid any excessive build up of government debt. No one who is aware of the present circumstances of The Bahamas would dispute the soundness of this advice.”
He added though that there is an aspect of the report which is unattainable.
“The recommended reduction by the IMF staff reducing the deficit to 1 percent of GDP, although desirable, is not attainable at this time,” Mr. Ingraham said. “In the absence of significant or almost immediate economic growth, it’s not likely to happen soon. It can only happen with economic growth.”
But the IMF never suggested that that decrease would be attainable at this time.
The IMF recommended that certain measures could lead to the deficit declining to the equivalent of about 1 percent in fiscal year 2006-2007.
The team also recommended “shifting to a broad-based value-added tax or sales tax, in line with the conclusions of recent technical assistance missions to The Bahamas.”
Prior to leaving office in May 2002, in response to what he considered as “constant and repeated” IMF recommendations to review the country’s taxation system, Mr. Ingraham said the FNM government agreed for a technical team of the IMF to visit The Bahamas in that respect.
“There is no secret that the IFM favours for The Bahamas, a sales tax in substitution of our heavy reliance on customs duty,” Mr. Ingraham said. “Sales tax won’t eliminate customs duty, but reduce them considerably. You will always have some element of customs duty in a sales tax arrangement as they do in Barbados and elsewhere.”
Mr. Ingraham requested that the prime minister make a copy of the report either public or at least a copy available to the official Opposition for what he suspects will be a national debate on the new tax structure for The Bahamas.
By Hadassah Hall, The Bahama Journal
