THE EDITOR: Finance Minister Colm Imbert said in last week's mid-year review that the Government would be repaying VAT refunds up to $250,000 in cash and $3 billion via bonds.
While this would give SMEs room to breathe, he did not tell the whole truth to the population of this continuing scheme of issuing bonds to pay VAT refunds. This is not the way to improve tax efficiency and would signal that the Government is either out of money or using cash for wasteful spending.
By taking so long to repay the VAT debt owed to businesses, he distorted the revenue outcome, took a tax-free loan and adversely affected business activities, as evident with the recent numerous complaints from the business chambers.
It is passing strange that the minister would be seeking to repay some of the VAT refunds at this time when we are approaching local government elections. What a coincidence!
Anyway, the truth is that government bonds refer specifically to the practice of issuing bonds, which are essentially IOUs that promise to pay back a specific amount of money plus interest at a future date.
This fact is important to note because by understanding the government budgeting process, you would realise that the Government's accounting is done on a cash basis. This would mean therefore that the VAT bonds would not be an expenditure until it matures after the next election. Surprise, surprise!
The VAT bonds will in fact increase the debt to GDP ratio and is not the solution for a tax administration. The revenue outcome for the rest of the year could see a significant fall and, as a result, a significant deficit will arise. More borrowing would continue.
It is therefore safe to say that the recent revenue windfall the country benefitted from did not transform the economy, so the minister has resorted to borrowing to pay VAT refunds. A dangerous path.
According to the minister, the outstanding VAT refunds as of September 2015 was $4.6 billion and at the date of writing it is in the vicinity of $7.8 billion. The minister borrowed from the tax system $3.2 billion.
Bond financing also comes with some risks. One risk is that the Government may not be able to generate enough revenue to pay back the bonds, which can lead to default. Another risk is that interest rates may rise, which can increase the cost of servicing the debt.
No mention was made of how the Government is going to raise the money to repay these bonds. Yet you can certainly guess that it would be through increased taxes.
The minister should clearly state how he will address the bond repayment. We are already seeing much lower oil and gas prices on the world markets than that used by the minister for the presentation of the 2023 budget. With summer approaching it is expected that oil and gas prices would remain depressed for some time to come.
So in effect the minister is simply kicking the can down the road.
The problem with the VAT system is that the minister is getting involved in the refund process and was using the VAT refunds as an interest
