Prime Minister and Minister of Finance, Mia Mottley, today delivered what she called Barbados’ Economic and Recovery Plan.
Like a doctor informing family on the state of health of a relative, she told Barbadians that their country is basically in intensive care. However, she also made clear that, in her judgement, the patient’s prognosis is good. In the meantime, however, she outlined three steps on the road to recovery within the next three years.
Phase 1 is designed to stabilize the patient and stop the bleeding. It also calls for what she described as “bitter medicine”, but it is medicine that will be shared by all Barbadians.
To stop the hemorrhaging, the first step is to cut Government’s transfers to prominent state-owned enterprises (“SOE”). To begin with, she proposed that the Barbados Tourism Marketing Inc and Barbados Tourism Product Authority which cost the Government approximately $96.3 million a year, will no longer be funded out of the Consolidated Fund. Instead, she stated that it will be funded completely by a fee of US$70 paid by passengers flying outside of CARICOM a fee of US$35 for those flying within CARICOM. Further infrastructural maintainance will be funded by an interim room levy ranging from US$2.50 to US$10.00 per night, and a 2.5% Product Levy on all Direct Tourism Services. In addition, starting 1 January 2020, the Prime Minister also proposed to increase the Value Added Tax (“VAT”) on rooms from 7.5% to 15%.
With regard to the new fees on air travel, although the Prime Minister expressed confidence that this would have little effect on the level of travel to Barbados, we are concerned that it would make Barbados’ aggregate airport tax and fees amongst the highest in the Caribbean.
The interim room levy is a funding mechanism which is widely applied by hotels around the world and should not, in itself, place a too onerous burden on guests. The proposed VAT increase in 2020 needs to be carefully reviewed because in conjunction with the aforementioned imposts, it will contribute to a major increase in the cost of our tourism product and thereby risk making Barbados less competitive.
To further enrich the funding of these tourism entities, there will be a 10% shared accommodation levy on all fees charged for shared accommodation, such as AirBnB and Home Away. The 10% shared accommodation levy is a fair and an efficient way to tax this activity, especially if collections are handled by AirBnB and Home Away.
In a bolder step, the Government announced that it will de facto be privatizing these tourism entities by transferring lead responsibility to the private sector for ownership and management. This is an encouraging step. We hope this is a blueprint for SOEs in the future.
In yet another step to remove SOEs from the Consolidated Fund, Government is proposing a new method of funding the Sanitation Services Authority’s annual budget of $65 million. A new levy will be issued on householders and businesses but it will be collected by the Barbados Water Authority. The levy, known as the Garbage and Sewage Contribution (“GSC”) will be $1.50 per day per household, but this will be discounted to 0.75 cents for pensioners. Businesses will pay GSC of 50% of their water bill. While this is an unusual method of collecting user fees, it is a more direct way of having all Barbadians contribute to the cost of the sewage system.
The Prime Minister was able to keep some of her election promises, namely the removal of tuition fees for undergraduate programmes at University of the West Indies (“UWI”), the increase in the non-contributory old age pension, and the removal of the NSRL, which was responsible for doubling inflation for the first quarter of fiscal year 2018 when compared to the same period in 2017. She also removed the annual road tax, but compensated for the loss in revenue by introducing a new tax on petrol, diesel and kerosene. As well, she announced one-time registration fees on new and second hand commercial and private vehicles, but commercial vehicles will still have to pay an annual registration fee.
Other measures to speed up the country’s healing process included an increase in the basic corporation tax rate from 25% to 30% and the introduction of a new personal income tax band of 40% on assessable income above $75,000. This puts the corporation tax rate back to what it was in 2005, and the top personal income tax rate to what it was in 2004.
For personal income tax, the last time we had three tiers of tax was 26 years ago; then the top marginal income tax rate was 40% where it remained until 2003. Clearly Government is turning the clock back to levels of taxation imposed when we last sought assistance from the International Monetary Fund (“IMF”). We hope that as the situation improves, that these tax rates could be reduced again.