BRIDGETOWN, Barbados, CMC – The Barbados government has maintained the 17.5 per cent Value Added Tax (VAT) but has announced some partial tax relief for citizens as Finance Minister Chris Sinckler outlined the government’s fiscal policy for the next 12 months on Tuesday night.

In a presentation lasting just over four hours, Sinckler also announced a 50 per cent excise tax on gasoline and diesel, a partial restoration of allowances to workers, insisting that the budget was aimed at restoring, repairing and rebuilding an ailing economy.

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There had been widespread anticipation that the Democratic Labor Party  administration would have reversed a series of tax measures implemented in the last budget including the increase in VAT from 15 per cent, but Sinckler strongly defended the government’s fiscal strategy during his presentation.

He told Barbadians that the local economy is not of the woods just yet and prudence dictates that the measures must be moderate and in keeping with the government’s goal to maintain stability.

“It is critical for all Barbadians to appreciate the depth of the economic challenges we face. We have to understand that injudicious decision making on either side of the spectrum will only unravel the gains that we have so far on the road to recovery but also seriously compromise the things which we have come to cherish as Barbadians

“The VAT rate of 17.5 percent will remain in place until further notice. The VAT has proven to be a most effective and efficient instrument in our efforts to increase revenues and help close the fiscal deficit.

“Given the seeming reduction of oil on the world market now put at just over US$80 a barrel and which is beginning to filter through to the domestic price for the refined products we have decided to retain the 50 per cent increase for a little longer to assist in attaining our revenue targets and contribute to our ever expanding alternative energy programme,” he said.

Sinckler however assured that if oil prices surpassed US$95 a barrel in the near future, the government will take action to adjust the rate.

On the issue of tax free allowances, the Finance Minister lamented that the system has been abused by employees and employers causing the government to lose substantial revenue.

As a result he announced a new initiative which will restore allowances for low income workers while middle and high workers will only get back some of their money.

“I propose that with effect from August 1, 2012, we increase the tax threshold from BDS$24, 200 (US$12,100) to BDS$30,000 (US$15,000) and adjust the effective tax rate at the bottom down from 20 per cent to 17.5 per cent.

“This will effectively mean that all those persons earning between BDS$24,200 and BDS$30, 000 dollars will pay 17.5 per cent on the amount between the two points and those earning more than BDS$30, 000 dollars will pay 17.5 per cent on the accessible income up to BDS$30, 000 and will continue to pay the upper rate of 35 per cent on anything above that rate.

“It means that all will be better off than currently obtains with the taxed allowances but will not be fully restored at this time. As I indicated this is what we surmise is feasible and responsible in the circumstances and what will help to ensure we can assist our country with its objectives,” he added.

The Minister said the measure is expected to give full restoration to some categories of workers, particularly those in the lower income bracket, and “partial restoration of the amounts previously given as non-taxable allowances to those in the middle and higher grades.”

He insisted that it means “that all will be better off than what currently obtains with the taxed allowances but not all will be fully restored”.

Sinckler also outlined measures to boost the local agricultural sector which he said “has the power to contribute towards a reduction of the island’s food import bill”.

He said as well that agro businesses will have access to BDS$20 million (US$10 million) in financing from a proposed Hotel Refurbishment, Energy Efficiency and Food Production Fund.

He also promised incentives for businesses generating and distributing electricity from a renewable energy source. There will be a boost to the Small Business sector. According to him, an additional BDS$600 000 will be injected into the factoring programme on behalf of the small and micro businesses while a further $400 000 will be made available to the Micro Enterprise Grant Scheme.

The Barbados Association of Retired Persons (BARP) will be exempt from the payment of VAT on supplies, there is to be a temporary Child Support Assistance package to help parents to carry some of the load of maintenance

Sinckler said that the government’s fiscal strategy has been paying off the economy which is projected to grow between 1 to 1.5 percent this year.

He told legislators that the Barbados economy remained stable during the first quarter of 2012 with preliminary estimates showing positive activity in the productive sectors which expanded by 2.1 per cent for the first three months of 2012.

“This was driven by 5.1 per cent expansion in tourism output as long stay tourist and cruise arrivals increased by 2.3 percent and 16.5 per cent respectively. The primary factors for the growth of long stay arrivals were due increased performances in the Canadian market by a whopping eight percent.

“The CARICOM market increased by 8.5 per cent and the European Market grew by a startling 18 percent on the account of a fortnightly charter from Sweden.”

But he said, disappointingly, the US and UK markets fell by 4.3 and 5.6 per cent respectively.

The Finance Minister also reported that the economy recorded a balance of external receipts and payments in the first quarter of the year and Central Bank reserves increased by BDS$3.8 million (US$1.9 million).

But he noted that the current account of the balance of payments continued to be adversely affected by persistent increases in prices for oil and commodities and the deficit for the first quarter is estimated to be 3.8 of gross domestic product.

Sinckler said that activity in the manufacturing sector remained depressed during the first quarter of 2012 as output fell by 1.7 per cent while non-sugar agriculture is projected to have contracted by 4.1 per cent.

In the non-traded sectors, activity expanded by 1.3 per cent at the end of March 2012. The construction sector advanced by a further 3.4 per cent during the first quarter on account of activity in the housing market as well as tourism related projects.

However unemployment rose to 11.2 per cent in 2011 up from 10.7 per cent at the end of 2010, while the inflation rate stood at 9.1 per cent at the end of February 2012 compared with 6.3 per cent a year earlier.

Sinckler said that that the general trajectory of the local economy is heading in the right direction, and that “clear gains have been made in halting the massive negative declines experienced in the 2008/2009 period.

“Equally we have made significant progress in bringing our fiscal deficit down to the extent that we are in fact as I said better than the targets we have set in the medium term fiscal term strategy for this stage of the programme.

“Relative to what we expect in 2012 as outlined earlier much of that will depend on how the global economy handles this new round of seeming downturn across economies,” he said.

Opposition Leader Owen Arthur is expected to respond to the budget presentation later on Wednesday.