Central Bank cautions against sweeping VAT cuts  

The Central Bank of Barbados has warned against major cuts to the 17.5 per cent Value Added Tax (VAT), arguing that such a move could harm economic stability and fail to bring meaningful relief to those most affected by the high cost of living.

Governor Dr Kevin Greenidge set out the Bank’s position on Wednesday in response to a question from Barbados TODAY during a press conference to review the country’s economic performance for 2025.  

Speaking against the backdrop of pledges by some opposition parties contesting the February 11 general election to cut VAT as a means of easing the high cost of living — if they form the next government — Dr Greenidge contended that any such decision would not be economically wise, particularly if it involved a wholesale reduction.  

The bank chief told reporters that if a cut were to be implemented, his recommendation would be to craft a policy that is strategically targeted rather than across the board.  

“If you reduce the VAT because it is broad-based, it impacts everyone. So, first of all, you are going to get effects going to persons who don’t need it, versus persons at the bottom and the vulnerable, who need it. Depends on your objective. If your objective is cost of living, then persons who are better off and can afford to deal with it, who don’t even see cost of living as an issue… probably getting better or the same benefits as those who can’t. That’s the first thing. 

“The second thing is that in most countries… you know I have worked at the IMF and I have been to a few programmes… when you take off the VAT, you are hoping that the merchants and the wholesalers pass on that to the customers. That’s not necessarily the case. So, you have to hope for a pass-through effect.”

He used the example of reducing the tax on motor cars, where an importer brings in the vehicle and gains a saving but leaves the customer uncertain as to whether they would benefit as well, “especially in a country where prices don’t fall”.  

“The effects that are going to go to the consumer are limited. And the evidence has shown, it is not always what you expect it to be. You would then have to put a way in place to measure and monitor all prices to say ‘well, I gave you 15 per cent of X amount in VAT, but I don’t see it in the final product.’ And that costs you money. You might spend more money monitoring than you get.”  

Dr Greenidge added: “I think, if you are talking about cost of living, ask yourself who you are trying to impact. If it is growing companies or persons, you focus on those groups. Then you design policies… we say in economic jargon, targeted measures for those groups. There is room sometimes when you reduce VAT, but the objective is different. The usual objective is not to do with the cost of living.”  

He said it is usually done when the VAT system is performing well and the aim is to achieve a general reduction for the benefit of the productive sectors.  

“Usually, you get something. But you get much more bang when it is targeted policy.”