Tax Cuts or Targeted Relief? Experts Debate Fiji’s Economic Strategy

Westpac Fiji’s senior economist Shamal Chand has voiced concerns regarding the government’s recent decision to implement a 2.5% reduction in the Value Added Tax (VAT) from 15% to 12.5%. In the latest edition of Westpac Wave, Chand critiques this move as insufficient in addressing the rising cost of living for Fijians, particularly in a high-inflation environment.

Chand suggests that instead of reducing VAT, the government should have considered more targeted forms of financial assistance to support vulnerable populations who are struggling to cope with escalating living costs. He argues that shifting VAT frequently can lead to inefficiencies and increase the burden on households, potentially resulting in the need for higher income taxes to cover the revenue shortfall, which is forecasted at $250 million.

While he acknowledges that reducing duties ranks as a positive step towards trade liberalization, Chand highlights the inefficiency of reducing VAT as a blanket solution. He points out that it disproportionately benefits higher-income households, which raises concerns about equity in financial support measures.

This ongoing budget discourse resonates with earlier discussions where mean inflation rates reached alarming heights, such as in April 2024 when inflation was at 7.1%. Such economic pressures have driven many to call for significant tax reforms, including re-evaluations of VAT policies as an effective way to alleviate financial strains on citizens.

The government’s fiscal strategy currently emphasizes short-term relief measures, but experts like Chand advocate for clearer communication regarding future VAT policies, including whether it will stabilize at its new rate or revert to the previous higher rate. This continued dialogue highlights an essential opportunity for restructuring financial policies that could foster both immediate support and sustainable economic growth for Fiji’s citizens amid challenging conditions.

With careful consideration and targeted strategies, there is hope that Fiji’s economy can rebound while ensuring that support reaches those most in need.