The long anticipated study by the IDB was released on Friday past. Download the IDB Study on Introduction of VAT (pdf) here...
Completed by Mr. Jorge F. Baca-Campodonico, it makes the case quite well that these are economic models that are simply tools and must be used with great care. In fact it says "There are no substitutes for good judgement." … And the results should be interpreted with great care."
On pages 7 and 127 the IDB clearly state that this is a wealth transfer from the private sector that is not "fully" compensated by the reduction if tariffs.
Doublespeak for this is not going to be good for anyone.
In other words, for the models to be correct, businesses in the sale of goods specifically, are not expected to raise their mark ups to compensate for this loss.
Also, taxpayers should expect to pay more for goods and services.
Businesses, many of whom are struggling today, will have to adjust and increase prices where they can and remain competitive with direct imports.
Consumers will also adjust, as their income will buy less, possibly slowing the economy further.
As it relates to services, logic says the increase in prices will be substantially more that the 5 to 6 percent they indicate will happen overall, so on net, inflation should be higher than projected.
How it will actually play out? My crystal ball is not telling me :0) But I do understand that businesses require profit to keep their doors open, hire associates and pay salaries, benefits and other related costs so they will have to adjust somehow. Consumers pay cheques will not go as far, so they will have to change their purchasing patterns. At least that's the way it works all over the world and no one has convinced me we're any different yet.
They go on to tell us of need to implement a safety net for the less fortunate in society. It; "is a clear message that transpires" from their simulation efforts we're told.
This emphasises that the increased burden on taxpayers will be quite severe in my view. Something the taxpayers and business community have feared all along based on evidence from the experience of other countries in the region.
Overall, this is not a pretty picture, and to use the IDB's words; "There are no substitutes for good judgement." And the results of this study "should be interpreted with great care." Is our political directorate up to the task?
In other words taxpayers and businesses, fasten your seat belts for a bumpier ride.