The Tribune

By NEIL HARTNELL Tribune Business Editor LIFTING the civil service wage freeze will increase public spending by a sum equivalent to "less than 0.1 per cent of GDP", the Government believes, its major difference with the International Monetary Fund (IMF) involving the timing and will to undertake major tax reform. Responding to the Fund's Article IV consultation report on the Bahamian economy, the executive director for this nation, Thomas Hockin, said that neither the wage freeze end nor government guarantees provided to aid CLICO (Bahamas) liquidation would result in increased spending pressures. Speaking on the Government's behalf, together with Bahamian economic advisor John Rolle, he revealed that the Government had set no short-term targets or timelines for reducing the $4.25 billion national debt, and associated deficit, on the grounds that it needed fiscal flexibility to respond to any deterioration in the overall economic environment. And Mr Hockin also disclosed that the Government had established a Debt Management Committee, whose members include Central Bank of the Bahamas, Ministry of Finance and Public Treasury officials, to "propose strategic policies for the debt and to comprehensively monitor debt operations". The Fund, in its Article IV report, described the Government's medium-term fiscal strategy as "not sufficient" to deal with the rising national debt and deficits, and set them on a downward trend, arguing that introducing a consumption-based tax (sales or VAT tax) to broaden the tax base should be "a key priority". This, though, represents the major difference between the IMF and Bahamian government's views on the way forward for the economy. "The major point of departure is on the timing of, and resolve to undertake, more deep-seated taxation reform," Mr Hockin conceded. While foreign direct investment (FDI), largely due to the $2.6 billion Baha Mar project, was expected to remain strong through 2o13 and help to slowly reduce high unemployment levels, Mr Hockin acknowledged that the Bahamas' fiscal woes would endure for several years. "Fiscal strains are expected to persist longer," he said on the Government's behalf, "despite a continued commitment to discipline, as the taxable base of economic activities will only increase more notably once large-scale tourism developments transition into operations." Mr Hockin also dismissed concerns expressed by the IMF regarding the end to the public sector wage freeze and CLICO (Bahamas) guarantees, and the potential impact they might have for increased public spending. "Neither the lifting of the wage freeze nor the pending resolution of CLICO poses significant spending pressures," he added. "The resumption of promotions and payment of salary increments will add less than 0.1 per cent of GDP to expenditures. Meanwhile, potential contingent liabilities from the CLICO resolution are already capped at less than 0.4 per cent of GDP." Taking government estimates that the Bahamas has an $8 billion annual economy at face value, with 1 per cent of GDP equivalent to $80 million, it appears that the Government believes the wage freeze end and CLICO guarantees will only add $40 million to its spending bill. The former will account for just an $8 million increase, and the latter some $32 million. Outlining the Government's fiscal strategy, Mr Hockin said the Ingraham administration was "still squarely focused on rebuilding the buffers used up during the recession". Doing so will take time, and the need to run primary Budget surpluses - something the Bahamas has not managed to achieve during 38 years of independence - was acknowledged. And, if "near-term fiscal strains are exacerbated" by the faltering global economy or the failure of revenue/spending measures to bear fruit, the Government is braced to take further measures to reduce recurrent spending on its fixed costs and "postpone low priority investments". "The authorities are careful not to set specific targets or timelines for reducing the debt ratio in the near term that could undermine the flexibility of fiscal operations, given an external environment that is still uncertain," Mr Hockin said. "However, eventual return to a government sector debt-to-GDP ratio of 40 per cent is desirable, and a combination of sustained economic growth and primary surpluses will be needed to achieve this. "Improved revenue yields have to contribute substantially to consolidation, albeit within an environment of further enhanced tax administration. Such reforms will prepare the Bahamas for more fundamental structural changes in the tax system over the medium term, once a political decision is taken in this direction." The Government's response to the Fund also revealed that it wants the Tax Administration Division (TAD), established within the Ministry of Finance in the 201-2012 Budget to handle all major non-Customs taxes "to evolve into a more autonomous body over the medium to long-term, in keeping with best international practices". That may cause some concerns among Bahamians who believe, as PLP MP Ryan Pinder suggested during his Budget contribution, that the Government wants the TAD to become the Bahamian equivalent of the US Internal Revenue Service (IRS). The Government, meanwhile, has engaged the Inter-American Development Bank (IDB) to provide a technical consultancy entitled: 'Conditions for a sustainable fiscal balance in the Bahamas'. This, according to the IDB's website, will focus on "improving property tax revenue yield, equity and efficiency in the Bahamas". Mr Hockin, in the Bahamian government's Article IV response, said the Ingraham administration was also focused on rationalising, and streamlining, this nation's unwieldy network of fiscal incentives. It was looking to balance this with maintaining the Bahamas' attractiveness as a foreign direct investment destination. "One important undertaking is to achieve significantly strengthened real property tax compliance," Mr Hockin said, in reference to the estimated $400 million-plus bill of such uncollected taxes that continues to accumulate year after year. "Similarly, the officials are cognisant of the need to further streamline tax concessions, and will explore how best to achieve this, guided by the IMF and IDB at a pace that does not undermine the country's relative appeal to FDI." The Government also acknowledged the need to improve "the efficiency and transparency" of all state-owned corporations and agencies. "This is essential, both to manage contingent risks that could undermine budgetary consolidation efforts, and to lower the costs of inputs for private businesses," Mr Hockin said.