The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Excise Tax revenues from the auto industry are down because the rates are too high, a former finance minister believes, as he questioned whether the Bahamas is ready to endure “the pain” of fiscal adjustment.

Agreeing that the Government was facing “a minor storm” due to the negative influences all working at the same time against its financial position, James Smith told Tribune Business that the Christie administration would need “very strong political will” to turn the situation around.

The now-CFAL chairman, and ex-minister of state for finance and Central Bank governor, said that in the short-term the Government ought to assess whether it would earn more revenues if the duty rates on certain products/industries were lower.

Pointing to the auto industry as one such sector where the Government appeared to be earning diminishing returns, Mr Smith added his voice to those also calling for a comprehensive review of the Bahamas’ tax incentive legislation.

And he reiterated previous concerns that the Ingraham administration’s so-called infrastructure stimulus spending had both expanded the fiscal deficit and reduced the foreign exchange reserves.

Analysing what the Government could do immediately to bolster its financial position, Mr Smith told Tribune Business: “Take a closer look at the duty regime to see whether, with the existing regime, in the short-term we could get more revenue from existing imports.

“It’s not one:one. With auto imports, the duty is too high and you could probably yield more revenue at a lower rate. With a shrinking economy, you’re getting fewer imports with higher duty rates, and therefore getting less return. Are the rates you are charging on new and used autos giving you maximum yields? You can almost lower the rate and get a greater return.”

Such comments, coming from a key Ministry of Finance adviser, are likely to encourage new and used car dealers that the Excise Tax rates levied on their industry since the 2010-2011 Budget could be reduced either in January or July next year.

Dealers have consistently argued that the increased tax rates, imposed by the Ingraham administration, acted as a ‘double whammy’ together with the recession and further depressed sales. This translated into fewer imports, and reduced revenue to the Government.

Meanwhile, Mr Smith suggested that the Government target outstanding arrears in areas such as real property tax. With that specific tax, he also suggested that the administration look at the different treatment applied to Bahamian versus foreign-owned real estate in the Family Islands, and how the former’s landholdings were exempt.

“One has to look at the extremely large series of concessions we’ve been giving away duty-free,” Mr Smith said. “You also go after outstanding taxes, things which will be paid if there is an effort. You have cherry-picking almost.

“We simply didn’t have to do this kind of exercise years ago, because we were generating good returns from tourist expenditure. We’re not getting that now, so we have to go after what’s out there and what’s collectible.”

The CFAL chairman also called for the Government “to revisit the whole idea of marketing and promoting the Bahamas in the US”. He added that recent advertising tended to be resort-specific, as opposed to marketing the Bahamas as a whole.

Referring to the Bahamas’ recent sovereign downgrade to ‘Baa1’ by Moody’s, Mr Smith told Tribune Business: “The message is: ‘Look guys, we don’t see where anything concrete is being put on the table to stop this, arrest this and turn it around’. That is something the Government will have to grapple with over the next few months.”

Agreeing that tax reform in the shape of a Value-Added Tax or some other option was a medium to long-term effort, Mr Smith said “a number of negative influences are working at the same time” against the Bahamas.

Apart from reduced visitor spending and yields, foreign direct investment (FDI) was down and unemployment high at almost 15 per cent. Lower FDI levels impacted the foreign exchange reserves, while the jobless rate translated into reduced import demand and falling government revenues.

Mr Smith added that the Government had also “exhausted short-term borrowing facilities, which does not give us the wiggle room we need”.

“All of these taken together would be quite troubling, but taken together and you’re looking at a minor storm,” he told Tribune Business. “You’ve got to reverse that trend. It calls for very strong political will.

“We know what the problem is; the steps have been defined for us. The problem is that it’s a painful journey. We may not be ready to take the pain, but the adjustments are always painful.”

Mr Smith said it was also a “misnomer” to describe the New Providence Road Improvement Project as a ‘stimulus’ to the economy, given that it had been started years before the recession in 2001.

“The other element one ought to keep in mind is that in an open economy with a non-convertible currency, a traditional stimulus programme is not as effective,” he added. “You spend more and more, increase the deficit and run down the foreign reserves, affecting your parity.”

Mr Smith said this especially happened if products and raw materials were largely sourced from abroad, not the Bahamas, which meant local job creation was muted.

“You head for trouble. That’s where we are now, although it’s not dire straits,” he added.

Mr Smith said the Ingraham administration’s decision to borrow $300 million in foreign currency via a bond issue had also “given an artificial boost to the reserves and a false sense of comfort”.