The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government is planning to release its Tax Reform White Paper for public consultation next month, a key Cabinet Minister yesterday telling Tribune Business the Government was “up to the task” of avoiding a further sovereign credit downgrade.

Speaking after Standard & Poor’s (S&P) last night cut its economic outlook for the Bahamas from ‘stable’ to ‘negative’, Michael Halkitis said the move was “not unexpected” and the Christie administration was working on a four-point plan to bring the country’s finances back on to a sustainable path.

Apart from tax reform, the minister of state for finance said this plan also involved maximising government revenues through better administration and enforcement; controlling public spending as much as possible; and growing the economy through stimulating the private sector.

“We’ve been expecting it, and the job is to make sure we do all we can to ensure we don’t get downgraded,” Mr Halkitis told Tribune Business.

“It could have been worse, and we just have to keep plugging away. We undertake to turn it around. We’ve got our work cut out for us, but we just have to keep working.

“The main thing is, one, we’re doing a White Paper on tax reform. What we’re doing now is getting some input from industry - the banks, Chamber of Commerce and small businesses - before we release it.

“We’re looking at having that released in October, so we can get on with the reforms. We really want to start this process early next year.”

Value-Added Tax (VAT) has been the most-touted tax reform option for the Bahamas, but it remains to be seen if all options - including an income tax - will be placed on the table.

Meanwhile, Mr Halkitis said the Government aimed to combat its fiscal deficit - projected to hit $550 million for 2012-2013 - by “clamping down on revenues”.

This, he added, would involve better revenue administration, particularly in Customs and with real property tax (the latter estimated to have a collective outstanding bill of between $400-$500 million), and cracking down on smuggling - especially tobacco products.

With S&P projecting a fiscal deficit of 7 per cent for 2011-2012, and one equivalent to 6.7 per cent of GDP for this year, Mr Halkitis said the Government would do “as much as we can to keep the reins on public expenditure, taking it down”.

And, finally, the Christie administration was aiming to facilitate economic growth through the private sector, given that this should result in increased revenues.

Whether this will satisfy S&P’s calls for a credible “medium-term plan” to address the fiscal deficit and national debt remains to be seen, as this will be key to warding off a further cut to the Bahamas’ sovereign rating.

When the more than-$500 million in contingent liabilities (government guarantees) on behalf of public corporations are factored in, the Bahamas’ national debt is already more than $4.5 billion - and its debt-to-GDP ratio greater than 60 per cent.

It is now closing on the 70 per cent range identified by the International Monetary Fund (IMF) as a ‘danger zone’ threshold.

Mr Halkitis acknowledged that S&P was correct in taking the action it did, given that the Bahamas was running back-to-back fiscal deficits of more than $500 million with no new revenues to pay for it.

He also agreed that the Bahamas’ fiscal position was “concerning”, especially given its narrow tax and economic base that was principally reliant on tourism and financial services.

Mr Halkitis acknowledged that while the Bahamas’ position looked much better than those of rival Caribbean and other states, its narrow economic base meant it could not sustain as much fiscal bleeding as they could.

“We have to be very careful in running up our debt-to-GDP ratio,” Mr Halkitis told Tribune Business.

“Ours being an open economy, and narrowly based as it is, we have to be extra careful. It is very concerning, and our number one job is to stabilise the situation, reverse it and go in the opposite direction.

“We have to demonstrate to the IMF and rating agencies that we’re serious and up to the task.”

Khaalis Rolle, minister of state for investments, said that with the Bahamas attracting $1.5 billion in foreign direct investment (FDI) inflows in 2011 - far more than any other small island state - this nation should have been better placed than many to withstand the recession.

“We did not benefit significantly from that as we kept spending all the money,” he added. “There’s no reason why we should be in the position we are in, but we are working our way back to where we need to be.”

Mr Rolle said the roadworks had the added effect of denying the Government critical revenues, as many businesses were forced out of business.