The Tribune

APRIL is tax return month in the US - and here in the Bahamas we have just embarked on the road to substantially increased taxation, with the proposed introduction of a value-added tax on goods and services before the next general election. This will begin a process of raising government revenue from around 19 per cent of GDP to some 23 per cent.

Most people who think about these things accept that the country could do with more revenue to invest in essentials like infrastructure development, training, and healthcare. But they also see a big problem with demanding more taxes while we continue on our present course.

The danger is that those extra taxes will go down the same monstrous drain hole of political boondoggles like Bahamasair, ZNS and BEC, as well as pay for extra perks and benefits for the political class and their cronies. And in the end, we will be left no better off than we are now.

To make the point crystal clear (for those unfamiliar with the term), a boondoggle is a project that is considered a useless waste of time and money, yet is often continued for external political reasons. And a boondoggle can exist for a very long time, either because the failure is not widely recognised or because those responsible have ulterior motives.

The fear of government waste and boondoggles is hardly misplaced. The three state corporations alone, mentioned earlier, offer more than enough evidence over many decades.

Le’s start with benefits. The generous defined benefit pension plans offered by public corporations are simply unsustainable. For example, the highly-paid employees of BEC contribute nothing to either their retirement plan or their medical insurance. The Bahamian taxpayer covers them, because none of these corporations is profitable.

A defined benefit plan guarantees a certain payout at retirement, according to a fixed formula. A defined contribution plan provides a retirement payout based on the amount of contributions made and the performance of the investments made by the plan administrators.

Government pension obligations are currently unfunded, meaning they are not on the books. In other words, the government is deliberately misstating its spending commitments to the tune of many millions of dollars, at a time when public sector debt is already at 60 per cent of GDP. A pension commission is supposed to review all these plans, but it has yet to be appointed.

In the case of the Broadcasting Corporation (of which I was a board member from 2007-2012), the boondoggle is even more stark. First, there is clearly no need for the government to be operating a general broadcasting station supported by taxes. Second, all governments have used ZNS and other public corporations and agencies (such as Bahamas Information Services) as slush funds, for political support, and to hand out jobs to cronies.

Today we can listen to droves of radio talk shows and watch hundreds of channels via cable or satellite. But ZNS is still an irrational entity, devoid of fiscal or professional sanity. During the previous Christie administration, for example, monthly financial statements were not produced, required audits were not completed, annual reports were never published, and employees actually received severance pay when they resigned.

When we took over, ZNS was more than bankrupt. Salaries alone for 2005-06 were almost $10 million, against revenues of about $7 million. Unfunded obligations to government and other creditors were another $9 million (not including millions in unfunded pension liabilities), and the total public subsidy was over $24 million a year, supporting 280 employees – including more than 90 managers.

This was the culmination of decades of outrageous political abuse and wholesale financial irresponsibility.

Under our supervision, the corporation was downsized in 2010 and other adjustments were made in an effort to reduce the subvention and promote greater independence, but these efforts have been largely reversed by the new PLP administration, which hired more people (including some who had already received severance) on the excuse that digitalisation required more manpower – exactly opposite to the fact.

And then there is the government’s ongoing inability to collect the taxes it already levies – especially property tax, where chronic non-payers receive periodic amnesties that are a clear incentive to avoid paying in the first place.

So the bottom line is that we need to get more productivity and value from our taxes before we start increasing them.

The usual justification from policymakers for this state-sponsored largesse and gross inefficiency is that the public sector is a necessary safety net for a work force that is ill-equipped to compete in the general economy. This brings us to the question of education.

The story here can be encapsulated by three recent comments from politicians. Prime Minister Perry Christie acknowledged that poor results from government schools posed a threat to national development.

Former Education Minister Desmond Bannister said our schools suffered from an entrenched bureaucracy that protected “unqualified teachers in critical subjects”.

And current Education Minister Jerome Fitzgerald admitted that half of all students are flunking and called for “a frank and open discussion” on reforming the system – which has yet to take place.

For years, there has been a consensus that our young people lack the skills to benefit from economic growth. And experts say that our massive investment in education is producing nothing more than a growing underclass of functional illiterates who are virtually unemployable.

During the previous Christie administration, the private sector Coalition for Education Reform reported that “the overwhelming and critical national problem is functional illiteracy on a large scale (resulting in) a crippling shortage of qualified Bahamians to fill jobs. What we are looking at is a societal failure of immense consequences”.

But the political response (from both major parties and the union) has been nothing short of a cold shoulder to any serious efforts to bring about reform. Somehow the country must awaken to the need to make hard decisions. If we don’t, we can expect lower economic growth and increased social instability.

The failure of education leads inexorably to social inequality. And if the population feels that the economic benefits and burdens are not being fairly shared (as in Greece today) the result will be social instability and a fall in trust of the government. Inequality is not only unfair to those at the bottom of the economy, it is also unsustainable and risky for those at the top.

So let’s look at two examples of countries that have got it right.

Surveys show that the main Nordic societies (Sweden, Norway, Finland and Denmark) are very high on trust — both between individuals and between individuals and the state. That is certainly not the case in the Bahamas, where conspiracy theories abound concerning who actually runs the country and who benefits the most.

Nordic countries succeed better than others in combining economic efficiency and growth with a peaceful labour market, a fair distribution of income, and social cohesion. As one economist said, “these countries are doing rather well. If you had to be reborn anywhere in the world as a person with average talents and income, you would want to be a Viking”.

According to the Economist Magazine, in the 1970s and 80s the Nordics were tax-and-spend countries. Sweden’s public spending reached 67 per cent of GDP in 1993. Today, the government’s share of GDP in Sweden is 49 per cent. Its public debt fell from 70 per cent of GDP in 1993 to 37 per cent in 2010. And Sweden has replaced a defined-benefit pension system with a defined-contribution one, making automatic adjustments for longer life expectancy.

Denmark and Norway allow private firms to run public hospitals. Sweden has a universal system of school vouchers, with private for-profit schools competing with public schools. The performance of all schools and hospitals is measured. Governments are forced to operate in the harsh light of day: Sweden gives everyone access to official records. But the Nordics still employ 30 per cent of their workforce in the public sector.

The main lesson to learn from the Nordics is that the state is popular not because it is big but because it works. A Swede pays tax more willingly than citizens in many other countries because he gets decent schools and free healthcare, the Economist says.

According to venture capitalist Daniel Sachs, in Sweden “the employed pay enough taxes so that the unemployed can support themselves….Our ambition is not only to provide a safety net if a citizen stumbles because of a job loss, but also to invest in human capital so that the citizen is less likely to fall”.

And Economist editor Adrian Woodridge says “good government can square the circle and ensure that we have a competitive economy and a generous welfare state. Bad government can do the opposite and turn economic crises into calamities and political dysfunction into long-term economic decline”.

Singapore is another oft-cited example of good government. Around the time of independence in 1963, a quarter of that country’s workforce was unemployed or underemployed, and its per-capita income (adjusted for inflation) was less than a tenth of what it is today.

The government mandated that individuals save into a provident fund — 36 per cent of the wages of young workers — to be used to pay for adequate healthcare, housing and retirement benefits. It provided universal education, sent some of its best students abroad, and did what it could to make sure they returned. Singapore realised that the key to future success was heavy investment in education, and student scores on math, science and reading tests are now among the highest in the world.

Singapore has grown 5.5 times faster than the United States has since 1980. And one of the main reasons is that the government acknowledged that an economy could not succeed if most of its citizens were not participating in its growth or if large segments lacked adequate housing, access to healthcare and retirement security. Singapore today is routinely rated one of the world’s least corrupt and most transparent governments

In the Bahamas, reforming public education and raising public sector efficiency are critical goals. Achieving them would free up resources and yield better outcomes with the same inputs, helping to stimulate productivity and growth. This is the path we should be taking as we consider increasing taxes.

It’s no good making responsible statements about reform and good governance while acting out the same inanities that have created the problems in the first place.

• What do you think? Send comments to larry@tribunemedia.net or visit www.bahamapundit.com.