The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Wall Street yesterday described the Government’s plan to introduce Value-Added Tax (VAT) by 2014 as “a good first step” to tackling the Bahamas’ fiscal woes, given that it could have “dragged out” much-needed reforms.

Praising the Christie administration for “moving in the right direction”, Edward Al-Hussainy, the Moody’s analyst who covers the Bahamas and its sovereign rating, said the solution to the Government’s fiscal dilemmas lay on the revenue - not the spending - side.

Describing it as a “revenue side game” for the Bahamas, Mr Al-Hussainy also added his voice to those warning that VAT was not a panacea, or total cure, for this nation’s public finances.

Emphasising that he was watching “the longer term picture”, the Moody’s analyst said next week’s Mid-Year Budget statement, plus the 2013-2014 and 2014-2015 Budgets, would be critical “signals” in terms of how the Christie administration planned to tackle its major policy issue.

Reiterating that concrete Budget actions were more important than mere proposals to cut spending by 10 per cent or 25 per cent, Mr Al-Hussainy told Tribune Business that “a lot of things have to gel” to turn the Bahamas’ fiscal position around.

Key to this would be combining economic growth with fiscal consolidation, and he warned that the Bahamas needed to embark upon a “multi-year effort” to accomplish something that any country would find difficult.

“It’s a good first step, although nothing is concrete yet,” Mr Al-Hussainy said of the Government’s VAT plans and ‘White Paper on Tax Reform’.

“It’s a good proposal. We’ll have to see it in terms of nuts and bolts, and it’s going to take another year at least for us to see it in action.”

And, praising the Christie administration for pushing forward on VAT implementation and public consultation, the Moody’s analyst told Tribune Business: “This is definitely the way to go, and we’ve been saying all along the solution will be on the revenue side for the Government, as a lot of the expenditure is set in stone.”

Around 55-60 per cent of each Budget is now taken up by the civil service wage bill, with a further 15-25 per cent comprising other fixed costs, such as rents and interest/principal payments to service the national debt.

With the Government having discretion over how to spend just 10-15 per cent of its Budget, at most, Mr Al-Hussainy said it was “going to be a revenue side game” for the Bahamas in tackling its expanding national debt/fiscal deficit.

“If you look across the Caribbean, they [the Bahamas] really stand out as one of the few jurisdictions that doesn’t have a VAT,” he added.

“This [the VAT reform proposal] is a useful lever to pull when you’re trying to raise revenues.”

However, as far as Moody’s and both its rating on the Bahamas’ sovereign debt and economic outlook are concerned, Mr Al-Hussainy said he was less focused on VAT and more on the upcoming mid-year Budget and 2013-2014 Budget.

How the Government was planning its finances for the remainder of this fiscal year and next would be “the best signal” on how the Christie administration aimed to right the country’s fiscal ship.

“The Government is still relatively new. It’s an opportunity for them to demonstrate a commitment to [fiscal] consolidation,” Mr Al-Hussainy said of the impending Budgets.

“A Budget is more concrete than a fiscal proposal. The overall theme in my mind is VAT is a good response to the Government’s challenges. They had an opportunity to drag this out longer if they wanted, and are moving in the right direction.”

The Mid-Year Budget, he added, would show “how bad the hole is in terms of the deficit, and what they are projecting through to the end of the fiscal year, then what they are going to do about it.

“There’s a lot of noise around VAT, but from where I sit it’s a multi-year process to see if they turn this thing around,” Mr Al-Hussainy told Tribune Business.

“It’s a tough thing to do. It takes years. A lot of things have to come together, including economic growth. We have to see what kind of growth numbers they have, if the Bahamas continues to get investment. All these things, combined with fiscal policy, have to gel.

“From where I sit, these are more the things to look for, but the indications, at least on paper, are good.”

The Central Bank of the Bahamas’ recently put the Bahamas’ total national debt at more than $4.8 billion at end-November 2012, consisting of a $4.2 billion-plus direct charge on government and around $600 million in contingent liabilities.

The 2012-2013 Budget projected a $550 million fiscal deficit for the year to end-June 2013, but there are fears that the final outturn could easily breach this target and force the Government into further borrowing.

Many observers believe the Government’s decision to set July 1, 2014, as the target date for VAT implementation, combined with its search for major spending cuts, truly reflect how dire the fiscal position really is.