The Tribune

Faced with a rising Budget deficit, an increasing debt-to-GDP ratio, high levels of unemployment, a stagnant economy and the threat of further credit rating downgrades, the Ministry of Finance is under intense pressure and scrutiny to formulate a comprehensive plan to combat the Bahamas’ fiscal woes.

Last week, Michael Halkitis, minister of state for finance, announced the Government’s plan to introduce austerity measures ( increased taxes and decreased government spending) as part of its fiscal recovery plan.

The increase in taxes will be introduced in 2014 in the form of a Value Added Tax (VAT), and the decrease in spending will be implemented by a 10 per cent cut in the budget of each ministry.

I am happy to see that the Government is trying to formulate a plan of action. However, austerity measures are only part of the overall solution, and will only be successful if ‘smart austerity’ measures are utilised.

Studies have shown that “traditional austerity” measures have not resulted in an increase in government revenue.

In fact, just the opposite has happened. For every $1 increase in taxes or decrease in government spending, there is a $1-2 decrease in consumption and GDP.

Thus by extrapolation, the debt-to-GDP ratio also worsens.

The prolonged recession in Greece and the ‘double dip’ recession in the UK are glaring examples of the impact of traditional austerity measures.

The question is: How should the Bahamian government go about implementing ‘smart austerity’ measures in the context of the proposed VAT and the 10 per cent ministry budget cuts?

First, government should introduce a sales and services tax, but not a tax on production.

Production

The reason for this is that the Bahamas runs a trade deficit, and therefore you want to encourage production for export purposes so that some of the trade deficit can be offset.

This is important, because a trade deficit means that as a country you are consuming more than you are producing each year.

The difference results in more debt in the private and public sector.

So, yes, we need to encourage the export of Bahamian beers such as Kalik and Sands.

Second, as the sales and services tax is introduced, import duties need to be reduced in a graduated fashion over a five-year period.

The reduction in import duties is necessary, otherwise the cost of living in those sectors associated with the introduction of VAT will increase by 15 per cent, which will have a negative impact on consumption, GDP and, by extension, produce a corresponding increase in the debt-to-GDP ratio.

If import duties are reduced over the five-year period, the Government would be better able to further titrate decreases in import duties for the following year, based on the income from the new tax.

Also, reducing import duties would result in a reduction of the cost of goods and services, which would result in more economic activity (domestic consumption and investments) and an increase in GDP.

Third, all the sales and services aboard the cruise ships while in dock in the Bahamas, and at their six privately-owned cays, would be subject to the new sales and service taxes.

This is the case in Alaska, and is a large source of revenue for local government. One must remember that the cruise ships that come to the Bahamas have more sales and services than 10 Bay Streets.

Because of the logistical difficulties of accessing accurate sales and services information from the cruise lines, the easiest way to implement this would be to make the cruise ships pay an additional flat rate of $15 per passenger.

Fourth, it appears that businesses with a turnover of less than $50,000 will not be subject to VAT because of the presumed difficulty in the collections process, the added financial burden of accounting fees and, indeed, the lack of accurate accounting records.

One of the many reasons why small businesses fail is because of the lack of ‘accurate bookkeeping’.

The cost of forcing these businesses to keep accurate records would be more than offset by the important financial information that business owners would be able to obtain.

To keep things simple, businesses in this category would pay a yearly flat rate.

Fifth, I would suggest that the collection of these taxes be done electronically and not on a manual basis, as is the case with NIB payments.

The appropriate software would be downloaded to the hardware of merchants, and the government would be able to collect its taxes on a daily basis.

Framework

This system would provide transparency, accuracy, better cash flow and the infrastructural framework for any future tax collections.

Also, it would encourage electronic payments (credit and debit cards), which would take cash out of the system and reduce the chances of crime.

With the increased usage of cards, the Government could negotiate with the banks to reduce the merchant fees to more internationally competitive rates, and thus increase the bottom line of all merchants. For example, merchant rates are currently 3.5-4 per cent.

This is equivalent to a bank tax of 3.5-5 per cent on all merchants, which for low profit margin companies such as food stores and gas stations is akin to a death toll.

In my opinion, the proposed 10 per cent budget cut for governmentministries, corporations and other sponsored agencies would be very difficult to implement, due to moral hazard, nepotism, cronyism, corruption and a culture of financial mismanagement inherent in these entities.

Budget

Additionally, the $3 million cut in the College of the Bahamas’ budget would place COB in a financially unsustainable position, and further impede any chance of the development of a Bahamian knowledge-based economy.

A much better alternative would be the formation of a National Procurement Bureau, which would be mandated by government but managed by the private sector.

Such an organsation would be mandated to adhere to internationally-accepted and transparent tendering policies and procedures, and would be responsible for all of the Government’s purchases - from pencils to BEC generators.

An IDB study done a few years ago showed that this could save government up to $200 million per year. Over a five-year period this could reduce the national debt by $1 billion.

There are other smart austerity measures that could, and should, be implemented.

Anyone interested in finding out additional information about how government can reduce the national debt can so by reading my new book (due out next month), entitled ‘The Bahamian Dream’.