The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A former finance minister says it is “doubtful” that the Government will hit the target timelines for its two key fiscal objectives - the introduction of Value-Added Tax (VAT) and eliminating the fiscal deficit.

Sir William Allen, who headed the Ministry of Finance under the first Ingraham administration, warned that implementing VAT - the centrepiece of the Christie administration’s tax reforms - by July 1 next year will be “a huge accomplishment if it could be achieved”.

But, writing in Fidelity Bank (Bahamas) 2012 annual report in his capacity as its chairman, Sir William warned it was “equally as doubtful” that the Government would achieve its goal of eliminating the fiscal deficit by the 2015-2016 Budget year.

And Sir William, who is also an ex-Central Bank governor, warned that the “herculean feats” being contemplated by the Christie administration could have “unintended consequences” - a likely reference to economic dislocation and reduced growth, if adjustment occurs too quickly.

Sir William pointed out that in the two-year span between VAT’s planned introduction and the fiscal deficit elimination target, the projected $372 million growth in government revenues will be equivalent to almost 50 per cent of forecast Bahamian gross domestic product (GDP) growth.

Warning that the Government would be sucking up a “higher proportion” of the economy’s growth to fill its fiscal holes, thereby leaving less for the private sector, Sir William added that VAT’s introduction would not necessarily be offset by reductions in other taxes.

“The proposed date of 1 July, 2014, for implementation of VAT will itself be a huge accomplishment if it could be achieved,” Sir William told Fidelity Bank (Bahamas) shareholders.

“A realistic assessment of this target date suggests it has to be viewed as doubtful. Perhaps equally as doubtful is the projection of fiscal year 2015-2016 as the date for the elimination of the fiscal deficit.”

And he added: “Such a herculean feat is not necessarily desirable because of the unintended consequences that will likely accompany its achievement.

“It could only happen when expenses equal to 3 per cent of GDP are eliminated, or additional revenue of the same amount is collected or some equivalent combination of both is realised.”

A common thread running through Sir William’s commentary is a concern that the Government is attempting too massive a fiscal adjustment too quickly. The result, he implies, could be slower than-projected economic growth and prolonged high unemployment.

Putting the scale of the Government’s fiscal adjustment plans into context, Sir William said: “Between 1 July, 2014, when the new tax system is scheduled to be implemented and 30 June, 2016, when a balanced Budget is projected to be achieved, the economy is projected to show cumulative growth in nominal terms of $795 million.

“During the same period, 1 July, 2014, to 30 June, 2016, government revenue is projected to grow by $372 million or nearly 50 per cent of the total economy’s growth.

“And so Government, which aims to peg its revenue at about 20 per cent of the economy, will be taking a substantially higher proportion of the economy’s growth in order to eliminate the fiscal imbalance in that short period of time.”

While backing the Government’s goal to eliminate the recurrent fiscal deficit, and reduce the debt-to-GDP ratio to more sustainable levels, Sir William said: “How quickly that can be done, or indeed how quickly it should be done, is a matter which still lacks some clarity.

“Too rapid an elimination of the imbalance could put a drag on growth in an economy which already suffers from unemployment estimated at over 14 per cent.”

Drawing a distinction between eliminating fiscal imbalances and halting the growth in debt-to-GDP ratios, the former FNM finance minister said the Bahamas’ debt-to-GDP ratio was “still below the danger level that is creating such havoc for some countries in our region, and many around the world today.

“The bad news is that, given the seemingly intractable nature of the imbalance between recurrent revenue and expenditure, it is only a matter of a little time before the level of debt could be well beyond the danger zone. It would be both courageous and wise if the level of Government debt could be restricted, at least in practice, to a maximum 60 per cent of GDP.”

Expressing hope that VAT’s introduction, and enhanced tax administration, would help, Sir William also dashed the hopes of many consumers - and those in the private sector - that it would lead to simultaneous reductions in other taxes.

“The transition period to a new tax system will be enormously challenging. Getting it right will take some time as Government seeks to achieve an appropriate balance in resources allocation between the public and private sectors, while working toward the laudable objective of ultimately eliminating its recurrent deficit,” he said.

“The essential objective of our tax reform is to increase government revenue by about 3 percent of GDP. Tax reform is, therefore, not intended to be a neutral exercise and so looking for a reduction in other taxes and charges sufficient to offset the VAT, as some appear to be assuming, is not realistic.”

Sir William, meanwhile, identified the “ruinously high cost of energy” as the other so-called downside risk for the Bahamian economy.

Noting that the Bahamas could do little about this in the short-term, the former finance minister noted that oil’s share of the Bahamas’ total merchandise import bill had more than doubled over the last 40 years.

“The problem represented by the high cost of energy is perhaps less daunting, but it is also less capable of a local solution, although it is a huge burden across the entire economy,” Sir William wrote, making the comparison with the Government’s fiscal challenges.

“Forty years ago, oil consumption accounted for about 13 per cent of our total merchandise import bill. Now, after several oil shocks and decades of oil crises, it appears that oil has achieved some kind of permanently very high relative price level, and now represents on average more than 27 per cent of our merchandise imports.

“In the Bahamas, the price of oil seems downward inflexible. The cost of energy has substantially reordered our individual and corporate budgetary allocations, and placed a huge burden on our balance of payments. A long-term strategy to lower the cost of energy could yield significant benefits to the economy in the future.”