The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Around “two-thirds” of the Government’s monthly payroll is eaten up by salary deductions, it has been revealed, in a move to seemingly illustrate why it is so hard to cut public spending.

Figures obtained by Tribune Business show that $20 million is deducted from public sector salaries every month, on average, to ensure civil servants and other officials can meet their debt servicing obligations to the likes of banks and credit unions.

The striking figures were revealed in recent presentations given by John Rolle, the Ministry of Finance’s financial secretary, to a variety of private sector groups on Value-Added Tax (VAT).

While the estimated $240 million in annual civil service salary deductions might be taken to imply that many officials are massively over-leveraged, the Government appears to be using this data to justify its approach to fiscal reform.

Many observers, particularly the Nassau Institute economic think-tank, have called for the Christie administration to focus on spending cuts/restraint to get the public finances back on track.

However, while seeking to contain expenditure growth in line with that of the overall Bahamian economy, the Government’s approach focuses almost exclusively on the revenue side (new or increased taxes, plus other enhancements) with the proposed VAT as its centerpiece.

Mr Rolle’s presentation, which has been obtained by Tribune Business, noted that around one-third of the Government’s annual recurrent (fixed cost) spending goes on civil service salaries.

With recurrent spending in the 2013-2014 Budget projected at $1.737 billion, this implies an annual civil service salary, and emolument bill of around $580 million.

“More than 70 percent of salaries go to deductions for obligations to banks, credit unions and insurance companies,” Mr Rolle’s presentation said, adding that cuts to the civil service and/or its payroll would have a major negative impact for the Bahamian financial services industry.

“The numbers show that approximately 70 per cent of the deductions taken from salaries go to banks, and about 17 per cent go to credit unions,” Mr Rolle confirmed to Tribune Business via e-mail, when asked for clarification. “Collectively, these add up to two-thirds of monthly salaries.”

His presentation said a total $20 million from the Government’s monthly payroll went on servicing public officials’ debt obligations to a variety of institutions. Some 69 per cent of this figure (almost $12 million) went to Bahamian banks, while another 17 per cent was sent to credit union.

Of the remainder, some 10 per cent ($2 million) goes on insurance, with the 4 per cent ‘balance’ headed elsewhere.

The data suggests that many Bahamian public officials are massively over-leveraged, given that institutions such as the Central Bank of the Bahamas recommend that individual borrowers and household debt servicing obligations go no higher than a collective 40 per cent of monthly income.

At “two-thirds of monthly salaries”, the average civil service debt burden appears to be more than 50 per cent higher, in percentage terms, than those admittedly non-binding benchmarks.

Elsewhere, Mr Rolle’s presentation revealed that the Government is seeking to generate an extra $500 million in annual revenues by 2017 to close a fiscal deficit ‘gap’ that is equivalent to almost 4 percentage points of GDP.

Some 40 per cent, or $200 million, of that amount is projected to come from VAT. The same gross figure, and percentage, are projected to come from enhanced administration/enforcement measures with respect to existing taxes, especially real property tax.

And the final $100 million, or 20 per cent of the projected revenue growth between now and 2017, is forecast to come from the Bahamian economy’s overall growth.

Given the recent International Monetary Fund (IMF) cuts to the Bahamas’ short-term growth outlook, achieving that latter target may now be in question. Much depends on the impact from Baha Mar’s $2.6 billion Cable Beach redevelopment when it opens in late 2014.

Seeking to further bolster the Government’s case on why spending cuts would be so hard to make, Mr Rolle’s presentation noted that it granted total private sector investment incentives and subsidies worth some $200 million per year.

The IMF pegged this figure at $285 million in its 2012 Article IV report on the Bahamas, and Mr Rolle said to cut/end such incentives now would “imply greater private sector retrenchment, and less ability in the current environment to attract foreign investments”.

The Financial Secretary’s presentation showed that while the tourism industry attracted 25 per cent (one-quarter) of the Government’s annual subsidies and incentives, the lion’s share went to the industrial sector at 33 per cent.

Another 12 per cent went to manufacturing, with utilities and the public corporations gaining 12 per cent and 8 per cent, respectively, of government subsidies and incentives. Agriculture, too, gained its fair share with 4 per cent.

Mr Rolle’s presentation warned that cuts in government spending would also result in fewer purchases of goods and services from Bahamian businesses, many of whom relied heavily on public sector contracts.

Emphasising the Government’s focus on the revenue side of the equation, the document added: “A VAT would help to spread the fiscal adjustment burden more equitably than an exclusive focus on spending cuts.

“The Government must continue to address cost efficiency issues, but the pace of expenditure adjustments must also be managed, given likely impacts on private businesses and private sector employment.”

Data contained in Mr Rolle’s presentation showed that the Government’s interest bill (debt servicing costs) had increased by more than one percentage point of GDP over the past five years. It had risen from just under 1.6 per cent in 2007 to around 2.7 per cent in 2012, implying that more than $80 million extra has had to be allocated to servicing this nation’s bills in just five years.

The Financial Secretary’s offering said that while the Bahamas’ debt-to-GDP ratio and debt servicing costs were lower than many other countries, this nation’s worsening fiscal woes needed to be tackled now.

Delaying, it hinted, would only make the eventual correction even more severe. And, in the meantime, the Bahamas would likely suffer a further downgrade to its sovereign credit, coupled with increased financing costs and potential loss of access to credit markets.

The Bahamas would also have less capacity to borrow in emergencies, such as a hurricane or global downturn affecting its major source tourism countries.

Among the organizations to witness Mr Rolle’s presentation has been the Bahamas Hotel & Tourist Association (BHTA), which has again reiterated its concerns about the aggressive July 1, 2014, deadline the Government has set for implementing VAT.

A report on Mr Rolle’s address revealed that the Financial Secretary said the Government was allowing a two-month consultation period on the VAT legislation and draft regulations. These, along with the revised Tariff Schedule, were likely to be released soon, with their enactment set for “the turn of the year”.

BHTA members, though, “raised questions and concerns” about whether VAT would apply to gratuities and fees tied to room charges, plus other services within a hotel’s property.

BHTA president Stuart Bowe said: “We remain concerned about the readiness capacity of both the public

and private sectors for a July 1, 2014, implementation date. Should this date be hard and fast, it underscores the critical importance of working closely together on a range of readiness activities.”

Tribune Business can also reveal that senior Bahamian hotel industry officials have expressed similar concerns to the International Monetary Fund (IMF).

A report to the BHTA’s August Board meeting, on a discussions that Mr Bowe and Frank Comito, its executive vice-president, had with Fund officials, stated: “IMF representatives were also advised of our concerns about fast-tracking implementation of the Value Added Tax, citing the lack of sufficient time to review draft legislation and supporting information, and ensure the readiness of the public and private sectors to support implementation.”

In a report to BHTA members on Mr Rolle’s recent presentation, Mr Bowe added:”We’ve welcomed the opportunity for constructive dialogue with the Financial Secretary and the Ministry around a range of issues associated with VAT. While VAT will affect every business and individual in the Bahamas, it is especially important that we pay close attention to the impact on the tourism industry.

“Because tourism is essentially an export business, many nations with VAT have treated it differently, recognising the importance of being competitive in order to attract foreign revenue, and create a multiplier

effect to benefit the broader economy. Thus far the Government has recognized this and we will need to continue to work towards minimising the impact of VAT on the cost of doing business and our global competitiveness.”

The BHTA has secured representation on the Government’s VAT Implementation Advisory Committee in the shape of Gene Albury, senior vice-president at Atlantis for supply chain management. The Association said it was also working through the Downtown Nassau Partnership (DNP) to ensure that duty-free retailing was “protected as well” under VAT.