The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government is “right at the precipice” where ever-increasing debt servicing costs mean it fails to get a full 100 per cent return for every dollar borrowed.

Dionisio D’Aguilar, presenting the Coalition for Responsible Taxation’s case for comprehensive fiscal reform, said the Bahamas’ debt-to-GDP ratio was at the point where countries started to experience diminishing returns from government borrowing.

Addressing the Rotary Club of east Nassau, Mr D’Aguilar warned that the Bahamas’ impending fiscal crisis would “only get worse” if corrective action was delayed or not taken.

The Superwash president said that with the debt-to-gross domestic product (GDP) ratio now standing at around 66-67 per cent, the Bahamas had reached a ‘tipping point’ on current and future government borrowing.

“For every dollar of debt that we incur, the returns start to diminish as so much goes to debt servicing. For every dollar borrowed, we don’t get full use of that dollar,” Mr D’Aguilar said, as an increasing percentage went to service existing debts.

“We’re right on that precipice. We’re right there.”

Debt servicing costs are now the largest line item in the Government’s Budget, with almost $260 million earmarked for interest payments in the 2014-2015 fiscal year.

With the Government spending a further $98.355 million on redeeming debt principal, it is spending almost $358 million in the year to end-June 2015 dealing with its existing debt burden.

And the Government’s own figures show the problem is only getting worse. For the 2015-2016 fiscal year, it will spend a total $384 million in dealing with its debt - $255 million on interest payments and $128 million on principal redemption.

This is projected to rise again in the 2016-2017 fiscal year to $389 million, with $248 million in debt servicing interest payments and $141 million in principal redemption. Thus an increasingly heavy burden is being placed on Bahamian taxpayers, with rising amounts of money sucked away from essential services such as health, education and the police.

Mr D’Aguilar said such a scenario was why the cries of those calling for no new or increased taxes had to be rejected. He noted that the Government’s debt servicing costs in 2006, just eight years ago, were $116 million - a sum equivalent to just 44.8 per cent of the current total.

Calling for a comprehensive solution that mixed increased government revenues with spending constraints, economic growth and fiscal responsibility reforms, he said: “The fiscal status quo is unacceptable.

“If we can’t bring this deficit, this debt, under control, we are headed for calamity...... We act up and scream right now, but it’s only going to get worse.”

Bahamians, Mr D’Aguilar said, were “kidding ourselves” if they felt taxes did not have to rise to pay for recent massive infrastructure investments such as the New Providence Road Improvement Project.

While the ‘general rule’ was that a government’s capital spending should be no more than 2 per cent of GDP, the Bahamas’ ratio had consistently been between 3-5 per cent in recent years.

Mr D’Aguilar, the Superwash laundromat chain’s president, said the Coalition was born out of a perception that successive governments had failed to prudently safeguard the people’s money.

“We felt that our government was raising money, not spending it judiciously and coming back to us to ask for more money, and will not spend that judiciously,” he added.

The initial debate, Mr D’Aguilar said, had focused on what tax the Bahamas should employ as its fiscal reform centrepiece. “And, when they [the Government] got the money, they would not blow it like they have done,” he added.

With recent fiscal deficits running from $440 million to $500 million-plus, Mr D’Aguilar said the Government was incurring between $30-$40 million per month in red ink - equivalent to a daily $1-$13 million deficit.

With a simplified, lower rate 7.5 per cent Value-Added Tax (VAT) now selected, he explained that the Coalition was switching its focus to more comprehensive fiscal reform and seeking to engage the Government on this issue.

His presentation to Rotarians indicated that the Bahamian economy’s “flat growth” over the past several years, with just a 1.2 per cent GDP expansion now projected for 2014, had contributed to the “poor fiscal health”.

The Bahamas’ share of Caribbean stopover visitors had fallen from 9 per cent to 7 per cent over the past several years, with visitor spending suffering a similar declining trend.

Mr D’Aguilar gave further indications of economic stagnation, noting that the Bahamas’ unemployment rate remained higher than that for the likes of the Dominican Republic and Turks & Caicos Islands.

Bahamian electricity costs were “twice what they should be”, with the Government collecting “just below” 50 per cent of the taxes due to it under the current system.

“People in government are being absolutely badgered by these credit rating agencies. They are being beaten up like you wouldn’t believe, and being forced to raise taxes,” Mr D’Aguilar said.