The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas should wait until after its upcoming reforms to impose a ‘fiscal rule’, a former finance minister agreeing that it could impose “discipline” on the Government’s Budget.

James Smith, now a key Ministry of Finance adviser, told Tribune Business that “the timing has to be right” for the Bahamas to impose such a mechanism, which would set limits on government spending, deficits and debt.

He argued that the country needed to go through the planned fiscal adjustment before it implemented a ‘fiscal rule’, as it was impossible to determine the correct target figures and ratios until the deficit and national debt were set on a more sustainable path.

“As a general rule, it imposes a kind of discipline and gives you a kind of road map going forward,” Mr Smith said of a ‘fiscal rule’, which the International Monetary Fund (IMF) last week recommended that the Bahamas introduce.

“But in the case of the Bahamas, the timing must be right,” the now-CFAL chairman added. “The fiscal adjustment that is taking place should be complete, and we need the macroeconomic stabilisation.

“Done the other way around, it wouldn’t be wise. The policy prescriptions be in the wrong sequence and wrong time,” he added.

“We won’t be able to establish the appropriate mechanisms until we’re on the path we need to be on. The deficit and the debt have been growing much too rapidly in the last several years, and that has to be brought back to a manageable trajectory.”

The IMF made the fiscal rule call in a release on the Article IV consultations with the Bahamas, in which it said bluntly: “The introduction of a fiscal rule would enhance the predictability and credibility of Budget policies.

“This would notably help ensure that the authorities’ public finance reforms are implemented within a well articulated and durable medium-term fiscal framework. The reform’s details and implementation timeframe authorities should be fleshed out.”

Fiscal rules are numerical targets and limits, often placed into legislation, which control the level of debts, deficits and spending a government can incur within a particular timeframe.

They are commitments designed to create ‘anchors’ for fiscal policy, giving the public, investors and the private sector an idea of what to expect, and are often linked to the maintenance of specific debt and spending ratios.

While ‘fiscal rules’ have been used in other countries, such as the UK, they have never been utilised in the Bahamas. While some observers have argued this creates fiscal policy uncertainty, others have suggested it would bind the Government’s hands too tightly, given how often the Bahamas is impacted by hurricanes.

Mr Smith, though, indicated he was not opposed to the implementation of a Bahamian ‘fiscal rule’, provided it came after the necessary fiscal consolidation.

“We’ll work towards this once some very broad objectives are met,” he suggested, “reducing the GFS deficit to, say 3 per cent, push the debt-to-GDP ratio below 60 per cent, and keep the inflation rate below 3 per cent. Then go into the fiscal projections.”

Mr Smith added that ‘fiscal rules’ needed to be created via cross-party consensus in the political world, adding: “It should be a joint piece of legislation for broad agreement on targets, so it doesn’t change every time you change the Government.”

Robert Myers, co-chair of the private sector’s Coalition for Responsible Taxation, last week backed the IMF’s recommendation as “fully in line” with its own demand for budget caps to be imposed at all levels of government within three-five years.

He said: “I like that. That’s good advice and spot on. That’s one of the things among our objectives. That’s absolutely fully in line with what we’ve been talking about - a top down Budget, budget caps, accountability etc...”

The Coalition for Responsible Taxation, in a draft letter setting out its strategy for dealing with the non-revenue side of the Bahamas’ fiscal imbalances, had called for Budget caps “to be imposed at all levels of government” within the next three-five years.

This was part of a 13-pronged strategy to rein in public spending, which also included a long-term capital expenditure plan and an assessment of all social security programme costs.

The letter, entitled ‘Paramount Factors required to effect fiscal reform in the Bahamas’, also called for improvements in government productivity. And it suggested outsourcing some responsibilities to the private sector, urging that the Bahamas Chamber of Commerce and Employers Confederation (BCCEC) becomes the Business Licensing authority.