The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A key Ministry of Finance adviser yesterday said the Government’s improved fiscal performance may provide “more leeway” on the timing and extent of tax reform, with revenues running ahead of last year’s figures for the past three-four months.

James Smith, a former minister of state for finance and ex-Central Bank governor, told Tribune Business that the current economic and fiscal performance were both factors that had to be included in the overall reform assessment.

While the credit rating agencies, Moody’s and Standard & Poor’s (S&P), had both indicated they wanted to see a “definitive” fiscal reform timetable or implementation start by the time the 2014-2015 Budget cycle begins, Mr Smith said ‘organic’ improvements in revenue intake may have bought the Bahamas a little more breathing space.

“I think for us, in the Bahamas, it has more to with actual performance,” he explained to Tribune Business.

“In the last several months, I don’t know if it’s a bottoming out of tourism or some other feature, but for the last three-months revenue, cash flow has been exceeding that for the same months in the last fiscal year.

“It could be organic growth, other features. If you don’t do the major reforms, but have a narrowing of the deficit, you have to investigate whether this is a trend or a one-off.”

Mr Smith said that while he did not have the Government’s revenue figures in front of him when speaking to Tribune Business, he remembered “not seeing the red line when comparing the two.

“The question is whether this will continue going forward, or if it’s just an aberration,” he reiterated. “It’s the combination of policy direction and the improving direction of the economy, whether it’s a blip or just short-term.

“If the projections are going north, if we’re getting a better performance naturally, then we’ve got more leeway, more room for deferral, but if it’s going the opposite way there is more urgency to bring the date forward. It’s really the additional performance.”

Prime Minister Perry Christie recently confirmed that Value-Added Tax (VAT) would be introduced at a lower rate than 15 per cent, and that the implementation would likely be pushed back beyond the July 1 target date.

Most observers believe that the Government will probably implement a 10 per cent VAT by July 1 next year, the start of its 2015-2016 fiscal year. That date is likely to be an outside one, with most thinking the new tax will come in on or by January 1 next year, given the Government’s need to both urgently tackle its national debt/fiscal deficit and appease the credit rating agencies to avoid another sovereign downgrade.

Mr Smith said the improving economic and fiscal outlook, and existing reform efforts on spending, Customs, Road Traffic and the Central Revenue Agency (CRA), all had to be factored into the mix and were more important than a ‘new tax’ implementation date.

On Moody’s and S&P, he added: “They’d like to see it topped off at the start of the next Budget cycle, either a definitive plan or implementation of a plan that can start to be executed.”

Given the likelihood of both a change in the VAT rate and implementation timing, Mr Smith said it was currently “hard to say what the rating agencies’ thoughts are. It goes beyond the actual date”.

The former finance minister said Moody’s and S&P’s assessments would be governed by the “actual policy and reasons for the delay”, and whether these were credible.

“It really depends on what’s the explanation for any deferral, and how credible the explanation is for the people doing the evaluation,” Mr Smith told Tribune Business.

He added, though, that the Bahamas simply could not afford to delay fiscal and tax reform indefinitely, as ‘red ink’ as extensive as the $443 million projected for the 2013-2014 fiscal year was creating “a deficit on a deficit” due to debt servicing/interest costs.