The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Prime Minister Perry Christie yesterday said he rejected advice from the Government’s consultants to introduce “a permanent fiscal rule” requiring an increase in the Value-Added Tax (VAT) rate if debt targets were missed.

Unveiling the 2014-2015 Budget, Mr Christie said the study by US consultants, Compass Lexecon, had called for the Government to set twin targets - a “maximum” debt-to-GDP ratio and a “minimum” annual reduction for that ratio.

The twist, as outlined by Mr Christie, was that should the Government fail to meet those targets, it would trigger an automatic VAT rate increase that would be set in law.

“The Compass Lexecon study also suggested the introduction of a new, permanent so-called fiscal rule to enhance the sustainability of our fiscal plan and to strengthen the Government’s credibility,” the Prime Minister said yesterday.

“Under such a fiscal rule, we would set two targets: One, a maximum target for the debt-to-GDP ratio, and two, a target for the minimum annual reduction in that ratio, which would be waivable under emergency circumstances such as economic downturns and natural disasters.

“The key point in this recommendation is that, should we fail to meet our fiscal debt target, the VAT rate would automatically be increased by law.”

Explaining why he rejected the US consultants’ recommendation, Mr Christie said he felt it was not suitable for an “archipelagic nation” featuring 700 islands and spread over hundreds of miles.

He added: “While such a legislated approach to fiscal consolidation does have some measure of theoretical appeal, my view is that it is lacking from a practical policymaking point of view.

“I firmly believe that both success on the fiscal front and solid credibility rest on the transparency of our plans and the concrete results of our actions. Over the last two years, we have committed ourselves to a detailed medium-term fiscal plan and we have stayed the course on this plan..”

The Prime Minister further said: “The virtue that we see in this plan is that it is balanced and adaptable to circumstances, allowing for adjustments not only on the revenue side of the ledger, but also in respect of Government spending, whether recurrent or capital.

“As such, legislating automatic increases in the VAT rate as the sole avenue for staying on track would not be appropriate nor desirable.”

Several observers have previously suggested that ‘set in stone’ fiscal rules, of the type suggested by Compass Lexecon, would make it impossible for the Government to respond rapidly to emergencies, such as natural disasters.

But many in the Bahamian private sector are likely to be disappointed that the Prime Minister moved so quickly to reject any notion of a ‘fiscal rule’ that could cap, or put the brakes on, government spending.

Numerous business executives have suggested that in return for the private sector agreeing to VAT or some other tax reform, the Government should fulfill ‘its side of the bargain’ by cutting or restraining spending - the other side of the debt/deficit equation.

However, Gowon Bowe, the Coalition for Responsible Taxation’s co-chair, told Tribune Business that persons ought not to “read too deeply” into the Prime Minister’s rejection of an automatic VAT rate increase if fiscal targets were not met.

Mr Bowe suggested there were many other ways to react to the missing of such goals, and called for private sector patience when it came to tackling government spending.

Noting that the Government’s VAT announcement had moved the tax reform position much closer to the private sector’s demands, Mr Bowe told Tribune Business: “One hurdle at a time.

“We have gotten the discussion to be on fiscal reform, so it must include expenditure controls..... We have gotten to the point where absolutely nothing happens but expenditure controls.”

Mr Bowe referred to the Coalition’s Oxford Economics study, which showed that for a 7.5 per cent VAT (the chosen option) to have the desired deficit/debt reduction effect, the Government had no choice but to implement spending cuts and controls.

With the Government having acceded to calls for a lower VAT rate and delayed implementation until January 1, 2015, Mr Bowe added: “The final point is to press as best we can for wider reform and fiscal rules to affect expenditure controls.

“That’s going to have to come from programme cuts. It can’t be holistic; it’s going to require targeted, specific cuts. There is some immediate, low-hanging fruit and hopefully we can identify them and put them in place.”

When it came to dealing with Budget expenditure, Mr Bowe urged the private sector to avoid confrontation and adopt the same approach that appeared to have worked on the VAT/revenue front.

Noting that spending cut proposals needed to be “practical and feasible”, the Coalition co-chair added: “We must take a mature stance and the best approach is to give them [the Government] solutions as opposed to highlighting the problems.”