The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Grand Bahama Chamber of Commerce’s president has backed calls for this nation to urgently impose a ‘fiscal rule’, arguing that it would hold the Government accountable and prevent unchecked “spending sprees”.

Kevin Seymour told Tribune Business in a recent interview that measures must be implemented to ensure the Government uses its Value-Added Tax (VAT) revenue ‘windfall’ for the promised objective of paying down the $6 billion national debt.

While agreeing that any ‘fiscal rule’ should not hinder the Government’s ability to respond to emergencies such as hurricanes, Mr Seymour warned that “the horse will have already bolted from the stable” if one is not implemented quickly.

“We need a fiscal rule to ensure that the Government, essentially, is not allowed to go on a spending spree,” he told Tribune Business.

“We need to have that happen as soon as possible - something that is not really onerous for the Government, but something that ensures the Government uses the new tax for earmarks previously stated - paying down the debt and deficit.”

The Grand Bahama Chamber chief acknowledged that there were opposing views on this issue, with some suggesting ‘fiscal rule’ implementation should be delayed, and others believing it could “be damaging to the economy” if introduced too quickly.

Disagreeing, Mr Seymour told Tribune Business: “If it’s not done in a timely manner, it will be too late.

“The revenues collected will be used, and once the horse has bolted from the barn, it’s hard to reel it back.”

So-called ‘fiscal rules’ are designed to set targets or limits that a government must either achieve, or not breach, with the public finances on an annual basis.

They are designed to rein in excessive government spending and deficits, and introduce greater accountability and transparency into annual Budgets - qualities many observers believe are desperately needed in the Bahamas.

Mr Seymour also called on the Government to abandon “traditional funding sources” when it came to capital works and infrastructure projects.

Rather than rely on 100 per cent public funding, he urged it to embrace private-public partnerships (PPPs) where the private sector provided the necessary capital and expertise.

“The Government doesn’t have the resources, and if they continue with their spending, these new [VAT] revenues are not going to make it anywhere near to paying down the debt,” Mr Seymour told Tribune Business.

Yet, while he and other private sector leaders have called for the Bahamas to embrace a ‘fiscal rule’, its implementation was rejected by Prime Minister Perry Christie in his 2014-2015 Budget presentation last May.

Mr Christie also went against the advice of the Government’s own fiscal advisers, US consultants Compass Lexecon, which had called for it to set twin annual targets - a “maximum” 65 per cent 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.

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.”

Compass Lexecon had argued that a ‘fiscal rule’ would “maintain credibility” with bondholders and the international capital markets, given the switch to a lower revenue-yielding Value-Added Tax (VAT) - 7.5 per cent as opposed to the initially proposed 15 per cent.

“To maintain credibility with bondholders even as the Government enacts a VAT at a different rate than it initially proposed, it would be advisable to establish a ‘trigger’ that raises rates on the VAT if specified fiscal goals are not met,” the US consultants suggested.

Expanding on this theme, Compass Lexecon added: “We recommend that the Government also establish a new, permanent fiscal rule. Fiscal rules have been found to help governments shift to sustainable fiscal policies, while enhancing the Government’s credibility with credit markets.

“The issue of credibility is especially important for the current government, since our recommendation would represent a change from the Government’s announced VAT policy.

“Changing the VAT policy at this point may be seen by some market actors as an indication of a lack of commitment to fiscal sustainability, and enactment of a fiscal rule like that suggested here could help offset this effect.”