The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

SUCCESSIVE governments will continue adding $1 billion-plus to the national debt every five years without structural reforms and greater GDP growth, an ex-finance minister saying: “I saw this coming 13 years ago.”

James Smith, also a former Central Bank governor, told Tribune Business he was struck by the similarities in “tone” between the 2017-2018 Budget presentation and the first one produced by the former Christie administration in 2012-2013.

Both blamed the former government for leaving the Bahamas in a ‘fiscal crisis’, and with unpaid bills totalling nine-figure sums, which Mr Smith argued was evidence of structural deficiencies and the absence of economic growth - not “mismanagement”.

“The speech was almost of the tone you would have heard in 2012,” Mr Smith said of last week’s 2017-2018 Budget presentation. “The incoming government in 2012, I think, said something to the effect of: ‘Look at what they left us with; all these unpaid bills.”

The Christie administration, upon taking office, alleged that its FNM predecessor had left it with $97 million in spending commitments that had to be met, including some $63.14 million in unpaid cheques and wire transfers.

And in unveiling the 2012-2013 Budget, Perry Christie said: “Our room for manoeuvre is, at least in the short-term, severely constrained by the dire fiscal situation that has been handed to us by the previous administration.

“The Government’s deficit and debt levels at this time are much worse than we had anticipated. We have been left with sizeable, ongoing capital expenditure commitments and a legacy of contracts entered into in the final days of the former administration.”

And: “We also face the carry-over into 2012-2013 of certain recurrent expenditure commitments of the previous administration in respect of the promotions exercise, back pay, salary increases and the payment of insurance benefits.

Fast forward five years, and the similarity in rhetoric and content with the 2017-2018 Budget is striking. K P Turnquest, minister of finance, last week told the House of Assembly that the fiscal situation was “far bleaker than we could ever have imagined. Our predecessors have literally left us with a cupboard that is bare.”

He blamed the previous administration for burdening the new government with $300 million-plus in accounts payables as result of a “backlog” in spending and payments commitments, which required the Minnis administration to borrow some $400 million to cover the ‘hole’.

The similarities between the two Budget presentations were not confined to the rhetoric either, as both blamed the previous administration for saddling them with deficits of around $500 million when they left office.

Mr Smith told Tribune Business this was evidence of a multi-billion dollar debt pattern that the Bahamas was doomed to repeat every five years without fundamental Budgetary and economic reform, disclosing that fears of huge annual deficits had prompted him to initiate studies on VAT 13 years ago.

“It tells me, if you look at the historical data, that the Government borrows about 20 per cent of its revenue for capital or otherwise,” he explained to Tribune Business, “and the deficit on the recurrent is around $100 million to $200 million.

“So you’re dealing with around $300-$400 million a year [in deficits]. You’re going to borrow more than $1 billion every single [political cycle]. It’s got nothing to do with mismanagement; it’s the nature of the economy, and the important issue is unless we have economic growth, the ratio of debt-to-GDP - where GDP remains constant and the debt is going up more - starts climbing into a dangerous area.

“It should be clear to everyone that our problem is an anemic economy,” Mr Smith added. “We have stagnant GDP levels, and a lot of stuff is baked into the Budget, like salaries, rents, goods and emoluments.

“That’s not going to change much. The discretionary room for manoeuvre is too small to make a difference in the Budget. Unless we have substantial economic growth, everyone will be saying the same thing every five years.”

Mr Smith said the Minnis administration’s first Budget failed to properly lay out a strategy for reviving economic growth, instead concentrating on the $500 million deficit it had inherited from 2016-2017 and the need to borrow more than $722 million to cover two years’ worth of fiscal ‘red ink’.

“We’ve got to look at the macro economy and the growth rate,” he told Tribune Business. “Look at the last government and this government; you don’t see much about how I’m going to stimulate growth, and whether I’m going to get local and foreign investment, or a combination of both.”

The Bahamas enjoyed four consecutive years of zero or negative economic growth between 2013-2016, and the direct link between GDP expansion and revenues likely helps to explain why the Government’s income failed to meet expectations.

Mr Smith, acknowledging that $756 million in net VAT revenues over the past two years had helped to slow the national debt’s growth rate, called on the Government to focus on increasing tourist spending given that the sector accounted for two-thirds of the Bahamian economy.

“You make more things available for them to spend money on,” he argued. “Entertainment, goods and services. You can’t change how many come in overnight, but you can increase spending by finding more for them to do.

“Redirect efforts to stimulate your main industry in the short-term. I think we’ve just got to find ways to get a little bit more out of the tourism sector. We’ve seen growth in the Dominican Republic, Jamaica and others. The question is why are people flying over us to other destinations when we are just 40 minutes from Florida.”

Mr Smith said economic diversification was a long-term goal, and disclosed that concerns over the Bahamas’ fiscal outlook prompted him to initiate VAT assessments when at the Ministry of Finance in 2004

“I saw this coming,” he told Tribune Business of the Bahamas’ debt and deficit crisis. “You may recall I tried to introduce VAT in 2004. We knew that unless we expanded our revenue base from 17 per cent to 20 per cent we would be in trouble.”

Mr Smith said he was given Cabinet approval to initiate VAT studies by the IMF and Crown Agents, but never received permission to implement it.

“Once we took a look at it, we needed to have the revenues increase to 20 per cent or down the road we would really have an increase in the debt and deficit. We knew that 13 years ago,” he revealed.

VAT was eventually introduced some 11 years and two administrations later, and Mr Smith agreed that the Bahamas’ fiscal rebalancing depended on combining tax reform with similar adjustments on the spending side and faster economic growth.

He added, though, that government spending was a “larger ship to turn around”, as civil service lay-offs would only switch costs from salaries to the social security budget. The threat posed by natural disasters, and the role government expenditure played in the wider Bahamian economy, also meant any reductions needed to be approached cautiously.