The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A former finance minister yesterday warned that the forecast $130m cut in government spending this fiscal year could undermine Bahamian economic growth and job creation.

James Smith cautioned the Minnis administration against cutting recurrent expenditure too quickly and deeply on the basis that it remains a critical component of this nation’s annual gross domestic product (GDP), accounting for almost 20 percent.

While praising the government for seemingly being on track to hit, or even better, its full-year deficit target for 2018-2019, he expressed concern that it seemed “laser focused” on fiscal goals and was in danger of neglecting the bigger economic picture.

Mr Smith, who was minister of state for finance from 2002-2007, and is also an ex-Central Bank governor, said solely concentrating on fiscal issues - and listening to closely to the likes of the credit rating agencies - could cost it “the opportunity to target more meaningful things” such as the unemployment rate.

The Bahamas has endured a prolonged period of fiscal austerity, featuring new and increased taxes, which has lasted for around a decade. “One outcome of getting the targets right in terms of deficit reduction is you may end up, in the medium term, with higher unemployment,” Mr Smith said.

“Your total output, in the Keynesian way, is government spending, private sector investment and consumption by consumers. If you depress government spending, other things being equal, you depress gross domestic product (GDP).

“Government spending is a very important component of GDP, and they’re positively correlated. If you begin reducing that, it reduces by some multiplier the impact on GDP.”

Mr Smith’s comments are likely to revive, in a Bahamian context, the ages-old debate over the proper role of government within a nation’s economy. Many observers believe that the private sector should be the primary growth driver and job creator, with government merely acting as a facilitator for it through efficient laws, regulations and policies - including on the fiscal side.

Members of the Minnis Cabinet have argued that the former Christie administration instead sought to solve its economic and political problems by expanding the public sector through mass hires. However, the Opposition, led by its leader, Philip Davis, have this week echoed Mr Smith’s concerns by warning of potential dangers for the economy by contracting government spending.

Mr Smith’s comments came after K P Turnquest, the deputy prime minister, in unveiling the mid-year Budget revealed that the Government is on track to potentially beat its $237.6m full-year deficit estimate by $5-$10m - but only thanks to “significant spending restraint”.

To offset a 7 percent, or $185.43m, shortfall in revenue against budget projections, the Government is forecasting that recurrent spending - which goes on fixed costs such as civil service salaries, benefits and rents - will come in some $130m or 5 percent lower than predicted.

While giving “kudos” to the Government for seemingly holding true to its fiscal consolidation plan, Mr Smith told Tribune Business: “I’d like to remind ourselves that if we become overly concerned with meeting the macroeconomic fiscal targets, particularly in terms of the Government’s fiscal accounts, we might lose the opportunity to target more meaningful things with the economy like lowering the unemployment rate and growing GDP, both of which sometimes require expansionary policies that put pressure on the deficit.”

Such policies, he suggested, involved investments in infrastructure vital to facilitating private sector growth as well as training initiatives to improve workforce productivity.

“I think we don’t want to take our eyes off wider macroeconomic policies that positively impact the economy,” Mr Smith added. “There’s a tendency to meet these macro fiscal targets, the mechanisms the rating agencies follow very closely, because they provide the reports to the people that end to us.

“The Government has a bigger role, and sometimes to do that it has to adopt a slingshot approach where it pulls back to go forward. I’m not saying this is necessarily happening, but based on what is coming out publicly they seem to be laser-focused on mechanisms to deal with the deficit and debt.”

The former finance minister urged the Government to focus on a “larger target” than simply tackling its debt and deficit woes, and said it needed to consider the medium and long-term effects of its policy actions - especially those that impacted job creation and economic growth.

“On several occasions I pointed out it’s possible to have a balanced budget with 20 percent unemployment and no growth, and that’s not desirable,” he added.