First published in The Tribune on: Monday, June 07, 2010. Posted here with the kind permission of the author.
Bahamas 2010/2011 Budget did not go far enough
by Neil HartnellLET'S be clear: if Prime Minister Hubert Ingraham gets the extra $200 million revenues he is projecting in the 2010-2011 Budget, then he may possibly have his genius licence returned to him. But I don't think he'll get it. Even the man himself admitted the targets were "ambitious".
Of course, the Prime Minister's 'trump card' in achieving those projections may well be proceeds from the Bahamas Telecommunications Company's (BTC) privatisation, which may well be concluded during the 2010-2011 fiscal year and bring in somewhere between $100 million to $130 million to the cash starved Public Treasury.
But while there is good cause to greet the Government's latest revenue projections with more scepticism, and to criticise what was the perfect 'doom and gloom' Budget, Mr Ingraham and his team did get a number of things right. They just didn't go far enough. And Tribune Business's editor will now explain why.
TAXING and SPENDING
Some tax rises were probably inevitable. That has to be conceded, given that the Government needed to send a strong signal to Wall Street and the IMF that it was putting its fiscal house in order and arresting the growth in the deficit, national debt and debt-to-GDP ratio. And it could hardly have sent the message better, from a PR point of view.
Yet the problem Tribune Business has is that the burden of getting the country's finances back in order has been placed 100 per cent on the private sector, which contains the wealth and employment creators, the entrepreneurs, that the Bahamian economy needs to pull itself out of recession. The full impact of the tax increases on many businesses and industries is currently unknown, but it is clear they will only act as a further drag on the economy as it attempts to rise from the bottom - and may potentially be the difference between business survival and failure, job retention and lay-offs.
The pain has not been spread evenly. It has been borne by business, households and consumers, but the public sector has largely been spared. Rather than just focusing on revenues ($100 million in new taxes, $200 million in additional monies) to plug a $259 million recurrent deficit, the Prime Minister needed to take an axe to the Government's $1.554 billion in fixed costs - wages and salaries - that comprise recurrent expenditure.
Despite union opposition, Tribune Business would have recommended a 5 per cent pay cut across the board in the public sector, possibly going up to 7.3 per cent for those in the upper echelons. Half a loaf of bread is better than no loaf at all. As one senior banking executive told me, the Prime Minister squandered a golden opportunity to wield the axe, having "seized the moral high ground" through his 16 per cent salary cut.
Mr Ingraham was right to avoid public sector redundancies, since this would only have depressed aggregate demand further, heaping more misery and unemployment on to a society where the social fabric is already stretched. And he was right to slash overtime payments, ending the anomaly where officials were making more from this than their regular salaries.
Yet their can be little doubt that the Government has a spending problem, and the Prime Minister's Budget did little more than tinker at the edges, no doubt for fear of upsetting all those votes bound up with the public service. Consider the facts: assuming Bahamian GDP is at $7 billion now (even that may be a stretch), recurrent spending at $1.554 billion is some 22.4 per cent of GDP. Given this, the Government may want to revise its 'revenues 20 per cent of GDP' critical objective, since this means that it will always be running a recurrent deficit.
While Mr Ingraham was correct in seeking to get the recurrent side of the Budget back to zero as quickly as possible, Tribune Business would have liked to see him cut recurrent spending by between $100-$150 million this Budget year, getting that back to closer to 20 per cent of GDP.
At the very least, a 'nuts and bolts' study of the entire public sector must be conducted, probing into every nook and cranny to uncover inefficiency, overstaffing, waste and fraud, a lot of which is said to go on. The savings that could be realised might be substantial, and surprise a lot of people.
HITS or MISSES
Let's look at the main tax increases, starting with tourism.
Tribune Business would have preferred that the Government increase departure taxes by $10 or two-thirds to $25 per head, instead of the one-third or $5 increase he opted for. These are imposed at the back end for tourists, and would make less of an impact that the hotel room tax.
This newspaper would have suggested a one-third or two percentage point rise to 8 per cent for the latter tax, rather than a four percentage point or two-thirds increase to 10 per cent, simply to minimise the impact on hotels that were already struggling to maintain profitability.
When it comes to the two percentage point increase in real estate Stamp Duty, the Government should have addressed the problem of 'tax bracket creep'. With most Bahamian middle class purchases taking place at price points above $250,000, these deals will now be subject to a 12 per cent rate - a further disincentive to home ownership.
To encourage the latter objective, the tax brackets should have been amended thus:
$0-$100,000: 6 per cent
$100,001-$500,000: 8 per cent
$500,001 and up: 12 per cent
Then we have the auto industry. With new car sales down 40 per cent, the fear is that the Government's tax increases here may send the sector into a further tailspin. Business plans are having to be torn up, and it is doubtful whether the Government will realise its smaller cars, fuel efficiency and more revenue objectives, since the first consumer reaction is likely to be a rush into used cars.
A better plan would have been the model suggested by Andrew Barr, Friendly Ford's general manager, namely a reduction in Excise Tax for the smaller engine models; maintaining the existing duty rates for most others, including commercial vehicles; and the 85 per cent tax rate for the larger v6 and v8 models.
HITS
This industry is probably in the best shape to absorb these increases, so Tribune Business has little problem here. The Government's moves to graduate companies from the Industries Encouragement Act to the 10 per cent duty rates are also understandable, given that it cannot run a welfare state for ever.
But there remains the sense that the 2010-2011 Budget was an opportunity missed. And with missed opportunities come costs. One such missed opportunity was the $30-$40 million foregone from legalising the numbers business, and the cries of 'legitimate' businesses as to 'Why should the burden all fall on me?' echo loudly. Yes, the Government made some hard decisions, but it eschewed making the hardest - and most correct - ones of all.
