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$500m Revenue Rise No Fiscal Gap Bridge

By NEIL HARTNELL Tribune Business Editor THE Government's annual fiscal deficit averaged more than $170 million during the 2002-2008 'economic boom' years despite an almost $500 million rise in revenues over that period, showing that reining in out-of-control spending will be "the top priority" for the next administration. Drawing on data produced by the Central Bank of the Bahamas, Rick Lowe, a leading fiscal 'hawk' and Nassau Institute executive, told Tribune Business yesterday that the real cause of this nation's fiscal dilemma - and one which began before the current recession started - is recurrent government spending that massively outpaced revenue growth. Taking the period beginning from the 2001-2002 fiscal year, Mr Lowe said the Government's revenues grew steadily from $772 million that year to $814 million in 2002-2003 and $831.245 million in 2003-2004. They reached $925.11 million in 2004-2005, before breaking the $1 billion mark at $1.094 billion the following fiscal year. Government revenues then peaked at $1.204 billion in 2006-2007, and $1.267 billion in 2007-2008, before declining with the global recession's real onset in 2008. The former Christie-led PLP administration was in office for much of that 2002-2008 period, overseeing an economy booming as a result of global growth, yet Mr Lowe told Tribune Business that even with the resulting revenue growth, the then-administration was unable to fill in the red ink dominating government finances. The fiscal deficit for 2001-2002, the last year the first FNM administration was in office, totalled $134 million. It then hit $207 million for 2002-2003, and reached $197 million and $162 million for 2003-2004 and 2004-2005, respectively. The only significant inroads made by the Christie administration into reducing the Bahamas' fiscal deficit came in the 2005-2006 fiscal year, when it reduced it to $95 million, but it ballooned again the following year (likely because of an election) to $222 million. In 2007-2008, the first year of the second Ingraham administration, the fiscal deficit dropped to $186 million, but the recession and associated 'stimulus' and increased social security spending saw it jump to $403 million and $376 million, respectively, during the 2008-2009 and 2009-2010 fiscal years. Noting that $1.203 billion was added to the Bahamas' national debt during the 2002-2008 period, Mr Lowe had no doubt where the fiscal crisis' roots lay - the size of government and excessive public spending, especially on fixed costs such as civil service salaries and rents. "It emphasises there is a huge challenge in spending," he told Tribune Business. "Where do they start? We're not in the shape Greece is in, but we're trending in that same direction, and since 2002 it's been at a drastic pace. It [the fiscal deficit] seems to have been increasing every year, except for 2006." Noting that reversing the Bahamas' persistent fiscal deficits and $4.25 billion national debt did not appear to be a topic the major political parties wanted to address, Mr Lowe added: "The big concern is no one is saying, going forward, how they will tackle it. Are they going to raise taxes, cut spending? The Opposition is not saying. "From 2002-2007 we had the biggest GDP rise ever in the country's history, more revenue growth than ever, but were still running $180-$200 million deficits." James Smith, former minister of state for finance in that Christie administration, agreed with Mr Lowe that the present fiscal situation began "prior to the recession", the latter event merely exacerbating the situation. Arguing that resolving the Bahamas' deficit/debt woes should "be up there at the top" in terms of a new government's priorities, Mr Smith told Tribune Business that government revenues were "woefully inadequate" to cover recurrent spending. He added that the Government "doesn't seem to be doing very much about it", and said the Bahamian people needed to be "sensitised" to a problem that would not be short-term and impact all of them - making "fundamental reform" imperative. "This is going to be a perennial problem for the Bahamas for the next several years," Mr Smith conceded to Tribune Business. "What we are witnessing is that the recurrent revenue is woefully inadequate to cover the recurrent expenditures - salaries, rents and emoluments - so we've got a real problem there." While the Government was able to defer or cancel capital spending plans, Mr Smith said it was virtually impossible to adjust recurrent spending in the short-term. The administration frequently found itself running up $100 million overdrafts on a monthly basis, of which $55-$60 million was going to pay civil service and public sector salaries. Yet given the high unemployment situation, the Government was simply unable to cut civil service jobs, meaning that "fundamental" change - a revamped tax system to raise revenues, spending cuts or a combination of both was imperative. "This thing started prior to the recession," Mr Smith told Tribune Business. "It's probably been accelerated since 2008, and the longer it goes on it will become more difficult to adjust. It feeds on itself." The reduced economic growth and higher unemployment had already conspired to reduce revenues, while government spending was coming under ever-greater pressure as a result of demands placed on the social security safety net. "You're getting a negative feedback loop," Mr Smith explained. "The real difficulty is we don't seem to be doing very much about it. Plans should have been in place - debt rescheduling, a moratorium on any new borrowing, retirement of people from the service who have reached retirement age. "There are a number of small things we can do. You have to have the entire country sensitised that there is a problem, there's no easy solution to it, and there is nothing temporary about this in my view." Mr Smith said the preferred solution would be a combination of tax and spending reforms. Again advocating the introduction of a broader-based sales or Value Added (VAT) tax, he also suggested the Government could tackle "a lot of wastage" on the spending side without heavily impacting public sector salary levels. But, setting aside the public sector side, Mr Smith added: "Above all, we've got to find a way to stimulate the private sector for increased job creation, because with increased employment comes more imports and greater revenues. That's the greatest challenge." The former finance minister urged the 2012 general election winner to "almost immediately" take action over the public finances, given that the Bahamas' debt-to-GDP ratio was already approaching 60 per cent. Warning that an 80 per cent ratio would make the situation "unmanageable", with too much revenue being used for debt servicing, Mr Smith said of the situation: "I think it should be up there at the top of the priority list. "It's a problem that a new administration is going to run into as soon as they get in there, as new services will be demanded without revenue streams to service them." He added: "The Government has been using debt to fund its capital and social programmes, and by taking on debt it brings on further distress in your Budget. It sets the stage for problems. "We're almost in a whole new ball game that may call for new rules, and you have to lower expectations among the general public in terms of what you can deliver while you're doing this fix."

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