The Tribune

By LARRY GIBSON I CAN recall as a child growing up, we would refer to someone who had a propensity for telling long tales as being 'sweet mouth'. After hearing your sweet mouth friend tell one of his or her embellished tales, the others would look at each other and remark: "Boy he got sweet mouth hey". In listening to the launch of the "silly season" in recent weeks, I was quickly taken back to my childhood memories as I listened to aspiring and incumbent Members of Parliament make commitments, many of which, while sounding good some are simply not even possible in the foreseeable future, never mind the next parliamentary term. The Bahamas, like every other country in the world borrowed heavily during the last three years in order to protect its economy in face of the greatest worldwide recession the 1930s. Everybody now accepts that such a rate of debt accumulation is not sustainable and must now be addressed. Therefore, no matter who wins the next election, debt reduction will be a requirement for the Bahamas and all major global economies. In other words, the agenda is already set for the incoming government from a global perspective, as it is for all capitalist nations. Promises However, within the past couple of weeks, between the various political parties, it seems that just about every island (and in some cases constituencies) has been promised new schools, community parks and playgrounds, new clinics, additional road paving, hospitals, industries, new government buildings, relocation and/or creation of new government ministries, new or increased social benefits ... just to name a few. These promises beg the question; "How is all of this going to be paid for?" I would like to challenge the Free National Movement (FNM), the Progressive Liberal Party (PLP) and the Democratic National Alliance (DNA) to explain to the Bahamian people how each promise they make during the campaign will be financed. Further, political parties should identify which promises are new and which are perennial promises which are rolled out for each election. It is all good and well to have a vision ... but it is equally important that a realistic plan exist to make that vision a reality. To me, this is what responsible campaigning is all about. Irony What is most ironic is that there seem to be agreement by all political parties that the country cannot continue taking on new debt and that we have to reduce the country's debt burden. Yet, notwithstanding this, political parties have a propensity for making, in many cases, irresponsible promises for the sole purpose of getting elected. Once elected, they then spend the next five years blaming others for the problems of the country rather than stepping up and systematically solving the problems for which they were able to convince the electorate that they could solve. Reducing debt Contrary to public perception, countries very rarely are able to reduce the absolute dollar amount of their debt; instead they reduce their debt to Gross Domestic Product (GDP) ratio. For instance, if a country's GDP is $10 billion and its total debt is $6 billion, its debt-to-GDP ratio is 60%. Now if you are able to grow your GDP to $12 billion while holding your debt level at $6 billion, your debt-to-GDP ratio drops to 50%. This is the preferred way to reduce debt because it involves less pain in the adjustment process. The only problem with the example above is the economies do not grow by 20% per year to allow you to quickly fix your debt situation. Long-term economic growth tend to average 3% to 4% per annum, which mean that it would take five to six years with frozen debt levels to achieve the results of the example above. Alternatively, if GDP remains the same and you reduce debt (by higher taxes, spending cuts or a combination of both) you also reduce debt-to-GDP ratio to 50%. However, this solution is more distressing to all concerned and less palatable to politicians hoping to be re-elected. Sluggish Global Growth Further, when you are in an environment of sluggish, global and local, economic growth such as we are now experiencing...the 'fix' becomes more painful. The International Monetary Fund (IMF) in its January 24, 2012, World Economic Outlook (WEO) Update reported: "The global recovery is threatened by intensifying strains in the euro area and fragilities elsewhere. Financial conditions have deteriorated, growth prospects have dimmed, and downside risks have escalated. Global output is projected to expand by 3? percent in 2012 - a downward revision of about ? percentage point relative to the September 2011 World Economic Outlook." Reality As the world's economies goes through a major period of economic realignment the global prescription will be a combination of higher taxes and a cut in government spending... and the Bahamas will be no exception. Just look at the United States, higher taxes and reduced government spending will happen whether the Democrats and Republicans reach common ground or not. If they do not...then automatic tax increases and spending cuts kick in. So when we hear of all these election promises floating about do not take them all at face value. The morning after the general elections, we still have a country to run and a lot of debt to pay down in order to make our economy sustainable. It was Sir Walter Scott who once said "Oh what a tangled web we weave, when first we practice to deceive." The question is: "how will we be able to pay down the debt when we are promising everything...and more?" The truth is that no matter who wins...tough decisions will have to be made starting on day one. The questions are therefore: "Who is up to the challenge?" and "Who just simply has sweet mouth?" Until next week... Larry R. Gibson, a Chartered Financial Analyst, is Vice President - Pensions, Colonial Pensions Services (Bahamas) Limited, a wholly owned subsidiary of Colonial Group International Ltd, which owns Atlantic Medical Insurance Ltd and is a major shareholder of Security & General Insurance Company in The Bahamas. "The views expressed are those of the author and does not necessarily represent those of Colonial Group International or any of its subsidiary and/or affiliated companies. Please direct any questions or comments to Larry.Gibson@atlantichouse.com.bs