The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government has been advised that it could double real property tax collections to almost $200 million per year through better enforcement and ensuring all eligible properties are on the roll, a Cabinet minister has disclosed.

Admitting that Moody’s decision to downgrade the Bahamas’ sovereign credit rating had added to the “sense of urgency” to get the public finances back on a sustainable path, Michael Halkitis, minister of state for finance, told Tribune Business the Government was also seeking “significantly more” revenues from the Road Traffic Department.

Emphasising that the Christie administration would take a “balanced approach” to tackle the mounting fiscal problems, Mr Halkitis said it aimed to target the “low hanging fruit” on the revenue front through better administration and enforcement of the existing system. He ruled out new or increased taxes, due to the potential for stunting much-needed economic growth.

As for the Government’s $1.7 billion-plus recurrent spending, the Minister disclosed to Tribune Business that the Ministry of Finance had been working on a proposal to gradually reduce expenditure - as a percentage of gross domestic product (GDP) - over a period of years.

Mr Halkitis said cost containment would be the main goal, adding that cutting too deeply into government spending risked “tipping the economy back into recession”. And he pointed out that reducing the size of the public sector also ran the risk of increasing recurrent expenditure in other areas, chiefly social security.

Generating greater economic growth is the third and final strand of the Government’s strategy, and Mr Halkitis revealed that the Christie administration had considered cutting - or at least holding the line on spending -in the 2012-2013 Budget just weeks after taking office.

But, with 84 per cent or $229 million of the Ministry of Works’ capital budget already committed, and other obligations already entered into, he told Tribune Business that the Government has no choice but to play “the hand that’s been dealt”.

Promising that the Government would give more concrete proposals when it delivered the Mid-Year Budget report in early 2013, Mr Halkitis pledged that there were plans to “tighten up revenue administration”.

A consultant’s report has already indicated the benefits to be generated through improved real property tax collection and getting “more people on the tax rolls”.

“We have a problem because we have to make sure the rolls are complete,” Mr Halkitis told Tribune Business. “There are a lot of properties not on the roll, so we’re beefing up compliance, particularly on the Family Islands, to make sure we get them listed. It’s a long-standing problem.”

Asked how much extra real property tax revenue the Government could generate, Mr Halkitis replied: “It’s been suggested that, if we get the roll up to date and improve enforcement, they tell me we can look at almost doubling what we take.”

Given that the Treasury last year took in $92 million in real property tax, this implies that the right reforms - correctly implemented - could see this revenue source come close to $200 million a year.

Mr Halkitis said this sum “might be a bit optimistic”, but acknowledged: “There’s room for improvement in that.” Real property tax has been an historical weakness for the Government, with Auditor-General’s reports regularly estimating that more than $400 million and rising is uncollected.

Elsewhere, the Minister said amendments to the Excise Tax, designed to curb estimated annual losses of $20 million in revenue due to tobacco smuggling, were set to be re-introduced to Parliament in early 2013 following some changes.

Admitting that the Bahamas “needs quick results” on the revenue front, and cannot wait for tax reform, Mr Halkitis added: “It has been suggested that we can get significantly more revenue from the Road Traffic Department if we can improve our administration.”

Other revenue-related improvements are linked to the modernisation of Bahamas Customs, while the Government is also planning to review all legislation relating to tax incentives.

Ministry of Finance officials have suggested the Government gives up around $200 million in revenues annually via these incentives, and Mr Halkitis said: “We have to look at incentive legislation to make sure they’re having the desired effect.”

Emphasising that the Government was also pinning its hopes on economic growth to generate more jobs and activity, translating into increased tax revenues, Mr Halkitis said it would also try to “keep the lid on expenditure growth as much as we can”.

Acknowledging concerns over the size of Government, he outlined its dilemma: Cutting public sector jobs will result in higher unemployment, increased social security spending and less money circulating, depressing both tax revenues and overall economic activity.

“If we try to do this overly aggressively, in terms of expenditure cutting, you run the risk of tipping the country back into recession,” Mr Halkitis said. He added that the Government had “limited wiggle room” with the Budget, given that salaries and other fixed costs accounted for 60 per cent, and debt servicing close to another 20 per cent - meaning 80 per cent is fixed every year.

“A lot of things put off in former years, a lot of them are coming to the front of the table,” Mr Halkitis said of the impact the recession, and subsequent fiscal woes, are having on government policymaking.

He added of the Moody’s downgrade: “We should be concerned to the point where we know there’s actions we have to take. We have to slow the growth [debt-to-GDP and fiscal deficit] and get it back on a path where it’s going down. It’s moved up significantly, and we have to get it back down to a level that is acceptable.”

The Government is projecting a $550 million fiscal deficit for the 2012-2013 budget year, with the national debt moving towards $5 billion and a debt-to-GDP ratio of over 60 per cent. And, although he was waiting on updated figures, Mr Halkitis said revenues were “a little behind” projections.

Acknowledging the calls for the Government to hold spending flat, at least as a percentage of GDP, Mr Halkitis said the Ministry of Finance had been working on a proposal to that effect. He emphasised, though, that spending reductions would be akin to a surgical scalpel’s cuts, as opposed to a carving knife.

“We didn’t want to come in with the attitude of cut, cut, cut,” he explained. “We looked at it, shaved as much as we could without causing too much dislocation. If adjustments come over the next two-three Budget periods, we should be on the right path.”

Asked why the Government did not attempt to hold 2012-2013 spending flat with the prior year, Mr Halkitis told Tribune Business: “We thought about it, but the difficulty is we were spending $400 million on capital works. Realistically, you can’t say stop the roadworks, as you still have to pay the contractor and will be left with incomplete, dug up roads.”

Some 84 per cent, or $229 million, of the Ministry of Works’ capital budget had already been started or committed, while insurance and other benefit increases for certain segments of the public sector had already been agreed. Reversing them would “not bode well for the economy or the Government of the Bahamas”.

Arguing that much of the 2012-2013 Budget had been set by the Ingraham administration, the Minister said the Government aimed in the 2013-2014 Budget to at least bring capital spending down by around $100 million to “just over $300 million”. It would then look to bring it back down in line with historical trends of $200-$250 million in subsequent years.

Asked whether the former Ingraham administration spent too much on capital projects, Mr Halkitis declined to be drawn into a political row. “The Government was trying to support the economy by spending some money, and we have criticised them about the nature of it,” he said.

“That’s gone. We have to deal with it. We have to move ahead with it. What’s important is let’s learn a lesson from it, for when we do things in future. The objective was to create some employment and spread some benefits through the economy. We had mixed results; not as much as we’d like to see.

“We have a hand here that’s been dealt. To improve this situation, we have to be very aggressive in playing this hand, and be disciplined in our approach. We’ve got our work cut out for us.”

Mr Halkitis added that the Government’s White Paper on Tax Reform was likely to be ready for issue this week, although probably in limited fashion to the business community and stakeholders. Consultations in earnest were set to begin in the New Year.