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Gov't Spending Cut Will 'Choke Economy To Death'

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A former finance minister has blasted the private sector for continuing to criticise the Government despite largely getting the Value-Added Tax (VAT) regime it wanted, arguing that many did not understand the fiscal “complexities”.

James Smith, who remains a key Ministry of Finance consultant, said many in the business community appeared to be parroting “what they hear in the US” with regard to ‘fiscal rules’ and ‘spending caps’.

He suggested these were “not appropriate” for a small country such as the Bahamas that was prone to natural disasters, while merely eliminating waste and spending inefficiencies in government was “not going to be enough” to close the existing $462 million fiscal deficit.

And Mr Smith, also a former Central Bank governor, warned that the private sector was effectively ‘cutting its nose off to spite its face’ with calls for deep cuts in recurrent (fixed cost) spending.

He told Tribune Business that this, with salaries and wages accounting for 55 per cent of recurrent spending, generated about 25 per cent of aggregate demand within the Bahamian economy. Slashing this would merely “choke the private sector to death”.

“There seems to be, based on the commentary in the press, little appreciation of the complexities of the exercise and the people advising on it. It seems as if they feel these people don’t know what they’re doing,” Mr Smith told Tribune Business.

“I’m certain these people making the commentary do not have an appreciation for how complex this is. I don’t think most of them understand econometrics.”

Making clear his frustration with some of the Bahamian business community’s reaction to the 2014-2015 Budget, Mr Smith implied that much of its content had been based on private sector feedback.

In particular, it had got the low-rate (7.5 per cent), simplified Value-Added Tax (VAT) it had wanted, together with few exemptions.

“I would have found it very difficult to be making decisions in this kind of framework,” Mr Smith revealed. “It appears you push me in one direction to continue criticising me, when I’ve done that which you suggested to me.

“I hear these horrible comparisons some times; these guys [the Government] have not run a business, they don’t know what they’re doing. The Government is not a typical business. You’d better leave it to the people who have been doing it for a long time.”

Mr Smith said that given the Bahamas’ susceptibility to hurricanes, it was simply impractical to tie the Government’s hands with so-called ‘fiscal rules’ and limits on its spending. This, he suggested, would handicap its response in ‘life and death’ situations.

Together with cost overruns on capital projects, the former finance minister told Tribune Business: “There’s so many things that can throw you off track.

“It sounds to me that they’re simply echoing what they hear in the US, and I don’t know how appropriate these are for a country like ours.

“Government spending in a country like the Bahamas is probably 25 per cent of aggregate demand, and some businesses calling for it seem to forget the Government is their customer, or people working for the Government.”

Recurrent spending in the 2014-2015 Budget is projected at 19.9 per cent of the Bahamas’ $8.99 billion GDP, implying that one out of every $5 spent in the economy will come from the Government.

Mr Smith implied that recurrent spending cuts, if they resulted in either job losses, wage reductions or a combination of both, would automatically cut spending with private sector businesses and total aggregate demand. This, in turn, might result in business closures and/or private sector job losses.

Pointing out that the Government was also leasing property from private sector landlords, Mr Smith said the easiest cuts to make were in the capital budget. Yet this had already been reduced from $400 million to $300 million, and infrastructure demands (roads, schools and hospitals) meant there was little room for more.

“You can’t go down too much on that,” he told Tribune Business. “Our economy is a combination of foreign direct investment, local investment and tourist spending.

“That’s the way to grow it unless they [the private sector] know some other way. You choke it [the economy] to death if you pull government spending from the private sector. This economy is not the US economy because we do not have a convertible dollar.”

Mr Smith said escalation clauses in rents and union contracts, and the latter’s stipulations on the likes of civil service wages, gratuities and pensions, meant it was inevitable the Government’s size and spending needs would keep on increasing.

“The expenditure growth, despite what they say, has not been that drastic,” he told this newspaper. “This talk about expenditure controls, they need to look at these items very closely.

“There may be savings in terms of finding efficiencies and eliminating waste, but trust me, it’s not going to be enough.”

Asked whether the Bahamas had done enough to avoid a downgrade of its sovereign creditworthiness, Mr Smith replied: “It depends on the extent to which they buy into the plan.

“An entirely new tax regime will be brought into effect on the target date, and the infrastructure will be in place to support it.”

Comments

Reality_Check 7 years, 4 months ago

Neil Hartnell's love affair with any and everything James Smith has to say probably speaks more about Hartnell and The Tribune's foolish mindset than it does the incompetence of Smith himself. Smith never had the economic intellect or back bone to stand up and attempt to protect us from the failed policies of the PLP....it's really as simple as that. Smith, for all of his failings, now rightfully has about as much political capital to cash in as the typical pot cake that can't shake itself free of the multitude of fleas that cause it to scratch itself hairless!

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birdiestrachan 7 years, 4 months ago

Mr. James Smith is a very brilliant man who loves the Bahamas and wants the Bahamas and its people to do well. He is not a politician and he is not mean spirited, he has no political aspirations.

Mr. Julian Francis a FNM and a former Governor of the Central Bank knows that the deficits can not continue. and something has to be done.

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sheeprunner12 7 years, 4 months ago

The private sector in The Bahamas ............ the 30 Rich Families will not be adversely affected by VAT......... They will simply cut back on their overheads to protect their bottomline........ its the middle/lower class Bahamian who will suffer ............ The other foreigners or permanent residents who invest in our country will follow suit .....SMT

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JohnDoe 7 years, 4 months ago

I am sorry Mr. Smith, but if the private sector, as you note, seem to possess a lack of understanding of the “fiscal complexities”, I assure you that they are not alone. This government, in my view, has shown an equal or greater lack of understanding of those same fiscal complexities to which you refer. To continue to speak about tax reform merely as a government sector revenue grab, as this government has consistently done, without concomitantly speaking about economic and fiscal reform is not only short sighted but some may even say that it is fiscally irresponsible. Is 55% of recurrent government expenditure on salaries, wages and some fixed costs reasonable? Are we getting value for those dollars spent or is that even important? Can portions of that expenditure be re-directed to incentivize and stimulate economic diversification, economic growth and private sector job creation? This is the epicenter of our economic conundrum. Consistent with Mr. Smith’s faulty logic, successive governments have been in the business of subsidizing consuming demand for so long through gratuitously giving civil service jobs, wages and salaries to their respective supporters that our government is now arguing that any critical analysis of this civil service gratuitous subsidy will undermine the very foundation of our fragile economy. Talk about a circular argument! The penchant of successive governments to focus on the short term by allowing government expenditure and decision making to be driven by the timing of elections and to finance their re-elections as oppose to any long term economic development planning has certainly created a catch 22 dilemma for our economy. Mr. Smith and company have clearly demonstrated that they lack the creativity and wherewithal to solve this catch 22 dilemma.

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