The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A top QC yesterday warned it was vital that the Government allocate a “significant amount” of tax revenues to paying down the $6 billion national debt, arguing that its priority had to be reducing the debt-to-GDP ratio to pre-2008 recession levels.

Brian Moree, senior partner at McKinney, Bancroft & Hughes, told Tribune Business that reducing the national debt to a sum equivalent to around 40 per cent of GDP (which is where it was prior to the recession) was “critical to our economic prosperity”.

Calling on the Government to strike “the right balance” between financing its social/infrastructure programmes and debt reduction, Mr Moree said the latter issue could not be allowed to suck “enormous sums” away from benefiting the Bahamian people.

And he warned that international confidence in the Bahamas and its economy would be “greatly enhanced” by a reduction in the national debt and associated ratios, an outcome that would ultimately translate into higher growth given that foreign direct investment (FDI) was this nation’s “engine”.

Figures from the mid-year Budget reiterate how, at this stage, the still-increasing national debt is absorbing an ever-growing amount of taxpayer monies.

For the 2014-2015 fiscal year’s first half, a combined $185.422 million was spent by the Government on debt servicing (interest) and principal repayments - a 26 per cent increase over the previous year’s $147.187 million.

Together, interest and principal repayments on the national debt increased by more than $38 million for the first six months of the current fiscal year. This accounts for the majority of the $47.541 million year-over-year increase in the Government’s recurrent spending.

And, viewed in another light, the Government’s combined debt servicing and principal repayment costs are greater than the net $300-$350 million in annual revenues it expects to earn from Value-Added Tax (VAT). This illustrates just how much work remains to be done to right the Bahamas’ national finances.

“I think it is imperative that the Government set aside a significant amount of the revenue generated from our tax base, and that includes the new VAT revenues, to reduce the national debt,” Mr Moree told Tribune Business.

“That is a high priority for a country like the Bahamas, and while there is no doubt the Government and national revenues must fund the services the [public sector] provides to the people of the Bahamas, there has to be a very prudent and careful allocation of new revenue streams to ensure the proper balance is achieved between debt reduction and funding government programmes.”

The rate of growth in the Bahamas’ national debt, fuelled by successive $400-$500 million deficits in the years since the recession, has driven this nation’s debt-to-GDP ratio to more than 60 per cent.

Widely acknowledged as unsustainable, this growth rate has pushed the Bahamas’ debt-to-GDP ratio to near 70 per cent - a level branded as a ‘danger threshold’ by the International Monetary Fund (IMF).

Past this point, ever-increasing sums will be sucked away from the Government’s social and other programmes by debt servicing, and debt increases will become an ever-rising spiral - with diminishing returns experienced for every additional $1 borrowed.

While major industrialised economies can sustain such bleeding for some time, the Bahamas, with its small population and narrowly-based economy, cannot.

Hence the Christie administration’s rush to implement VAT as the main element of its plan to ultimately eliminate the fiscal deficit and get the public finances back under control.

However, post-VAT implementation the language used by Prime Minister Christie and other ministers appears to have changed. Rather than use the extra revenues to reduce the national debt, which was the originally stated purpose for introducing VAT, they have talked about using these monies to finance social and infrastructure programmes.

Picking up on these concerns, Mr Moree said yesterday that greater transparency over how the Government intends to use the VAT revenues would benefit all concerned.

“There is great temptation to spend new revenue streams on new programmes as opposed to allocating those funds to reduce the national debt,” the noted QC told Tribune Business.

“As a small country we have to be focused on reducing our debt-to-GDP ratio to the level it was prior to the 2008-2009 global recession. That, in my view, is a very important economic objective for the country.”

Mr Moree said one aspect of the Government’s promised Fiscal Responsibility legislation consultation (see other article on Page 1B) needed to educate Bahamians on

“why reducing the national debt, and maintaining it within certain international standards, is critical to the ongoing prosperity of our country.....

“It’s in the interests of every Bahamian to reduce our debt and maintain it within reasonable levels, so we don’t end up spending enormous sums [on debt servicing] that would otherwise be available to fund government services.”

Mr Moree said achieving the Government’s fiscal targets, and reducing the national debt, would send the correct international signals and bolster foreign investor confidence in the Bahamian economy.

“The confidence of the international community is greatly enhanced through prudent and conservative management of our economy, and one of the things they are looking at is the debt-to-GDP ratio,” the well-known QC told Tribune Business.

“Under our current economic model, foreign direct investment is the engine that drives our economy, and that is based upon the confidence of overseas investors. That confidence is clearly related to the management of our economy by the Government of the Bahamas.

“Simply put, the level of confidence by the international community in the Bahamas would be greatly enhanced by a higher level of transparency, accountability and stability. Fiscal Responsibility legislation is primarily designed to achieve these three core objectives.”