The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas would “be on a really slippery slope” without Value-Added Tax (VAT), a former finance minister believes, because government’s costs will continue to increase on an annual basis.

James Smith, also a former Central Bank governor, told Tribune Business that VAT’s implementation had given the Bahamas an opportunity to avoid going down Greece’s road to a debt default, provided it consolidated the benefits of fiscal reform.

He warned, though, that the Government would have to be “eternally vigilant” in ensuring it met its increased revenue/reduced deficit targets, given that it was “so easy” to relax and fall back into a debt spiral.

“We won’t see it now, but one of the most impactful things the Bahamas has done is actually the introduction of VAT,” Mr Smith told Tribune Business, “and being able to broaden its tax base to include the services sector.

“I think the cost of running the Government is going to escalate year in, year out, and unless we have an increase in the tax base, these deficits will continue to pile up and we will be on a really slippery slope.”

Mr Smith’s comments will likely be opposed by fiscal hawks, who believe the size of government in the Bahamas is too big, and that recurrent expenditure can be reduced - not increased.

However, the Christie government’s ‘like-for-like’ spending in 2015-2016 is forecast to increase by $100 million year-over-year to $1.944 billion. The addition of $100 million that has been reclassified from the ‘capital’ to the ‘recurrent’ budget has taken the Government’s total fixed-cost spend for the current Budget year to $2.044 billion.

The Prime Minister, in his Budget speech, touted a $90 million reduction in the GFS fiscal deficit projection for 2014-2015 as a sign that the Government was making progress in its plans for fiscal consolidation by eliminating that ‘red ink’.

But, warning that it could not relent and ease up, Mr Smith told Tribune Business: “We have taken that [VAT] move, and have to ensure we consolidate.

“Now there’s breathing space, we have to move a bit more prudently in managing the fiscal affairs. My fear is it’s so easy to slip into these things.

“You’ve got to be eternally vigilant and not relent on these targets for the next three-four years, as you’re not running a terrible deficit,” the ex-minister of state for finance added.

“There are other things going on, and we have to move forward with fiscal reforms and use our resources much more efficiently.”

Mr Smith, meanwhile, warned that Greece’s economic crisis, and debt default, had the potential to “trigger a second stage” global recession.

The southern European country, labouring under a 340 billion euro debt burden, voted at the weekend to reject the latest European Union (EU) and creditor proposals to solve the crisis. That vote raises questions over whether Greece will remain in the EU.

Mr Smith suggested there would be “a lag” in terms of the Greek crisis’s impact here, and there was unlikely to be an “immediate effect” on the Bahamas.

He warned, though, that the global economy’s interconnected nature meant any fall-out in Europe would find its way across the Atlantic eventually, possibly manifesting itself in reduced trade with the US that resulted in unemployment and an economic slowdown in the latter nation.

“If it happens at all, we may not see it for another year or so,” Mr Smith said, adding that the Bahamian shipping registry, which contains numerous Greek-owned ships, would suffer no ill effects.

“The lesson for any country is that you’ve got to cut the sail according to the cloth available,” he added.