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The Last Thing We Need Right Now Is Austerity

EDITOR, The Tribune

Government should be wary of the voices out there that are using the Covid-19 pandemic to promote their own agendas by advocating fiscal austerity as a response to the crisis.

The economic illiteracy of these voices speaks loudly for itself. Following the last recession, they advocated wage freezes, public sector job cuts and spending limits. It all predictably failed. Why? Because these measures undermine the consumer demand that is required for any recovery. Applied in the Bahamian context, they are even more damaging.

Unlike many countries, the Bahamas government already spends too little (rather than too much) on its development needs. Its geographic characteristics require the replication of social and physical infrastructure over an elongated archipelago, yet its spending relative to Gross Domestic Product (GDP) is among the lowest in the world. Any reduction to this low government spending not only undermines development goals, but dampens aggregate demand, which in turn reduces growth.

Also, unlike most countries in fiscal crisis, The Bahamas has numerous ready sources of revenue that it fails to collect because special interests have its politicians whipped into believing that the economy somehow benefits from not taxing them: these include the taxes on income, wealth and property that make up the bulk of most countries’ revenues. The corollary to this is that taxes on consumption are already way too high and they disproportionately impact the very group whose spending drives the economy.

The spending of working class Bahamians is the principal agency that transforms foreign investment and tourist arrivals into growth in the domestic economy. When you tax their consumption, hold back their wages, cut their public sector jobs or lower their social safety net, you reduce their collective disposable income, leading to lowered economic growth, no matter how good the tourist or investment numbers appear.

The current crisis presents us with an opportunity to end this cycle of low growth and inequity by shifting the tax burden to areas that we have historically taxed too lightly or not at all: incomes of the highest earners and wealthiest corporations, taxes on capital gains and robust real property taxes on luxury, foreign-owned properties. Consumption taxes (like VAT and duties) should be reduced and gradually eliminated as these more lucrative revenue sources come on stream.

Minimum wages should be raised immediately – and no, you should NOT reflexively heed the advice of employers’ organizations on the matter. Employers are not economists and the economists who work for them are not paid to be objective.

Further, it is not the government’s job to protect the interests of particular businessmen, but rather the economy as a whole. And clearly, an economy like ours would only benefit from higher wages for workers, even (or perhaps especially) at the cost of lower profits to employers, an equation that would not only boost consumption but also help reduce the hideous income gap that politicians claim to care about.

For our economy to recover (as it never truly did after the 2008 recession, despite high levels of foreign investment in the last decade and the strongest-ever tourist numbers last year), working class Bahamian consumers need to have more money in their pockets relative to a cost of living index that is elevated by regressive taxes.

We have now been hit by a monstrous hurricane and a worldwide pandemic in the space of a single year. The last thing on earth we need right now is austerity.

ANDREW ALLEN

Nassau,

May 17, 2020

Comments

Proguing 2 weeks ago

Dear Mr. Allen, The last thing we need now are news taxes and people promoting their own agenda by advocating socialist policies. It would be well known if countries could tax their way to prosperity. VAT contrary to what you say is well fitted for the Bahamas as it is collected by the private sector. This has the advantage that the cost burden is not on the government and that it is collected efficiently contrary to other taxes collected by the government. Also, breadbasket items are VAT exempt so that the poor can purchase what they need to live. If wealth taxes, income taxes etc. were instituted as you suggest, most rich persons would flee the island and the rich who remain would finds ways around it, so that these new taxes would fall on the middle class, which would be wiped out in a few years. Warren Buffet clearly explained that when he stated that he paid a lower tax rate than his secretary. In any event I do not see how increasing taxes to hire more civil servants or awarding overpriced construction contracts to political cronies is going to make Bahamians richer. The coming austerity is the result of previous governments having run enormous budget deficits funded by debt so that inevitably there comes a time when government bond holders begin to wonder if they will ever be repaid. Furthermore, any government spending for a fiscal stimulus is limited, as our foreign reserves are running on empty. The only way to replenish these reserves is by attracting foreign investors and they will not come back if the Bahamas goes socialist as you suggest. If you want the Bahamas to thrive, I suggest you look at Dubai or Monaco as models, not the French model. Just ask the Yellow vests if you don’t believe me.

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