by Larry Smith
It looks like a perfect storm of economic and fiscal challenges is descending on our heads - due mostly to the long-term avoidance of hard choices by one administration after the other in the interest of political expediency.
As we slowly recover from the great recession, our battered little economy faces significant obstacles. And those who have the responsibility to address these issues don't want to talk about them. Instead, we are fed a daily diet of childish, and often vicious, political propaganda.
What am I talking about? Well, let’s start with the issue of the day - taxes. And not just taxes, but wholesale tax increases, including value added and/or payroll tax, higher National Insurance payments, higher property taxes, higher business licence fees, a proposed 5.3 per cent National Health insurance payment, and who knows what else.
In fact, the IMF prescription for the Bahamas to be able to maintain its currency peg with the US dollar is to spur tourism growth (our main export) while “containing demand through fiscal consolidation” - meaning more taxes to soak up liquidity and curb imports.
Surprisingly, there seems to be a broad recognition among Bahamians that the government needs more revenue, despite a tendency to throw money at wasteful political projects and an inability to enforce compliance with existing laws and taxes - especially for political cronies.
Fiscal deterioration means rising debt. According to the Central Bank, last year the ratio of government debt to GDP rose by 5.4 percentage points to an estimated 66.2 per cent, and subsidies to public corporations were about 3 per cent of GDP. Gross domestic product ls a measure of the size of our economy - about $8 billion these days.
Under these circumstances, the IMF says that unless we implement new taxes and enable public corporations to cover their liabilities, we will be in for a rough ride. Among the biggest risks are a weakening of the currency peg (foreshadowing devaluation) and a credit rating downgrade - making government borrowing more difficult and costly.
But that’s not all. The revenue picture is further complicated by billions of dollars in unfunded pension obligations - over $1 billion already and likely to rise to over $4 billion within a few years, or about half of our current GDP. In fact, if these liabilities were included on the government’s balance sheet, public debt levels would rise into critical territory, experts say.
According to financial advisor Greg Bethel, "With the average person getting around $500 a month in benefits from NIB, this leaves a significant gap to be filled. People have mountains of debt, valleys of savings, and no hope for the future. That's where we are.”
Corporate lawyer and financial advisor Richard Coulson put it this way: “It’s now much too late to create an investment portfolio to cover pension liabilities. So the government is between a rock and a hard place. They must either impose massive new taxes to provide funds, or renege on pension promises and cause vicious public disturbances. Which do you prefer? Maybe a little of both?”
So we can expect legislation to be introduced soon to phase in mandatory private pension plans. And the government will also seek to move civil servants away from their current defined benefit pensions to defined contribution plans. This will entail tough talks with the unions.
Then there is the worrying deterioration of our foreign reserves, which pay for all the things we import to maintain our quality of life, and support the peg to the US dollar.
Healthcare is another area that could benefit from substantial private sector participation. Some argue that the entire health infrastructure should be sold to private interests and the government focus on regulation and providing medical insurance to everyone, with capped administrative charges.
Then there is the spectre of accession to the World Trade Organisation - a process which began over a decade ago and which is now being pursued in earnest. Very little substantive information on the pros and cons of this is available to the public, but the usual reason given for joining is that we should be a member of a rules-based trading arrangement.
However, the cold reality is that WTO will change the way Bahamians do business and no-one is prepared for, or even aware of, the consequences.