The rising tide of expenditure

Mon, Jun 2nd 2014, 11:13 AM

Dissecting the 2014/2015 budget
The kindest thing that may be said of the 2014/2015 budget is that it is disappointing.
So said former Minister of Finance and former Central Bank Governor Sir William Allen, who was asked by National Review to assess the government's new spending plan presented in the House of Assembly last Wednesday.
"Saying something is so does not make it so, no matter how often it is said or how dramatically," Sir William said.
"That is a lesson you would think would have been learned since this government's last term in office. This government came to office vowing to bring a new discipline to government spending and to arrest the huge increases in government debt, which they said were endangering the nation's welfare.
"It has been in office more than two years now and in that time it has spent more and added more to the nation's debt in each of its two years than at any other time in the nation's history.
"It is projecting at the end of its third year to add more than $1.5 billion to government debt. When this last occurred it took six fiscal years to accomplish it. This government is now doing it in half that time, but it has been campaigning on the theme of fiscal responsibility before it came to office and continues to do so. Do words have meaning any more?"
In his budget communication, Prime Minister Perry Christie said the government is moving forward with reforms and measures targeted at "restraining the growth of spending and to make that spending more efficient and effective such that, through the medium term, recurrent expenditure shows a decline relative to the size of the economy".
Following that communication, Minister of State for Finance Michael Halkitis pointed out in an interview with National Review that while the government intends to borrow $343 million in the coming fiscal year, that borrowing is down from the $465 million borrowed in 2013/2014 and the more than $600 million borrowed in 2012/2013.
"What that (ongoing borrowing) speaks to is that really the structural nature of our revenue system is not adequate, and so we are in this position where we're going to borrow money just to run the government," Halkitis told us, not long after he brought the latest borrowing resolution to Parliament.
"I think it speaks to the need for tax reform at an early stage, and so, I'm happy to hear publicly announced value-added tax (VAT) on January 1, 2015, which we think will do a lot to alleviate this need to continually be filling these gaps."
Still, the new budget fails to reflect any serious effort at curtailing expenditure.
Sir William noted that at the end of June 2012, government debt was $3.9 billion.
It is projected to be $5.4 billion by the end of June 2015 -- an increase of $1.532 billion or roughly 40 percent in three budget cycles.
This includes a period of six months after the introduction of VAT in 2014/2015 when the government estimates an increase in its revenue of $305 million.
During the same period, 2014/2015, the country's national income is expected to increase by $344 million.
"As government shifts such huge levels of revenue from the productive private sector to the non-productive public sector, we are asked to believe that this itself will not be a huge drag on an already weakened economy," said Sir William, who was finance minister in the Ingraham Cabinet.
"And what would add the final destructive blow to our economic circumstances is a continuation of a fiscal deficit. And there is nothing about the pattern of spending so clearly established by this government to give any comfort that this would not be so. Saying it is not so would not be enough to make it so."
Sir William added that the government has now given into common sense and the massive national objection to the originally proposed introductory level of VAT and has maneuvered itself out of its commitment for some corresponding relief on customs duties as a compensation for its retreat.
Christie announced on Wednesday that VAT will be introduced on January 1, 2015 at a rate of 7.5 percent with limited exemptions and essentially unchanged customs duties.
The government's original plan was to introduce VAT on July 1, 2014 at a rate of 15 percent with more exemptions and lowered customs duties.
Sir William said, "They had the audacity to relate this retreat to some curious notion of the avoidance of currency devaluation.
"This is a most unfortunate concept to inject into the budget dialogue, especially by the state minister for finance (Halkitis).
"In the first instance it is silly to make the connection on the revenue side after the introduction of a brand new tax measure. You wish now not to endanger your currency stability, then stop spending so much."
Last week, Halkitis said introducing VAT and keeping customs duties at their current levels will prevent the government from sinking deeper into debt.
But Sir William told National Review, "If the government wished to have a concern it should be with the balance of payments deficits it has been experiencing despite the heavy levels of direct foreign investment of which it boasts.
"This has to be a more threatening concern than the promised relief on customs duties. That reference to currency devaluation in relation to the government's wish not to give the promised relief is just plain crazy."
The former finance minister added, "In an obvious response to the performance of the balance of payments, the government has not only been adding enormously to the level of government debt, it has been adding enormously to the level of its foreign currency debt."
At the end of 2013 government foreign currency debt increased by more than $500 net million since the end of 2010 and already this year there has been a further $424 million foreign currency borrowing by government.
"Reductions in external reserves at the end of both 2012 and 2013 would be greater cause for concern than the promised concession on customs duties," Sir William said.
Burden
Sir William said the government is about to place a burden of an additional $305 million on an economy suffering anaemic growth in which persistently high unemployment and excessive personal debt are leading to massive consumer delinquencies as Bahamians face enormous challenges in meeting their debt obligations.
"And note that the amount being transferred to government is nearly 90 percent of the entire projection of the growth in GDP for the period," Sir William added.
"GDP in current prices is estimated to have just lost $56 million. And this has not generated an expression of worry over its consequences."
Sir William accepted that the country needs to address a fiscal gap that is surely leading to a major crisis.
"At the end of 2006 the government debt as a proportion of GDP was only 30 percent," he said.
"That proportion of debt-to-GDP could and should be restored, but the timescale for that restoration should be carefully considered so as not to require too much pain on a troubled consumer."

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