The government has told the International Monetary Fund (IMF) that it will implement a "rule-based fiscal framework" to guard against "shortsightedness" in fiscal decision making, a move which the multilateral institution has thrown its full support behind.
This development was yesterday welcomed by Co-Chair of the Coalition for Responsible Taxation Robert Myers, who said it is one of a number of signs that the private sector grouping's message on the need for fiscal consolidation is getting through to the government.
A so-called "fiscal rule" is generally defined as a system in which the government constrains expenditure through the creation of simple numerical limits in legislation - also known as "budget caps".
The fact that the IMF in its latest Article IV staff report on The Bahamas is congratulating the government for "their commitment to fiscal consolidation and their intention to introduce a rule-based fiscal framework" may come as a surprise to some, given recent comments from government representatives on its position on the role of such a rule-based framework in constraining spending growth in this country.
In February, Michael Halkitis, minister of state for finance, said that he did not necessarily see the benefit or need for such a rule-based fiscal framework.
He told Guardian Business that the government exercises "its own brand" of fiscal discipline, and suggested that calls for more stringent "budget caps" or "fiscal rules" could limit necessary flexibility in the operation of government's finances.
This prompted Coalition Co-Chair Gowon Bowe to retort that had the government been successfully exercising its own brand of fiscal discipline, it would not be in the position it finds itself in now with respect to growing debt and deficits that have led to its efforts to introduce value-added tax (VAT).
In its latest report on this nation's economy and the government's handling of it, the IMF signalled that the government appeared to have changed its tune on a fiscal rule.
It said that the government has yet to "settle on the specifics" of such a framework, including when it would be adopted, but "saw the adoption of a fiscal rule as essential to guarding against government fiscal shortsightedness (e.g., policy changes depending on political cycle) and making the achievement of medium-term fiscal targets more predictable."
It added that any fiscal rule would have to take account of The Bahamas' country-specific condition, such as the fact that it is a small island state, and has significant vulnerability to natural disasters - that is, it would need to live the type of financial flexibility that would allow the government to respond to such threats which can be extremely costly to recover from and appear with little warning.
"It needs to strike a reasonable balance between sustainability and flexibility goals, and should make provisions for policy responses to unforeseen economic shocks (for instance, natural disasters)," said the fund.
Notwithstanding the need for country-specific tailoring of such a fiscal rule for The Bahamas, the IMF said it stands ready to provide support to the government in its efforts to implement a rule-based framework to govern budget efforts, calling a fiscal rule appropriate in The Bahamas' case given the "rapid widening of the fiscal deficit and increase in central government debt" in recent years.
Encouraging The Bahamas to soon "flesh out" how it would go about implementing a fiscal rule and what form it would take in this country, the IMF said that it should enhance the predictability and credibility of budget policies.
"This would notably help ensure that the authorities' public finance reforms are implemented within a well articulated and durable medium-term fiscal framework."
However, the IMF noted that a rule-based framework creates considerable "transparency demands" and requires "a comprehensive coverage of fiscal operations".
Myers said that the IMF's position fitted with that of the coalition, and he felt the indication of a change in the government's attitude towards a fiscal rule may be a sign that its message is being heard.
"We've being saying the same thing - that tax reform without fiscal reform is a failure. Tax reform plus fiscal reform will lead to success. So budget caps are one of our paramount objectives for fiscal reform. We want the government to deal with the budget issues, making them to international standards.
"Hopefully what's happening, even if we don't get credit, is they're starting to understand that this isn't going to happen (VAT) unless they do certain things and as far as the private sector is concerned, we're going to try to hold them to international practices and standards. We're happy to pay more money, but only if everyone is paying their share, and we're happy to do more if we see the government is being accountable and being prudent about how they budget."
Speaking with Guardian Business in February in the wake of the IMF's recommendation of a fiscal rule for The Bahamas, Michael Halkitis suggested at that time that it may not be necessary because the government already voluntarily operates within "certain parameters" when it comes to spending. However, he did admit that the government may "eventually" consider moving in that direction. The IMF report suggests that during meetings with the government, it gave a more firm and short term commitment.

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