"Progressive economic policies lead to a sustainable economy." - Keith Ellison
Two weeks ago, in part one of this series, we noted that in December 2016 Standard & Poor's Global Ratings (S&P) revised the outlook on its long-term rating on The Commonwealth of The Bahamas to BB+ (speculative or "junk" grade) from BBB- (investment grade). In that article, we examined the major ratings agencies, how sovereign credit ratings are calculated, what Standard & Poor's said about The Bahamas' rating and what the downgrade means for The Bahamas.
This is the first time that The Bahamas has received "junk status" rating from an internationally recognized ratings agency.
Last week, in part two, we reviewed the government's response to the S&P downgrade.
This week, in our final installment of this series, we would like to Consider this... What proactive measures can be taken to reverse the factors that got us to this point? There are several definitive steps that can be taken to accomplish a reversal.
1. Reduce the fiscal deficit
There are three ways to reduce the fiscal deficit. We can increase government revenue, reduce government spending and expand our gross domestic product. Either one of these measures would manifest positive results. Two of them should eliminate the recurrent deficit. If we can accomplish all three simultaneously, we would significantly reduce the national debt.
In the case of government revenue, there are several proactive steps that government can take. First, we need to plug revenue seepage that results from individuals and companies who either under-report or deliberately falsify their import declarations at the border.
Secondly, the state should aggressively prosecute corrupt officials who undermine tax collection by receiving "patronage" from persons and companies that under-report or falsify their import declarations. Furthermore, individuals who intentionally defraud the government should be aggressively prosecuted and severely fined for their nefarious deeds. These actions require resolute political will, which is difficult to achieve where a deeply rooted culture of corruption persists.
Third, there is an urgent need for better and more methodical tax collection administration. For example, there is considerable revenue seepage in the collection of real property tax. Many millions go uncollected annually from this revenue source.
There are also many persons and businesses who do not pay their fair share of business license fees. This is particularly rampant among second homeowners who regularly rent their high-value properties online, but never pay what they should into the public coffers. Some of these same second homeowners also rent cars to persons who rent their homes online. Such persons are not licensed to rent their homes or cars and the public coffers consequently suffer.
Then there are many entrepreneurs who sell new and pre-owned cars without a business licence to do so, thereby robbing the government of legitimate revenues, both in customs duties and value-added taxes.
On the expenditure side of the equation, there is a painful propensity and conclusive correlation between increased public sector spending and commensurate increases in public sector revenue collection.
2. Reduce the national debt
Successive governments have significantly increased the national debt because of government's insatiable inclination to deliver public sector services and provide infrastructural improvements that are necessitated by the archipelagic nature of our nation.
Our commonwealth is spread out over 100,000 square miles, with two dozen largely inhabited islands; therefore, government must expend public funds to construct and maintain roads, bridges, airports, ports and docks, hospitals and clinics, schools and government offices that provide urgently needed public sector services.
One of the most effective methods of reducing the national debt can be achieved by expanding our gross domestic product (GDP), the overall macroeconomic output in the value of goods and services. The greater our GDP, the larger the tax base and hence incremental increase in government revenue which reduces the need for government borrowing.
Another approach to mitigating the need for public sector expenditure is a deliberate, focused sharing of these expenditures by promoting more public-private partnerships.
3. Public-private partnerships
Considerable savings can be achieved if government adopts a progressive policy for public-private partnerships where the cost of infrastructural development is borne by the private sector as an integral part of heads of agreements that are executed by investors seeking development opportunities here.
Whenever concessions are granted to foreign investors, such investors should be required to contribute to the development of the infrastructure that is required to build-out their investments.
4. Council of economic advisors
Government should seriously consider appointing a council of economic advisors whose primary objective is to formulate economic policies that promote a sustainable and progressive economic agenda. The council would provide the government with objective economic analysis and advice on the development and implementation of a wide range of domestic and international economic policy issues.
The council would provide technical advice on policymaking, with a view to replacing our "cyclical model" of the economy with a "growth model". The council would also be charged with setting quantitative targets for the economy, including recognition of the need for greater flexibility and equity in taxation, methods to minimize fiscal drag, reducing the national debt and encouraging full employment.
The council should also be mandated to address the development of a sustainable energy policy, ways and means of increasing public and private sector efficiency and productivity, more sustainable entrepreneurial development and issues related to increasing import substitutes.
Conceptually, the council would consist of a chairman and other members, including an economist, a statistician, bipartisan businessmen, a representative from The Bahamas Chamber of Commerce and an academician. We believe that the government would be well served and significantly benefit from the real-world experiences of council members.
Finally, by more fully engaging a council of economic advisors on issues of economic policy, we believe that the council could assist the government by proffering practicable policy proposals, ultimately improving our prospects for addressing the systemic challenges that have contributed to the S&P downgrade.
Conclusion
As we noted earlier, the real test for addressing the downgrade will be the resolve of the political directorate to postpone its propensity for short-term, politically expedient gains. It must also enhance the institutions that inform public sector economic policy and, like the ratings agencies, look at the future and make crucial decisions in the interest of long-term, considered and sustained benefits to our nation and for our way of life.
o Philip C. Galanis is the managing partner of HLB Galanis and Co., Chartered Accountants, Forensic & Litigation Support Services. He served 15 years in Parliament. Please send your comments to pgalanis@gmail.com.
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