The Free National Movement (FNM) government's move to reduce value-added tax (VAT) on breadbasket items may have a bittersweet impact on the nation's fiscal deficit under the condition that spending remains excessive, according to economist Rupert Pinder.
Among other financial pledges, the Minnis administration said it would effect a reduction, and in some instances a repeal, of VAT on breadbasket items, and implement tax-free economic zones for Over-the-Hill communities.
Minister of Finance Peter Turnquest said more details would be provided in the upcoming budget presentation on those changes.
Speaking with Guardian Business over the weekend, Pinder explained that, by reducing VAT on breadbasket items, a shortfall in revenue would be created, and some form of compensation must be made to mitigate those losses.
The government would have to cut back on spending to help facilitate granting any additional concessions and reductions in government revenue, according to Pinder.
"One of the things that we have to be very careful of is the overall sort of impact, and how we meet any potential shortfall; because, bearing in my mind, we still have to cover a significant fiscal deficit," he said.
For the first half of the current budget period, the fiscal deficit increased to $314.2 million, despite $761.9 million in taxes being generated during the same period.
"So, while it is good to look in terms of some exemptions, we have to look at how we meet this overall shortfall," said Pinder.
The economist pointed out that any form of fiscal reform must "facilitate growth in the economy", adding that economic growth is "paramount".
The Bahamas has a negative growth rate of an estimated 1.7 percent as of 2015.
Pinder said that if granting concessions helps to create economic growth, then there is an overall net benefit. But in order to create a net benefit, cutbacks on spending have to be made.
Pinder outlined a three-pronged approach that would help to curb spending.
He said that government has to look at areas where there may perhaps be some potential duplication of resources.
"I am still not clear, to date, in terms of where the line of demarcation should be drawn between Urban Renewal and Social Services programs," he said.
He also urged the government to look at the divestment of some state-owned assets.
"Spending should not be looked at independently of some divestment strategy because I think they are some state assets that the government really should look at seriously in terms of divesting," said Pinder.
"I think Bank of The Bahamas (BOB) should be a part of the divestment strategy.
"Similarly, the question is whether or not there are some routes that are being serviced by Bahamasair are being best placed in terms of the hands of the private sector."
Pinder concluded that a closer look should be taken to see whether or not debt is being properly captured in special purpose vehicles (SPVs).
A SPV that remains in question in terms of management is Bahamas Resolve Ltd, which was created by the former Christie administration in October 2014 to take $100 million in bad commercial debt off the books of BOB.

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