Hubert Ingraham on Fiscal Prudence
Ingraham Slams Budget
By Candia Dames
Nassau, The Bahamas
17th June 2005
There appears to be a disconnect between an expanding economy and the growth in government revenue, former prime minister, Hubert Ingraham, declared in the House of Assembly on Thursday as he questioned the government’s commitment to fiscal prudence.
During the budget communication on May 25, Acting Prime Minister Cynthia Pratt noted that the government is aiming to contain the ratio of government debt to GDP to under 38 percent in fiscal year 2005/2006.
Expert advice is that the government should limit the ratio of government debt to GDP to as near as possible to 30 percent "so as to avoid the problems which would arise from a ratio significantly in excess of that level."
The government also projects that in the two fiscal years that will follow 2005/2006; the ratio of government debt to GDP will still remain around the 37 percent level.
At the time, the Acting Prime Minister also noted that the ideal government revenue to GDP is about 20 percent, but she admitted that this is becoming increasingly hard to achieve because of the narrowness of the country’s revenue system, which is heavily dependent on customs duties.
The government also projects a GFS deficit of $172 million, which would be $30 million more than what was projected for 2004/2005.
However, Mrs. Pratt stressed that the economy is on the upswing with growth of 3.5 percent expected in 2005.
The projections were the basis for Mr. Ingraham’s declaration of an apparent disconnect.
In the five years immediately prior to September 2001, government revenue averaged roughly 19 percent of GDP, he said, adding that the actual results of the following three years show government revenue falling by more than 2 percentage points to under 17 percent of GDP.
"It is therefore not a sufficient economic policy to focus exclusively on foreign investment and its impact on economic growth when that economic growth is not simultaneously translating into increased government revenue," Mr. Ingraham reasoned.
"Nothing can more quickly and more effectively arrest that flow of inward investment than a fiscal situation which is not sustainable, where the level of debt continues to rise by an ever increasing proportion of GDP, and where doubts about the commitment of fiscal management may legitimately arise."
He also indicated that after falling continuously since fiscal year 1996/1997, government debt as a percentage of national income has been increasing steadily each year since fiscal year 2001/2002.
"It would have been desirable for this budget to give a signal of a commitment to change in this pattern," Mr. Ingraham said. "It did not."
He also pointed to the projected outcome of a GFS deficit of 2.8 percent for 2005/2006, the same outcome projected for 2004/2005.
"As a result, government debt as a per centum of GDP is projected to grow by 1/2 of 1 percent in fiscal year 2005/2006, rising from 37 percent to 37 1/2 percent and projected to rise further in 2006/2007," Mr. Ingraham said.
"This [is going to happen] at a time when the economy is projected to grow by a nominal rate of more than 5 percent. There is no better time to send the signal of fiscal prudence than now. If it cannot be done now, when can it be done? Next year with election in the air?"
He said the widening of the recurrent deficit over the last several years has to be a major concern for those who value prudent fiscal management.
"The recurrent balance is a critical element in fiscal management," he reminded. "For governments, it reflects the long-term sustainability of its fiscal situation. It is for this reason that my government’s fiscal policy focused so heavily on the recurrent account which led to a substantial lowering of the level of recurrent imbalances and eventually resulted in a surplus on the recurrent account for two fiscal periods running – 1999/2000 and 2000/2001, for the first time in 23 years."
