The Bahamas Government’s Commitment to Fiscal Prudence Questioned

Hubert Ingraham on Fiscal Prudence

Ingraham Slams Budget

By Candia Dames

candiadames@hotmail.com

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."

The Bahamas Central Bank Governor, Julian Francis Contradicts Prime Minister Perry Christie on the Amount of the Nation's National Debt

The Central Bank Governor said that The Bahamas national debt is now around $2.4 billion, which is 42 percent of GDP.  But last week, the Prime Minister said the debt was just under 40 percent of GDP

The Governor of the Central Bank of The Bahamas Warns Also that The Bahamian Government Must Prevent A Fiscal Crisis Later - By The Containment  of The Country's National Debt Now

Bahamas Debt Warning Issued

By Candia Dames

Journal Staff Writer

candiadames@hotmail.com

Nassau, The Bahamas

06/07/04

Governor of the Central Bank Julian Francis on Sunday contradicted Prime Minister Perry Christie by revealing a level of debt that is higher than what the nation’s leader pointed to during the budget debate last week.

Mr. Francis also warned that the government must move now to contain the national debt to prevent a fiscal crisis in the future.

“We can’t continue to add to the national debt indefinitely,” said Mr. Francis, who was a guest on the Radio Love 97 Programme “Jones and Company”.

Mr. Francis said that the national debt is now around $2.4 billion, which is 42 percent of GDP.  But last week, the Prime Minister said the debt was just under 40 percent of GDP.

Countries that go beyond the 40 percent mark are considered to be entering the danger zone in terms of fiscal management.

Mr. Francis said, “So you can see, we’re already marginally above that number at 42 percent.  That doesn’t mean that all of a sudden we are bankrupt over night or anything like that, but it does mean that you don’t want to go much further than this.”

He pointed out that since 1984, the national debt has increased from 25 percent of GDP to the present figure of 42 percent.  This increase spanned three different administrations, he reminded.

“There is a tendency on the part of our country to accumulate debt in order to balance the budget of the government and what I am saying as the spokesperson for the Central Bank of The Bahamas is that this is getting to the point where we should not see this as a continuing option,” said the governor, who stressed that he was not attempting to create alarm over the situation.

He agreed with the Prime Minister that the national debt is less of a concern because most of the debt is domestic.

“I accept that idea,” Mr. Francis said.  “It would be of a much more important concern if it were substantially in foreign currency.”

With the budget debate ongoing, there has been much talk about the national debt and the projected deficit of $164 million.

“The fact that there is a deficit means that the government has to borrow to fund that deficit and any borrowings by the government have to be paid back at some point,” Mr. Francis said.

“What I am saying is that there is a point where we need as a people to recognize the fact that we’ve probably reached a level of borrowing that should not be too easily exceeded, except during very, very important emergencies,” he added.

While on the Sunday programme, Mr. Francis again highlighted the need for Bahamians to pay higher taxes.

It prompted the show’s host, Wendall Jones, to ask, “Do you think that it is proper for the Governor of the Central Bank to be making statements about the need to have an increase in taxes at a time when the Prime Minister and Minister of Finance has introduced a budget and has said that he is not going to increase taxes?  Isn’t that walking out of step with the Government of The Bahamas?”

Mr. Francis responded, “Well, no.  I don’t think so and I am sure that the government would agree with me on this.  The role of the Central Bank, which is an entirely professional institute, is to be a kind of monitor, in a way, almost a police on these kinds of issues.”

He added, “I have not sought and I don’t think that it is appropriate in fact to put myself at odds with the government on these kinds of issues, but it certainly does not prevent me – and I think that we have to be extremely careful about that.  If we get to the point where there can only be one view expressed, then I think it changes a bit the character of our country.”

Mr. Francis said his intension is not to criticize the government, but to sensitise Bahamians to the fact that there is no such thing as “a free lunch.”

“If we would like to have additional roads, hospital and schools,” he said, “we have got to be ready to pay for that.”

While expressing the need for a higher level of taxation, Mr. Francis also applauded the government’s efforts to improve its system of tax collection.

“You’ve got to collect what you can,” he said. “Don’t misunderstand me all.  I have absolutely nothing at all to say [against] the idea of being more effective in collecting taxes.  I think that is absolutely correct, but I don’t think that will cover the deficit.”