The Nassau Institute: “New Directions in Bahamian Economic Policy”

“New Directions in Bahamian Economic Policy”

26 June 2010

Joan Thompson, President, The Nassau Institute

In these taxing times the inevitable unpleasant fall-out from the 2010 Budget is a time to review a tax expert’s remarks on Taxation in The Bahamas in 1997.

In that year Dr. Alvin Rabushka made the following statement when referring to a government report:

“The report focused on "recurrent" revenue and expenditure and paid virtually no attention to capital expenditure, which has been a major source in the rising public debt. Down playing capital expenditure presents a more optimistic view of the public finances than is justified by looking at the total picture. The underlying notion is that borrowing to finance capital expenditures can be repaid from the earnings of capital investment. Unfortunately, governments rarely set prices at levels that are sufficient to cover current operating costs, much less an allowance for the cost of capital, and The Bahamas is no exception in this regard. And much of what is labeled capital investment is, in fact, consumption.” (Emphasis added)

“Eat Dessert First, Life is Uncertain” – as fiscal policy may explain why the Public Treasury needs an additional $100 million tax dollars to “bail it out”.

Dr. Rabushka describes the NIB as follows:

…”the payroll tax has been abused. Under the goal of establishing a public pension scheme, the payroll tax has facilitated a massive buildup in public debt, which has been spent largely on government consumption. The payroll tax amounts to Bahamians robbing themselves tomorrow to finance current consumption--eating one's cake and planning to have it, too”.

As of June 1st 2010 the payroll tax has been increased to 8.9% of wages – a 1% increase in cake consumption.

What can we expect to see on the dining table in ten years? (Forget dessert)

There are suggestions for tax reform for a small country wishing to maintain “tax haven” status. The banking sector comprises about 1/3rd of GDP and thereby a critical portion of the economy.

In the halcyon days of 1997 Dr. Rabushka explained to Rotarians why Exchange Controls would be around for a long time. In 2010 the likelihood of free exchange of the B$ with the $US is as remote as ever – unless a miracle strikes and the debt is significantly reduced.

The seeds for intelligent discussion were planted in the speech to Rotary, and they are still there. Perhaps a tea party on the steps of parliament is called for, no cake served – just plain tea.

Comments

Rick Lowe - 1 July 2010 20:19

Tax Policy

Should we not be suggesting limits to government deficits, debt and spending?
In allowing government to get their hands on more money won't they simply continue to borrow and spend until the new tax system is maxed out again (like we are now) without some legal or Constitutional restraints?

G.Wirth - 26 June 2010 06:53

New Directions of a Bahamian Economy

Totally agree with the NI re-circulating for publication the excellent article now dated but so current..... the pitty is no one then listened and will anyone now listen ?

The reality faces us - the 'Yes we can' economic plan of the current White House is not going to work - it would never receive the Best Housekeeping award...you cannot run up massive Deficts sooner the US will have to follow Greece - Italy - Spain -Portugal and UK infact the quicker the better.

Can The Bahamas find a new niche which will allow us some further space for a further 30-years ? I to-day doubt it...... we do not have the talents anymore and it will be more evident in the future as Hotels will be applying for more non-Bahamians to work - wealth has not been created we have created an exceptionally large debt created at the cost to any logical sense but we got caught up with the American Consumer war and chasing the Jones's (wanting whet the neigh bour has but we can't afford it).

The Budget put inplace increases in Taxs where it will hurt rather than looking harder and finding areas to tax which would benefit the local economy.

Dominican Republic - Jamaica have added in the past 10-15 years '000's of rooms, although low-end they have them incredibly with our stagnant inventory we have more profitably used the rooms but is a Baha Mar or a Ginn sur Mare the economic solution ? I argue strongly for the future it isn't and we had better realise that very very soon.

Kerzner created 6,000 jobs at a cost of $2.65 billion - that basically means every 2-years for the foreseeable future we need foreign investment of $2 billion +- to cover new job creation to cover the graduates coming out of the School system. We all know that is absolutely impossible.

Is Financial Services safe ? The Bahamas is an off-shore jurisdiction, still very much in the cross wires of OECD and President Obama. hedge Funds could be leaving our shores as they are already from Cayman back to where they were launched as a result of UK and others insisting that the Fund must be domiciled where created. Our clearing banks trade on Bay Street but are administered in Bridgetown,Barbados - the profit, til recently was primarilly made in The Bahamas...... whilst on this issue why didn't the Budget tax the repatriated funds-Dividends rather than increase the License fee which the consumer will pay for ?

We hear the talk about creating food dependency but no one realises that to develop a modern hydroponic farm you need Capital - the results of loans given, no truer word, by the Bahamas Development Bank indicate that would be like throwing hard earned tax dollars down a drain. Agroculture realises and feeds off protectionism... Government needs to get out of the business..... we need to develop a deep water fishing fleet and use the assets out there rather than lalowing poachers from the US and south benefit.

We need to excellerate developing the genuine souvenir production...eliminate the middle person and restrict importation of the knock-offs and the cheap souvenirs you see especially in the Straw Market.

I could write on but I hope your readers will realise the US is far from being out of their economic troubles - the new construction figures are the worst since 1963 - spending is declining and if Obama continues this madness over Gulf Oil believe me Oil will shoot past $100.00 a barrel and we all will have to park and walk.

The results this week-end of the discussions of the G-8 and the G-20 will indicate much - I hope sense will prevail....spending is not working it has put fear in everyone and when you are scared one thing you don't do is spend...sort of common stupid sense.

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