Budgets and Taxes

First Published: 2008-07-05

As reported in the press, the Prime Minister’s communication on the 2008/2009 Budget made much of those items slated for lower tariffs and not much about the items for tax increases. The reported “tax relief” is more of a Public Relations exercise than a reality.

The Initial euphoria about the budget “relief” as reported in the Press is bound to fizzle with the revelation that what government “giveth on one hand it taketh away with the other”.

A cursory look at the public finances shows a national debt of over $3,000,000,000. Yes, Three Billion. Some weeks before the budget announcement Mr. Laing reassured the country that he is not concerned with the size of The Debt because he is confident that the resources for servicing it are and will continue to be available.

The resources for the most part are the tax dollars paid into The Public Treasury. For the first time in our recollection, new terminology is introduced to describe changes in the tariffs. “Rounding up” and “rounding down” are nice sounding phrases meant perhaps to soften the pain of inevitable tax increases.

Budgets forecast requirements in the future. A reasonable assumption of continuing growth in the economy is factored into the Budget along with some confidence that revenues will be sufficient to meet demands including interest on The Debt.

Unfortunately the forecasts for economic growth and income for most of the world’s economies have turned negative, the Bahamas included.

One effect of higher taxes is to reduce the level and efficiency of capital formation. Savings and Investment by the private sector means more job creation and growth. Lower taxes end up generating more revenue to the Public Treasury.

Ironically in a period when more Bahamian entrepreneurial risk-taking is required to grow the economy, increased taxation reduces availability of capital resources in tandem with an economic slow down; a sort of “double whammy” to a struggling economy.

It is obvious that if lower taxes and maintaining fiscal responsibility is a desirable goal government has to downsize itself.

Also evident to the cautious observer, the Bahamas cannot continue a policy of year over year budget deficits, failing to balance income with expenditures.

Business cycles are the inevitable result of monetary policy of the world’s central banking systems. The Bahamas is not exempt from economic down turns and the prudence of an “anchor to the windward” such as less debt and higher reserves would have been a far-sighted fiscal strategy to reduce the risk of devaluation of the Bahamian dollar.

Over time, perhaps over dependence on foreign investment for capital infusion has led to an assumption that there will always be a Knight in shining armour to come to the rescue, and maybe there will. Nevertheless, good “housekeeping” includes low taxation to encourage local savings and investment.

An objective description in the Economic Freedom of the World Report notes that the country is a “highly regulated, central-managed economy. The business sector is characterized by a complex and contradictory set of entry restraints, targeted tax breaks and indirect subsidies. A bureaucratic licensing system restrains entry into many business activities and exerts political control over the economy”.

Until changes to the above occur, every Budget will produce winners and losers, based on bureaucratic decision-making instead of the realities of the marketplace.

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