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Commentary: The chill of government financial irresponsibility
By The Nassau Institute
Jan 1, 2012 - 3:15:21 PM

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As financial analysts the world over await the outcome of the "negotiations" in the United States to see if they can avoid the so called fiscal cliff - the day automatic tax hikes and spending cuts will kick in - many people believe it will push their economy back into a recession. To unsettle things even more, the fiscal problems have not abated in Europe and right here at home there are unsettling concerns among the business sector and taxpayers.

With The Bahamas debt to GDP ratio approaching 60% (including unfunded liabilities), and rumours of government cash flow troubles, they remain remarkably quiet on plans to help revive the struggling Bahamian economy and avoid a further downgrade of the Bahamas by the international rating agencies.

It is obvious all the capital works completed between 2007 and 2012 did not have the impact on economic growth that was forecast. The fact that the roads needed the work notwithstanding, the country's debt has been increased another $500 million and should the United States economy falter once again as anticipated, that could spell a few more difficult years for this economy.

Government spending and borrowing for government projects has done little to economies wherever and whenever it is tried.

What should not be done?

The last things The Bahamas Government should consider are further tax increases, restrictions and costs for employers, limiting trade, and continuing to pull the plug out from under the financial services industry, as these actions will slow the economy even more.

Targeting the so called wealthy with massive property tax increases is also a non-starter. Many of these second home owners, Bahamian and foreign alike, provide employment for a broad spectrum of people and more. One of the dangers in this "tax the rich because they can afford it" strategy, is governments end up with even less tax revenue.

Great Britain had more than 16,000 people declare an annual income of over £1 million in 2009-10 and when the government introduced the new 50 percent top tax rate the number fell to under 6,000 people.

In France, the fiscal problems have not abated and their new populist president was proposing a 75 percent tax rate for people that earn more than €1 million, but the Constitutional Council over turned the law that was due to take effect in 2013.

When governments target certain sectors of the populace by increasing taxes and other restrictions/regulations investment slows further exacerbating the economic slowdown. In the case of France, "it shocked foreign investors and infuriated high earners""prompting some such as actor Gerard Depardieu to flee abroad."

It should be clear from these reports from Great Britain and France that governments do not have the moral authority to assume they can take taxpayer earnings to pay for their imprudence over decades.

What can be done?

The present government bears responsibility for the fiscal dilemma the country faces, but that aside, there is no clear picture on how the problems will be dealt with and this makes investors and taxpayers uneasy.

In the near term, it is incumbent on the political class to:

  1. Lay the fiscal cards on the table.
  2. Assure employers there will be no further tax increases and labour regulations for the foreseeable future.
  3. Remove price controls and the bureaucracy that goes with it.
  4. Release a plan on reducing government expenditure. Not simply reducing planned increases in spending. Actually reduce spending from last years budget.
  5. Assure the financial sector that they will hedge against further intrusion by international governments.
  6. Streamline the process for entrepreneurs to get into business.
These six basic steps would at least help taxpayers and investors alike get a better feel for what to expect and can start to plan accordingly.

No matter the results of the "fiscal cliff" in the US, or Europe, it is high time The Bahamas Government gets its fiscal house in order for the sake of future generations. If not the chill being felt from decades of fiscal irresponsibility just might turn into a freeze.

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