Contribution by

Rt. Hon. Hubert A. Ingraham

Prime Minister

on the 2009-2010 Budget

Monday, 8 June, 2009

Mr. Speaker,

            The Constitution mandates that the Government present an annual budget in Parliament and that it be passed by both Houses of Parliament.

            The Budget Debate, scheduled to start on Wednesday of last week, is commencing today.   The time-frame of our debate will need to take account of the necessity for the passage of the Budget and the related Bills and the coming into force of the new Budget on 1 July, 2009.  

Twelve days ago today, I had the honour of presenting the 2009/10 Budget.

I wish to acknowledge the dedication and support of countless public officers throughout the public service and very particularly in the Ministry of Finance, the Attorney General’s Office, the Office of the Prime Minister and the Cabinet Office who laboured long and hard and late into the night to complete the preparation of this year’s Budget presentation.

This is the first Budget exercise in a great many years in which Mr. Edgar Hall, the holder of the post of Budget Director, did not participate.   Mr. Hall, who spent 40 years in the Budget Unit of the Ministry of Finance, retired in January this year.

I want once again to single out for praise the dedicated staff at Government Printing for working through the night so as to have printed materials and reports connected to the Budget Exercise and required presentations in Parliament.

Mr. Speaker,

A summary of the Budget is as follows:

·          The Bahamian economy is projected to shrink by 3.9% in 2009.   Growth projected for 2010: -0.5%; in 2011: 1.5% and in 2012: 3.0%.

·          Unemployment stood at over 12.0% at end-2008, compared to a mid-year estimate of 8.7% in May 2008; unemployment is projected to rise further.

·          Tourism, foreign investment and construction are all projected to remain weak in 2009.

·          No new taxes this year and no increase but one in the rate of taxes.

·          Write-off of outstanding surcharge accrued on owner-occupied dwellings following increase in the exemption level to $100,000 in 1994 and, in 2004, in respect of such properties valued at or below $250,000; outstanding taxes to be paid within six months from date of Amendments to the Real Property Tax Act.

·          Thereafter, a new surcharge of 5 per cent per annum on outstanding balances.

·          Property tax of 1 per cent on properties up to $7.5 million; on the value in excess of $7.5 million: 0.25 per cent.

·          Tax on vacant foreign-owned property up to $7,000: $100; over $7,000:   a rate of 1.5 per cent.

·          Tax rate on buildings on leased Crown Cays: 0.5 per cent.

·          Six tariff and excise tax rates eliminated and all moving to a lower rate; only 17 distinct rates of duty and excise remain.

·          Excise tax on several tourist items lowered, either from 25% to 10% or 10% to 7%.

·          A number of tariff rate cuts to ensure similar products face same rate.

·          The tariff on several products reduced to “zero”.

·          Duty on items imported temporarily rises from 7% to 10%.

Fiscal Performance 2008/09

·          Recurrent revenue estimated at $1.31 billion in 2008/09, down by over $260 million from the estimate in last year’s Budget.

·          GFS deficit estimated at $352 million (4.7% of GDP) in 2008/09, more than double the level projected last year.

·          Government Debt to be just over $2.9 billion (38.9 per cent of GDP) at the end of FY08/09.

Fiscal Outlook 2009/10 and Beyond

·          GFS deficit of $286 million in 2009/10 (3.9% of GDP), down 0.8 per cent from 2008/09.

·          Government debt to GDP ratio to reach 43.2% at end of FY09/10.

·          Over the medium-term, as the economy rebounds, ongoing vigilance on expenditure and revenue to bring about more desirable levels of public debt relative to GDP.

Public Sector Reform

·          A comprehensive reform process launched in Customs.

·          Consultations initiated on proposals for reforms to public financial management in the areas of accountability and transparency.

·          BTC to be privatized during the fiscal year and other Public Corporations being evaluated to determine benefits of privatization.

·          Business Licence Act to be amalgamated with Liquor Licences Act, Shop Licences Act and Music and Dancing Licences Act to create a “one-stop” service.

Business and Employment

·          Government is moving to safeguard the financial services industry and negotiating information exchange agreements with other countries, beginning with the Government of Canada.   A post TIA strategy for the industry is being developed.

·          Unemployment payments as a 13 week temporary benefit under the National Insurance Scheme introduced in April 2009; this temporary benefit will be extended to 26 weeks.

·          A National Training and Retraining Programme introduced for recently laid-off workers and geared to training in areas of business demand.

·          To further expand business opportunities, negotiations are underway for accession to World Trade Organization, to expand European Partnership Agreement to include services and to conclude, with CARICOM, a new trade agreement with Canada to replace the CARIBCAN agreement.

Mr. Speaker:

     This is a realistic Budget in extraordinary times, whose principal objective is to promote and protect the interests of the Bahamian people.

            This Budget continues our tradition of looking out for those in our community with the greatest needs. Fortunately our commitment to prudent policies has provided us with the fiscal room to maintain employment in the public sector, to maintain and increase provisions for welfare relief and to bring forward major employment-generating capital works.  

This Budget makes adequate provision for all essential services including education, youth and sports, security and social services; preserves public service employment and increases governmental expenditure on public health, public hospitals, environmental health, pensions and health insurance for members of our security services and others.

It provides for the payment of increments to all entitled public servants ($3.6 million).

            It provides $3.3 million for promotions and or regularization of the employment and/or pay scale of a number of persons in Government Ministries and Departments including Social Services, Prison, Customs, Immigration, Civil Aviation, Agriculture, Princess Margaret Hospital and Grand Bahama Health Service - nearly one-half of this sum ($1.5 million) is in respect of teachers pay.

            It provides $6.7 million in respect of new and additional employment in the following agencies: Social Services, Prison, Foreign Affairs, Public Treasury, Customs, Immigration, Royal Bahamas Police Force, Port, Agriculture, Princess Margaret Hospital, Grand Bahama Health Services, Public Hospitals Authority, Sandilands Rehabilitation and Department of Public Health.

            The total recurrent expenditure provided for in the Budget is sufficient to meet the public service needs of The Bahamas in 2009/10.   I do not now expect to have to revisit the upper limit of expenditure; however, if circumstances change in a material way, further cuts in allocations may have to be made.   Releases will therefore be made quarterly.   Ministries and Departments are all advised to ensure that expenditure commitment in the Current Budgetary period are paid from this year’s allocation.   The Public Treasury Accounts will be closed on 30^th June.

      Over the medium-term, the fiscal strategy comprises three major pillars:

Ø   Sustaining employment and living standards to the extent possible while maintaining as much fiscal flexibility as possible to be able to deal with emerging developments;

Ø   Implementing projects to mitigate the adverse effects of the present crisis and position the Bahamian economy strategically to take advantage of the upturn;

Ø   Recreating the fiscal headroom the crisis consumed by reducing the ratio of Government debt to GDP over the medium-term as the upturn commences. This, in turn requires enhancing the efficiency of current expenditure and modernizing revenue collection.

Mr. Speaker:

Economically and financially The Bahamas is in unchartered waters and unprecedented economic times.

The predecessor to the present global crisis, leaving aside major wars, was the global depression of the 1930’s.

             Since then, the effects of the crises that have occurred have usually been regional, such as the 1997 Asian Crisis or the various crises in Latin America. Or their effects have been temporary such as the various recessions in the United States. And in the case of the U.S. recessions – apart from being temporary – these have usually affected only a few U.S. regions, leaving many other regions free to forge ahead at least partly offsetting the damage of the recessions.

            Previous economic recessions bear no relationship to the present global crisis. In the case of previous recessions, the world’s policy-makers and leaders usually believed that they knew how to move out of recession, and they were usually successful in a short period. This present global crisis is fundamentally different in almost every important respect.  

            Many small countries which had enjoyed a decade-long period of economic growth and prosperity were suddenly and without warning thrown into an accelerating downward spiral, with devastating effects on employment and living standards. This state of affairs could last for perhaps a decade or longer; indeed, a number of these countries will take much longer to stabilize and longer again to recover.

            Some straight talk to Bahamians is necessary.   The Bahamas must not make the mistake in assuming that we can ‘sit out this crisis’ and that recovery will emerge after a short interval. This crisis is so great that the economic textbooks have no answers!   The textbooks can explain how an individual economy or even a small related group of countries can solve an economic crisis, but the textbooks have no answers to a recession which is enormous and global, and resistant to the textbook solutions.

That is why Governments and Central Banks in the major economies have introduced innovative, untried and novel measures of colossal magnitude to try to restart their own economies and the global economy. So far, the crisis seems highly resistant to these policies, and policy-makers will have to dig deeper still to find policies that might cause a turn-around in the global economy.

            Where does The Bahamas stand in this crisis?

Mr. Speaker:

            The global economic crisis was in the making for some time and though its impact was not readily evident in our economy before last September, we began taking clear, transparent and measured steps to insulate Bahamians from the worst of the global economic decline during the last Budget Period.

As tourism performance slipped beginning last September, I provided status reports on the country’s economic and financial prospects in this Honourable House and in the media.   I have periodically since that time provided updates on the unfolding economic downturn internationally and on the implications for our own economy.

Beginning in the fourth quarter of last year the Government took action to support the economy, preserve jobs and extend assistance as needs became pronounced.   For example, we:

• Substantially increased social service assistance payments to a wider category of affected persons;
• provided millions of dollars in relief to thousands of disconnected BEC customers;
• provided direct cash support to the Isle of Capri casino;
• facilitated the continued operation of the Emerald Bay Resort by forbearance in the collection of rates and taxes;
• accelerated a number of public sector infrastructure programmes in the Family Islands creating jobs and pumping millions of dollars into the economy including:

-                       $17 million of roadwork currently underway in South, Central and North Eleuthera, The Current, Current Island and Harbour Island; and

-                       $4 million of roadwork underway in Abaco;

• re-started the $130 million New Providence Road Improvement Project,
• engaged additional numbers of Customs and Immigration officers and guards, Police and Defence Force recruits and essential staff required in the Treasury department;
• reduced the down payment required for home mortgages from The Bahamas Mortgage Corporation and other lending institutions in respect of Government Insured Loans and raised the ceiling   on such loans to $250,000.
• reduced mortgage insurance to ½% from 2%;
• preserved jobs in the public service;
• expanded temporary jobs in the public sector through a $6 million parks and street cleaning programme to stimulate economic activity
• approved and signed the $50.6 million contract providing for the dredging of Nassau Harbour and $2.5 million for installation of bollards at the Prince George Dock;
• commenced the completion of the Magistrates Court Complex on Meeting Street at an estimated cost of $7 million;
• advanced plans for the construction of a $10 million replacement Straw Market at the original market site along Bay Street;
• progressed plans for the construction of new Government office   complexes in New Providence to house the Ministry of Finance, the Ministry of National Security, the Immigration Department and the Passport Office; in Grand Bahama to house Customs, Immigration, Passport Office and other Government Offices, and in Central Abaco to house Central Government offices in the one major Family Island District without a Government Office Complex;
• completed a new runway at the Marsh Harbour International Airport;
• caused to be executed a $2.8 million contract for the extension of potable water to Green Turtle Cay, Abaco;
• approved the commencement of the redevelopment of the Lynden Pindling International Airport project, and
• introduced the NIB unemployment benefit funded up to $20 million from the NIB Medical Fund.

Other action taken by the Government earlier in the last Budget year also served to support the financial and economic position of Bahamians.   For example:

• Since last July, 641 individuals have availed themselves of the Stamp Tax waiver on the acquisition of a first home.   The Government gave up some $2.3 million in stamp tax revenues on those transactions.   And, some $814,000 was waived by the Government on mortgages totalling $86 million in connection with the purchase of first homes.
• An amendment to the Real Property Tax Act in July, 2008 exempted first-time home-owners from the payment of real property tax for the first five years of home-ownership.
• 12 businesses were approved for real property tax and/or customs duty concessions since the enactment of the City of Nassau Revitalization Act last July.   Customs duty exemption was of the order of $10 million.  
• 70 vehicles with a value of $3 million were imported duty free under terms put in place in the Tariff Act during the 2008/09 Budget Exercise.
• The reintroduction of the Family Island Development Encouragement Act beginning last July resulted in exemptions from the payment of customs duty in Andros, Cat Island, Sweeting’s Cay and Water Cay in Grand Bahama, Moores Island and Grand Cat, Abaco; Mayaguana, Inagua, Acklins, Crooked Island, Long Cay, Long Island, San Salvador, and Rum Cay.    Instead these sums were pumped directly into these Family Island economies.

            More recently, Great Sturrup Cay, Little Sturrup Cay (Coco Cay) in the Berry Islands, Gorda Cay (Castaway Cay) in Abaco, Little San Salvador (Half Moon Cay) off South Eleuthera, and (Princess Cays) near Bannerman Town, Eleuthera were added to those islands eligible to benefit from customs duty concessions under the Family Island Development Encouragement Act.   The designation of these islands will accommodate significant new investment in the upgrade and expansion of the ‘port-of-call’ facilities operated by major cruise lines at those locations.

            We expect to access funding from the European Union to facilitate the:

• Repair and upgrade of roads in Acklins, and
• Repair and upgrade of roads, airstrip and dock in Ragged Island.

Funding is being secured from the Caribbean Development Bank to facilitate:

·          The construction of new ports in North Abaco and Exuma and the Angel Fish Creek Bridge;

·          The repair and upgrade of bridges and the construction of docks in Andros, South Eleuthera and Long Island;

·          The upgrade of the Three Mile Island Dock in North Eleuthera, and

·          The new airport terminals at New Bight, Cat Island and Marsh Harbour, Abaco.

Mr. Speaker,

                        Concessions are an area of policy that requires careful attention. The international financial agencies have and continue to advise against the grant of inordinate incentives/concessions for prolonged periods of time because of the distortions created in the economy.   Inevitably, industries enjoying concessions never achieve desired levels of efficiency.

            We had commenced a review of tax and duty concessions and waivers available under Legislation in the later 1990’s.   The events of 9/11 interrupted the process of rationalization of investment incentives and tax concessions and the process was further delayed by my Party’s defeat in the 2002 election.

            Current economic and fiscal circumstances now dictate that we revisit and continue that review; in some cases this may result in an extension of concessions in some areas and, in others, a scale back of concessions.

            Since 1999 some 500 plus persons or entities have been registrants under the Tariff Act and hence beneficiaries of customs duty waivers for the 5 year period provided for in the Act.   Consideration is being given, due to current economic conditions, to amending the provisions of the Act to permit an extension of the Registration period by one year.   Such an extension will be on the condition that the registrant/beneficiary has:

-                       lived up to the commitment made at the time of Registration in terms of dollar investment, employment generation, production etc.

-                       Paid Business Licence Fees on an annual basis;

-                       Remained current on payment of RPT where applicable and

-                       Paid NIB contributions as required by law.

            Other Concessions and Incentives are also under review:

·          In the area of Beer and Spirits manufacture, local producers benefit from preferential taxation vis-à-vis imports.   We will examine the extent to which such protection is warranted, from the perspective of both the producers and domestic consumers.

·          As for Condo Hotels, at its inception, the extension of incentives for the development of such hotels was not meant to include waiver of RTP payments.   In practice, however, in addition to customs duty on the construction of such structures, operators were also afforded RPT waivers and deferments reserved for traditional hotels.   It is not proposed to revoke RPT concessions enjoyed by existing condo hotels however, going forward this concession will no longer be available for such projects.

·          With respect to Hotels, we believe that provision on investment incentives and tax waivers for specified periods is a legitimate means of sustaining investment in the hotel sector.   However, the level of concessions granted at the time of initial construction should not continue indefinitely.   Hence, we will be revisiting the “graduation” process anticipated as early as 1999 with regard to some concessions.

            When tourism performance began to decline beginning in the fourth quarter of last year many Caribbean Governments took action to introduce concessions for hotel owners and operators in their countries.   We discovered that most of what was being proposed by those Governments already existed in The Bahamas under the provisions of the Hotels Encouragement Act.   We could not give any more because we had given it all under terms of legislation in place in some instances for more that 50 years.

Mr. Speaker,

            Proposed amendments to the Real Property Tax Act are designed to improve collections, both of arrears and on an ongoing basis, reduce the property tax burden on certain properties and encourage the development of foreign-owned vacant land.

Last year we introduced a 5 year waiver of real property taxes for first-time home-owners.  

This year we propose to amend the Real Property Tax Act so as to permit:

• the write-off of the outstanding surcharge accrued on owner-occupied dwellings following the increase in the exemption level to $100,000 in 1994 and, in 2004, in respect of such properties valued at or below $250,000. The outstanding tax is to remain on accounts and be paid within six months from the date of the Amendments to the Act, or face a surcharge of 5 per cent per annum on outstanding balances;
• the automatic application of the real property tax waiver on the first $250,000 value of a residence across the board – that is, regardless to the value of the home;
• the exemption on all owner-occupied property to be applicable automatically;
• In addition, the existing three-rate structure on owner-occupied properties is being replaced by a two-rate structure: a rate of 1 per cent on properties valued up to $7.5 million over the exemption of $250,000 and, for properties in excess of $7.5 million, a rate of 0.25 per cent on the value in excess of $7.5 million;
• The tax on vacant foreign-owned real property with a value up to $7,000 will be $100; properties over $7,000 will pay a rate of 1.5 per cent;
• Provision is being made for a 0.5 per cent tax rate on buildings on leased Crown Cays.

Mr. Speaker:

My Government would like to achieve a low real property tax rate.   We believe that we could achieve this if all property-owners declared the real value of their homes and other properties and paid the taxes due thereon.  

            There is great latitude for us to commence a discussion on how we might improve the compliance of home-owners and commercial undertakings in paying their real property taxes. It is an open secret that few property owners in The Bahamas pay real property tax on the true value of their real estate; indeed, many properties have never been registered for RPT purposes.

Two weekends ago, I put some suggestions to members of the Bahamas Real Estate Association on how we might promote increased compliance with the requirements of the Real Property Tax Act.   Among these were:

• Introduce real property tax zones and agree that value for real property tax purposes will be determined by set criteria, i.e. square footage of improvements plus the value of the land; or
•  Establish 75% of a residence’s sale price as the value to be used for RPT purposes, and  
• Remove the 9 month occupancy requirement for foreign owners of second homes or vacation homes in The Bahamas to maintain the real property tax exemption but make such residences subject to a hotel occupancy tax payment when the residence is used by paying guests (e.g. not members of the owner’s immediate family);

As regards concerns with the lifting of the $35,000 cap for residential real property tax I note the following:

• Prior to 2003 and the introduction of the cap, 17 owner-occupied properties paid annual real property taxes in excess of $35,000 in the amount of $1.1 million.  
• During the four-year period 2003-07 when the cap was in place, 57 such properties paid taxes of $35,000 per annum in the amount of $2 million.
• Since the removal of the cap in July, 2007, 68 such properties have paid taxes in excess of $35,000 per annum in the amount of $4.1 million.

            The amounts owed to Government for Real Property tax are staggering; this state of affairs cannot continue.   The amount owed for owner-occupied premises with a value in excess of $250,000 is $48.6 million.   

            Outstanding taxes and surcharge owed in respect of commercial properties is $296.4 million.  

            Outstanding taxes and surcharge due in respect of vacant properties amount to $105.3 million.  

            In addition to the waiver of surcharge being offered in respect of residential properties, consideration is being given to a 50% reduction in the surcharge owed in respect of commercial properties if the amount owned is paid in full by 31 December, 2009.

            As in the case of many other countries consideration will be given to including in the Real Property Tax Act, a provision empowering the Treasurer to dispose of vacant undeveloped property on which real property tax is owed and unpaid for a specified period.

Mr. Speaker:

This is a Budget for the people.   It responds to legitimate needs; a Budget crafted to do the necessary to ensure that the Bahamian economy is primed to grow strongly once the global economy recovers.

A National Training and Retraining Programme for recently laid off workers is being introduced and is   geared towards training workers in areas where there is a strong demand from the business sector.   The programme, offered by the Bahamas Technical and Vocational Institute and the College of The Bahamas, will be made available to 1,000 unemployed Bahamians selected from those persons registered for the NIB Unemployment Benefit.

Government is also moving with urgency to safeguard the financial services industry by ensuring that it fully complies, as it has hitherto, with the enhanced norms now being demanded.   In consultation with the sector, negotiation of appropriate information exchange agreements with other countries is being launched, beginning with the Government of Canada.

Mr. Speaker,

This is a Budget which moves us forward in our programme of public sector reform.  

We are seeking during this period to introduce a new Public Service Act.   The new Act will seek to introduce modern efficiencies into the management and operation of the public service.

We hope also to engage further with appropriate trade unions so as to make flexi-time more widely available throughout the public service.   This will require collaboration on the expansion of day-care and after-school programmes.   We would hope to use our experience of collaboration with the Bahamas Hotel Catering and Allied Workers Union in this regard.  

Mr. Speaker:

            Some hold the view that every adversity creates an opportunity for some meaningful accomplishment. That indeed to some extent may be true, more so in the sense that this hugely adverse financial environment does in fact create the circumstances which greatly encourage fundamental change to public financial administration.   In fact, our present circumstances create the necessity for fundamental change to public financial administration to be undertaken.

            The Discussion Paper “Enhancing Accountability and Transparency in Public Financial Administration” sets out proposals for just such a fundamental change.   Public comments and suggestions for improvements are welcome.

Mr. Speaker:

 With the full cooperation of Customs, a comprehensive process of reform has been launched which is expected to result in a truly world-class Customs organization meriting the respect and confidence of everyone.

It is also of vital importance to clarify and bring certainty to the administration of the Hawksbill Creek Agreement (HCA).   The goal of the HCA was to promote the establishment of factories and industrial undertakings in the Port Area that would provide large-scale additional employment and encourage economic development.

However, while a few major industrial ventures have emerged, the majority of the Licensees are engaged in the trade of providing goods and services.   As the HCA did not specifically provide for such ventures, the application of the HCA to such undertakings has been painstakingly difficult.

To clarify matters and simplify procedures, a Guide to Customs Duties Exemptions and Procedures was elaborated jointly in 1969 between Bahamas Customs, the Grand Bahama Port Authority and the Ministry of Finance.   This Guide was adhered to by all parties for some 30 years.

However, over the past ten years, at least four cases have been brought before the Supreme Court to challenge the procedures and practices of the Department of Customs, even though they are fully consistent with the Guide.

By and large, the contentious issues that surround the operations of Customs and bonded goods have arisen because the Guide has never been given legal authority and entrenched in statute law.   As a result no uniform practices have been established and there exists a high potential for revenue to be compromised and for fraud to be practiced.  

In the circumstances, there is an urgent need to clarify and bring certainty to the administration of the HCA in the Port Area.  

The Hawksbill Creek Agreement provides:

“Any person authorized by the Governor-in-Council shall have free access at all reasonable times to the Port Area and to any works being constructed in connection with the Port Project and/or Port Area Development and to any manufacturing, industrial, or other business, undertaking, or enterprise being operated and carried on within the Port Area and may enter and stay and remain therein and have free access to every part thereof during reasonable business hours for the purpose of ascertaining whether the several articles admitted duty-free under this Agreement have been or are in the course of being duly used and applied to and for the said Purposes, or any of them, and as specified in the bond or bonds given in respect thereof. “

The amendment proposed to the Customs Management Act is designed to put beyond a doubt that Customs is authorized to carry out the duties reserved to the Minister of Finance and to protect the revenue of The Bahamas throughout the archipelago.

Mr. Speaker:

 In the 2009/10 Budget Communication which I presented this Honourable House on Wednesday 27 May last, I set out clearly the colossal declines in GDP in major countries in 2009. The Communication and supporting tables, all of which are available on the internet, showed the IMF forecasts for The Bahamas for the years to 2012, on the basis of present global conditions. My purpose was to make every Bahamian aware of the gravity of the global situation, and of the challenges facing The Bahamas, but also to make every Bahamian aware that – compared with many other small countries – we are starting from a relatively strong position. We must exercise this strength with care and patience because we do not yet know how long this crisis will last or how deep or broad it could become.

The Report of the IMF Article IV Mission which visited The Bahamas in March/April, 2009, w as considered by the IMF Executive Board on Friday past. The Report will facilitate appreciation of the economic and fiscal policies that my Government is pursuing in the 2009/10 Budget.

To provide a succinct view of the findings of the Report, I would like to provide this Honourable House with 5 major comments from it. These are as follows:-

The first is:-

Solid macroeconomic management in the past has positioned The Bahamas relatively well for dealing with the difficult economic environment.

The second is:-

The authorities’ plans to undertake some countercyclical policies and support priority expenditures through the downturn appear appropriate.

The third is

At the same time, staff welcomes the authorities’ efforts to rationalize spending through more vigorous oversight given uncertainties about the duration of the global slowdown.     

The fourth is:-

While the outlook is subject to risks, the authorities have a strong record of prudent financial management, and are committed to medium-term sustainability. They are thus ready to take additional measures as needed in order to maintain macroeconomic stability in the coming period and lay the basis for a growth recovery as global economic conditions improve. The authorities also reiterated their commitment to bring debt down to 30-35% of GDP in the medium-term.

And the final one is:-

The authorities’ fiscal plans strike a reasonable balance between accommodating the shock – maintaining essential expenditures in 2008/09 and 2009/10 – and fiscal adjustment, particularly in light of the uncertain duration of the global slowdown.

Despite the severity of the global recession, our past prudent behaviour has enabled my Government to pace fiscal policy to ensure that The Bahamas is economically balanced at present, and that we are pursuing the appropriate policies going forward.   Not many other small countries can meet this standard.

If we do not, we will weaken The Bahamas critically for ourselves, and bequeath a foundering economy to the generations to come. This is a challenge which we dare not refuse.

            The focus of attention has to be on bringing the fiscal position under control. If we do not achieve this, and major fiscal deficits are permitted to occur, we will be allowing The Bahamas to enter uncharted waters, waters which we have never been foolish to attempt to navigate before. The shoals which we would meet in these waters are:-

·          A rapidly growing level of Government debt which would devour an increasing proportion of our Government revenue resources to make the interest and capital repayments. The revenue resources would thus be subtracted from the pool which we urgently need to finance health, education and security expenditures, and the other essential public services.

·          An increasing rate of interest on our debt as Government would be obliged to borrow whatever resources were needed, regardless of costs. This would set the stage for increases in private sector interest rates affecting mortgages and working capital for businesses, even as such mortgages and working capital become increasingly scarce.

·          An increasing vulnerability to external adverse forces, even mild ones, because we would have lost the ‘headroom’ or ‘fiscal space’ which we currently enjoy and would become increasingly at the mercy of capital providers.

·          Loss of our ability to maintain parity of the Bahamian currency with that of the United States which has been the anchor of our monetary stability.

·          Loss of our ‘cachet’ as a stable and safe location for productive capital investment, with consequent heavy loss of significant employment opportunities in the future, and further weakening government revenues.  

·          Loss of the banks’ ability to fund private mortgages, personal and business loans because available funds would be required to provide financing for the annual budget – to cover the shortfall between revenue and expenditure.

            We have chosen to avoid these uncharted waters and to steer away to the calmer waters of macroeconomic and fiscal stability. Even a casual review of the historical trend in fiscal performance confirms the justification for our fiscal stability strategy.

In the period from January 1982 to March 2009 the level of Government debt increased by more than ten-fold, far out-stripping the growth in GDP.   Government debt rose from $281 million to $2,880 million, with the greatest rate of expansion occurring during the ten-year 1982-1991 when the average annual growth was 20 per cent.

The ten year period 1992 to 2001 during which my Government’s commitment to fiscal discipline was established, the average annual growth was at its lowest at 8.4%, despite the occurrence of the crisis of September 11^th.   The five year period 2002-2006, the period of second highest annual growth saw an average growth of ten per cent. We created the necessary headroom for government borrowing to keep the economy moving.   This headroom gives us the time to adjust to any permanent or semi-permanent adverse forces.

At present however, we are availing ourselves of the headroom that our fiscal discipline affords in order to ease the economic hardship on the most vulnerable in our country while maintaining the Government’s level of employment and other recurrent spending so as not to place a further drag on the economy.   Furthermore, we are doing so without adding to the tax burden of the private sector of the economy which will itself aggravate the economic weakness.

In the current circumstances the level of Government borrowing will necessarily rise substantially.   It is envisaged that before this economic crisis is ended the level of Government debt will have risen significantly beyond the level of 40% percent of GDP.   While we will still remain well below the debt to GDP ratio of any independent country in the Caribbean except the oil-producing Trinidad & Tobago, it is a level of debt from which we will retreat with all deliberate haste when our economy returns to growth.   As quickly as possible we will restore the headroom that will be available to see us through the next inevitable economic down-turn.

            Three critical areas must be addressed, namely:

(1)         On the expenditure side, the loss-making entities – the Water & Sewerage Corporation, the Broadcasting Corporation of The Bahamas, and Bahamasair – absorb significant resources to meet losses and finance some capital expenditure. For example, in the 2009/10 Budget, these 3 entities will receive $44.5 million after having received almost $60 million in 2008/09. It will be crucial in the coming years to find mechanisms to gradually reduce and finally eliminate these costs from the annual budget. The task will not be an easy one, but it will have to be done if The Bahamas is to return to the levels of Government Debt which we judge to be the place where The Bahamas should be.

(2)         In addition, a critical point has been reached in the budgetary policy of The Bahamas: if the nation is to emerge financially strong and not financially strangled from the present crisis, all persons responsible for public expenditure must understand that financial   resources are scarce and must be deployed to maximum effectiveness.

(3)         The third area where remedial actions are crucial is in relation to revenues. In 2000/01, the ratio of Revenue to GDP was only 17.1% - almost 3% lower than the level of 20% deemed prudent to meet budgetary requirements. Had the level been 20% in that year, the GFS Deficit would have been eliminated, and resources made available to reduce the level of Government Debt which at that time stood at about 30% of GDP. In the years following 2000/01, revenue continued to seriously under-perform. For example, in 2001/02, following upon 9/11 the ratio fell to 14.8% and it rose gradually thereafter to reach 19.2% in 2007/08.   The ratio fell back to 17.5% in 2008/09 as a result of the global crisis.

Mr. Speaker:

            The question must be posed as to why the rate of collection of revenues is so far below the desired level. One possibility is that compliance is low and that more vigorous enforcement is vital. This is a view with which this Government concurs and that is why great improvements are being made in Customs and other revenue collection agencies. There is also the view that legislation must be tightened and greater penalties introduced for evasion. Again that is a view with which the Government concurs, and that is why new legislation will be introduced for Customs, Real Property Tax and Business Licence. However, it may also be the case that the revenue base is simply too narrow, as is repeatedly mentioned in IMF Reports. If that is the case, we will only have hard evidence when we are sure that there is full private and commercial compliance with existing revenue laws. If it is necessary to widen the revenue base, the change will come by implementing some form of sales tax to cover deficiencies.   For example, a Value Added tax has been adopted by over 140 countries around the world and would represent a prime candidate for The Bahamas.

            Just as our prudence in the recent past in containing Government Debt has given us vital headroom in this present global crisis, so our continuing prudence into the future will determine the speed with which we overcome the heritage of this crisis, and prepare ourselves to meet the next and inevitable crisis. If we allow expenditure to drift upwards, and we tolerate under-collection of revenues and general under-performance of revenue, we will drift towards the treacherous shoals we want so much to avoid. Surely we can navigate sensibly away from these dangers.

         We know what will happen if we drift and so we must take hold of the tiller and turn to port and safety. In the 2009/10 Budget Communication I set out difficulties presented to The Bahamas by this awesome global crisis. I also set out the course which we have to follow to emerge from this crisis with minimum damage and without a crippling level of indebtedness. For the benefit of all I will set out the requirements again:-

(1)          Control of expenditure through winding down Government support for loss-making entities;

(2)          Ensuring maximum efficiencies from the available level of expenditure resources.

(3)          Maximise revenue collection from the existing but modernized revenue structure and

(4)          If the gap between expenditure and revenue cannot be bridged, we must stand prepared to implement new and additional revenue measures.     

Mr. Speaker:

         The present circumstances have required that we make some difficult choices – that is, establishing priority among the several key projects planned to bring The Bahamas’ infrastructure to modern and efficient standards.

         This Budget makes provision for two very costly public sector projects in respect of which disbursements of $85 million will be made during this fiscal period- the Nassau Harbour Project ($39 million) which will render our harbour ready to receive the new Genesis Class Cruise Ship this Fall, and, the New Providence Road Improvement Project ($45 million in this fiscal period), designed to significantly alleviate traffic congestion, reduce road rage and contribute to a more efficient use of our roads.  

         One of these projects is critically essential to put The Bahamas in a position to take advantage of what we expect will be an upturn in the economy.   It will significantly improve our tourism product and hence our competitive position in the world; the other will alleviate the frustrations of residents of New Providence who daily contend with intolerable traffic congestion. Both will create hundreds of construction jobs.

         I note in this regard, that significant additional roadwork is being undertaken around New Providence where our roads have been allowed to deteriorate to an unacceptable degree.   And so, in addition to the repaving of Bay Street from Blake Road in the West to Mackey Street, significant additional roadwork will be carried out from Fox Hill Road eastward along Eastern Road and elsewhere around this island including portions of Shirley Street.

         And as I have indicated, a number of road work contracts are presently underway on several of our family Islands.

         We have never had such expenditure on projects of this magnitude before.  

         Funding is provided in this Budget in support of the construction of the College’s new Centre for Entrepreneurship. The Government and the private sector are each providing $2 million toward the Centre.

         Independently of these projects, the Government has approved the construction of the $85 million new US Departure Terminal at the Lynden Pindling International Airport.   This project is scheduled to commence in July and will also create several hundred new construction jobs.

Mr. Speaker:

         We have had to make the difficult decision not to proceed with a number of very desirable projects at this time.   For example we have had to determine not to proceed with the construction of a new Judicial Complex to house the Supreme Court and the Court of Appeal on the site of the old Royal Victoria Gardens, making the present Supreme Court site available for renovation and conversion to our National Museum.

         Instead, we have decided to refurbish the present Supreme Court building and the court buildings immediately around it. The main Supreme Court building will be completely renovated. The renovations will provide an additional 3,800 sq.ft of floor area on the upper floors and attic, provide additional space for new Judges’ chambers and secretarial areas, improve the accommodations for juries and witnesses, enlarge the exhibits store and library and provide additional facilities including IT equipment rooms, a conference room and a Marshalls’ office. The redesigned Supreme Court building will provide for improved security and the separation of circulation of the judges and jury from the public. The courtrooms themselves will be completely refurbished to reflect the dignity of the courts.

         In addition to the renovation of the main Supreme Court Building, the court building at the corner of Bank Lane and Bay Street will also be renovated. The court room upstairs will be enlarged to properly accommodate criminal trials. The space downstairs will accommodate a refurbished Judges Chambers, jury room and other offices for the work of the courts. The Office of the Speaker will no longer be located in that building.

         Members will be aware that the work on the completion of the Magistrates Court complex on South Street is well underway. When completed, it will provide for twelve Magistrates Courts with all the offices necessary for the work of those Courts. In addition to completing the construction of the magistrate court building, we are well underway in acquiring the properties immediately surrounding the building. These properties will be able to provide sufficient parking to accommodate the public.

Mr. Speaker,

         With the relocation of the Magistrates Courts from Bank Lane to South Street, the court rooms presently located in the building on the eastern side of Bank Lane will be vacated. We have retained architects to provide us with a design that would enable us to utilise that building as courts suitable for commercial, family and other civil matters.

Mr. Speaker,

         We are satisfied that with the completion of these projects, the facilities of the Supreme Court will have been greatly improved. The work of the Supreme Court will be greatly assisted and it should be possible to have at least 4 criminal courts in session on a continuous basis.

         Equally, the improvements to Bank Lane will result in a needed facelift to that area of the City of Nassau which is consistent with our commitment to the redevelopment of our beloved City.

         I wish to note, however, that the construction of a new Judicial Complex and the creation of a purpose built National Museum are dreams deferred and not cancelled.   Nothing that we are doing now will prevent the historic Supreme Court building from being converted to form part of our National Museum in the future.

Mr. Speaker,

         We have also had to postpone the introduction of the Chronic Prescription Drug Programme until later in this fiscal year and have determined not to proceed with the construction of the new hospital at this time.  

         Like the dream of a new Court Complex, these are plans deferred, not shelved.   We fully expect that once the Harbour project has been completed next year we will be in a better position to complete the planning and commence the construction of the new hospital.   Hence, I am pleased to advise that all planning for the construction of the hospital will continue.

         With regard to the Chronic Prescription Drug Programme, I advise that the programme will be introduced in stages commencing at a date later than was originally anticipated.

Health is a key source of wealth and this makes good health an investment for individual, community and national well-being.   However, the benefits of good health in The Bahamas are not being optimized because of the predominance of chronic non-communicable diseases and the heavy financial burden faced by too many persons affected by such diseases in paying for health services, especially prescription drugs.

To address this situation, the Chronic Disease Prescription Drug Programme will increase access to cost-effective drugs for treating one's chronic condition; reduce the burden faced by patients in paying for prescribed drugs; and improve compliance through timely purchase and appropriate use of prescribed drugs.   Based on criteria such as prevalence, health impact, financial burden and effectiveness of drug treatment, 11 chronic conditions will be covered initially: arthritis, asthma, breast cancer, diabetes mellitus, glaucoma, high cholesterol, hypertension, ischaemic heart disease, major depression, prostate cancer and psychosis.   The list of conditions will be reviewed periodically and modifications made to add or exclude conditions according to defined criteria.

The benefit schedule will include prescription drugs and specific medical supplies deemed necessary by the attending physician for treating the member's chronic condition.

The eligibility criteria for membership will include persons who are:

·          pensioners of NIB (retirement and non-contributory, persons receiving invalidity benefits) and children (18 years & under); and

·          diagnosed by a registered medical practitioner in The Bahamas with one or more of the listed conditions.

To ensure full choice of providers by members, public and private pharmacies will be eligible to participate.   In some cases, special medical facilities such as oncology centres may be designated as Participating Providers.

The Scheme at its commencement will cover all elderly pensioners and school-aged children.   Subsequently, the Scheme will be expanded and a levy imposed to include all NIB contributors.   Data suggests that there are 40,000 persons in the identified groups who may have one or more of these chronic illnesses and it is expected that approximately 80% or 32,000 people will participate in the first phase of this new Programme.

Mr. Speaker:

            I am tabling today the Report of the 2009 IMF Article IV Mission which visited Nassau in March/April of this year. This Report was presented to the Executive Board of the IMF last Friday, 5 June, 2009, and will shortly be published on the internet with a brief statement, called a Press Information Notice or PIN, setting out briefly the findings of the Executive Board.

            Since 1999, the IMF Article IV Mission to The Bahamas occurred only once every two years, with a less formal-type mission, called a ‘staff mission’ every other year. From 1999 to date, the IMF had considered that The Bahamas’ strong record of sound macroeconomic management did not require an annual mission. With the onset of this global crisis, the IMF has been recommending once-yearly Article IV Missions to all countries including The Bahamas. The next Article IV Mission will, therefore, be in 2010.

            We have agreed to the publication of these Reports since 1999 as they form a most useful source of information and expert comment on the Bahamian economy. Further the Reports are a test or standard by which one can gauge the macroeconomic management of the Government year by year. Of course, the IMF sets the most exacting standards so one must view a country’s performance against those standards as the equivalent of being marked out of 100%.   Like all responsible democratic and transparent Governments, my Government has no difficulty in releasing the IMF Reports. We are prepared to implement recommendations which we consider useful in those Reports and we are prepared to face up to any criticism on not implementing other recommendations which we, my Government, consider untimely or inappropriate. I will have more to say on this aspect.

            We are very grateful that there is an international organization of the caliber and function of the IMF which can provide us, and other countries, with objective economic and financial advice of a high quality and that can relate that advice to global developments for our information and consideration. It is an invaluable function of the IMF and one which benefits every member of that organization. If the IMF did not exist we would have to struggle far and wide to seek out advice and analysis of the caliber which the IMF provides as a matter of routine in the Article IV Consultation process.

            In the Report, the IMF refer to the record of sound macroeconomic management which we have followed in The Bahamas. The consequences of our sound overall macroeconomic management are:-

·          the adherence to the fixed exchange rate and parity with the US Dollar which continue to serve the country well in terms of making The Bahamas an attractive investment location and in terms of low inflation, and

·          a relatively low level of Government debt to GDP which, in turn, enables The Bahamas to remain a low taxation economy.

     The focus of the current IMF Report is to identify the policies now needed in this time of global crisis to ensure the continuation of these benefits of sound macroeconomic management.   In this context, the major area of greatest concern to the IMF is in relation to the budgetary situation because of the deterioration in Recurrent Revenues arising from the global economic crisis.     

            At this point let me enter two caveats.

            In looking at the budgetary data in the Report it is important to bear in mind that the Report was prepared several weeks before the 2009/10 Budget was finalized and that it therefore does not contain the most up-to-date data, especially on the 2009/10 Budget. Nevertheless, in the Report the data for 2008/09 and 2009/10 are very close to the final data used in the 2009/10 Budget Communication with the exception of revenue.

            The second caveat is that in comparing the IMF fiscal projections with the Government’s budgetary data one must bear in mind that the IMF classification is different in a number of respects. To get over the inconvenience caused by the 2 classifications, the IMF intend, starting with the next mission, to produce tables showing their projections on the same classification basis as the Government to facilitate comparison.

            The Report points out that the onset of the global crisis has seriously undermined Recurrent Revenue performance in 2008/09 and will, as long as the crisis continues, adversely affect the performance in 2009/10 and beyond. Further, the global crisis is affecting the capital inflow which, again, impacts on Recurrent Revenue.

            On the basis of their numbers the IMF project a weakening revenue performance which could mean that in 2009/10 the fiscal deficit could amount to 5.8%.   It will be recalled that in the 2009/10 Budget Communication the GFS Deficit was projected at 3.9%.   The essential difference between the 2 figures arises from a higher Budget projection for Revenue.   The higher projection is justified.

            Looking towards the medium-term, for many years the IMF has been recommending the implementation of a sales tax on both goods and services in The Bahamas. This matter has been the subject of ongoing research and analysis in the Ministry of Finance, and this will continue so that if, and when, it is decided to proceed with such a tax, as much as possible of the preparations are in place to commence the consultative process with the public and with businesses.

            However, before embarking on such a major step as a sales tax, my Government has to be satisfied that the existing system of Recurrent Revenues has exhausted its usefulness and potential. In this regard, it will be noted in the Table headed “Recurrent Revenue as % of GDP” attached to the 2009/10 Budget Communication that Recurrent Revenue – even with the measures outlined – will only reach 18.8% of Gross Domestic Product in 2009/10, which is 1.2% or almost $90million below the level of 20%, the level deemed reasonable to meet the needs of financing essential Government services. Further, this figure of $90million is based on the depressed level of GDP arising in 2009/10; a higher GDP would show that the gap of 1.2% is of even greater significance in absolute dollar terms.

            Of course, my Government accepts that, in the fullness of time in the context of future WTO membership, The Bahamas will have to modify its Customs regime and compensate these modifications with a sales tax of some form. However, that transition to a sales tax will have to be timed and managed carefully to provide adequate time for full consultation with the public and businesses.

            One view of the IMF Report is that it is a snap-shot of the Bahamian economy as at March/April 2009. The dynamics of the global economy, which has a massive bearing on the fortunes of the Bahamian economy and every other economy, are changing in ways difficult to identify until some time has passed. It could be that the global economy is commencing recovery, as some indicators such as recent movements in international interest rates suggest. It is reassuring to note that the next IMF Article IV Mission in 2010 will provide an update on the assessment of the 2009 Report and indicate any necessary adjustments.    

            The Government’s macroeconomic policy is fundamentally in line with the recommendations in the IMF Report. There are no policy differences except in relation to the timing of a broadening of the revenue base.  

            My Government is grateful for the work of the IMF Mission and their valuable Report. Governments led by me have never strayed far from a grade of Distinction in the IMF marking system! I commend the Report to this Honourable House.  

Mr. Speaker:

         In the Budget Communication we have rightly placed great emphasis on the careful fiscal management which is now permitting us to go temporarily outside our committed fiscal targets in order to moderate the harmful impact of the global economic recession on our people.   Nevertheless, the consequent temporary rise in the ratio of Government Debt to GDP beyond 40 per cent is a matter we take most seriously, and, make no mistake about it, as I have said in my Budget Communication, we shall lose no time returning our fiscal policy toward the target of 30-35 per cent ratio of Government debt to GDP that has always been my Government’s objective.

         So that you do not fall prey to those who would have you believe this is the end of the world, even if they themselves had no fiscal targets before mine were articulated, I wish to put our situation in some perspective relative to some Caribbean countries.

         In 2007, the most recent year for which comparative data are available, only The Bahamas and oil producing Trinidad & Tobago had total debt to GDP ratios under 50 per cent and external debt to GDP ratios under 10%.

         While our Government debt ratio will surpass the 40% mark, clearly this is to be seen as no more than a temporary departure from a disciplined path to which we have committed ourselves over our years in Government, the correctness of which we are firmly convinced.   That is why we are so confident that this departure will be temporary.

         The point should be made that this temporary departure represents a thoughtful balancing of the costs against the benefits of taking such a course, and without doubt we believe it is the right thing to do at this time.

         It was, in point of fact, the outcome of deliberate thought.