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Columns Last Updated: Feb 6, 2017 - 2:32:04 PM

Self-Imposed Austerity Measures Advisable for Next Government
By Arinthia Komolafe
Jan 11, 2012 - 1:37:15 PM

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As we enter into another election season and the next general elections of our beloved nation approaches, one of the greatest uncertainty that dominates the thoughts and minds of the average Bahamian is the current crippled state of our economy. Our national debt has increased during this economic crisis to more than $4 billion today with no end in sight to this spate of government borrowing that is being invested on infrastructure as opposed to people. In the last 2-3 months alone, the government has borrowed more than $200 million for the Water & Sewerage Corporation, road-works in Andros and construction of bridges in Abaco. 

The spending spree embarked upon by the government could erroneously suggest that the Bahamas government has been issued a blank cheque or a credit card that has no limit.  The reality remains however, that these loans will have to be serviced in the interim and ultimately repaid by current and successive generations of Bahamians with the debt to GDP expected to climb to an estimated 70% by 2016. 

Despite this massive borrowing, the real unemployment rate (including discouraged individuals) remains at more than 18% and no new industries have been created or expanded by the government. An economic recovery in which the working class can return to work with a legitimate chance of entering the middle class and the middle class is restored is desperately needed. The hope of realising the Bahamian dream of receiving quality education, a good paying job, owning a home and savings toward retirement must be rekindled within our nation.   

With the current state of affairs, it is clear that the successful political party at the polls this year will have to take a hard-lined approach toward fiscal policy and make tough decisions which may include self-imposed austerity measures to curb the current rising debt and set the economy back on the right path.  Currently, all eyes are on Europe and the Eurozone, which is experiencing what has been termed as the euro-debt crisis.  The European Commission has given strict orders to members of the European Union to carry out austerity measures to reduce their growing debts and deficits.  The ultimate reason for such a hard-line approach is to sustain the Eurozone and save the Euro, failure of which will spell a major disaster for the world economy and impede the ability of the global economy to climb out of this economic crisis in the near future.  British Prime Minister David Cameron has failed to fall to pressures to cut back on austerity measures and has gone as far as declaring that “We are living in the age of Austerity”.  Even more profound is PM Cameron’s articulation that he was prepared to be a one term Prime Minister who did the right thing as opposed to a two-term Prime Minister who did the wrong thing.  He asserted that this was the right route to create jobs and an environment for economic growth.  The Prime Minister of Spain in the same vein recently announced further austerity measures to the tune of $11billion and has committed to reducing his country’s deficit to 4.4% using measures such as a freeze on public wages and tax hikes on the wealthiest Spaniards.  Greece has also taken measures to carry out deep pay and pension cuts, tax increases and has committed to carry out changes to collective bargaining agreements.  France will increase its Value Added Tax (VAT) from 5.5% to 7% on many consumer goods except goods like produce, non-alcoholic beverages and water.  Meanwhile in the US, President Obama has already signed $11trillion in spending cuts into law and proposes more cuts.  He has also committed to reforms on the cost of Medicare and Medicaid.  

It would be unreasonable for The Bahamas to sit back and do nothing to help our own economy while the US, the EU and countries around the world are carrying out radical reforms to curb spending and revive their economies.  Countries that have been inclined to borrow from International Financial Institutions (IFI) like the International Monetary Fund and World Bank have been faced with conditionalities in the form of austerity measures to reform their economic policy to reduce their dependency on borrowing. We must be proactive and do something before we are told to. It is time to face the music, stop the rhetoric and make diversification of our economy a reality. 

The government of the day will have to become innovative and strategic to attract Foreign Direct Investments (FDI) and create opportunities and jobs for Bahamians outside of the unstable and vulnerable industries of tourism and financial services.  Understanding that FDI inflows are currently constrained due to the current state of the global financial markets, it must find new ways of creating revenue to service the national debt and fund essential social programs like education and healthcare. 

In the short-term, reforms must be made to the public service to achieve efficiency gains. This may mean job cuts where necessary, revisiting the statutory retirement age and improving tax collection. The continuous excessive subsidies allocated to government-owned enterprises must be reduced and eventually eliminated with privatisation of these enterprises being looked at more seriously.  With the reality of wage expense approaching 50% of government revenue, job and pay freezes may have to be initiated by the government with job freezes on essential services like education, healthcare and national security being exceptions.

The government will also have to consider welfare reform and a reform of its pension policies in a manner similar to that of the private sector. In the medium to long term, the reform of the existing tax code is inevitable; a progressive form of taxation must be implemented and the feasibility of a Value Added Tax (VAT) regime should be explored. The next government must commence the process for revamping the existing tax code in the best interest of the country and of generations yet unborn.

No one will argue that the current tax code which combines indirect and direct taxation is regressive and disproportionate to say the least. The tax structure in The Bahamas does not factor in the disparity in purchasing powers of individuals and corporate entities. While it may be argued that in the case of individuals, it boils down to better paying jobs and/or qualifications, the reality remains that the absence of a progressive form of income tax guarantees that the less privileged will always pay more and have less at their disposal.  It goes without saying therefore, that the gap between the rich and the poor will continue to widen unless the tax code among other things is addressed.  

The above recommendations may be a hard pill to swallow for many not least the government and ‘special interests’ who form part of the ruling economic class that have for decades failed to pay their fair share of taxes.  It is imperative to state that the positive affect of such a bold stance toward the fiscal prudence and the financial position of this country will not produce positive results right away, but if carried out with due care and diligence, they will produce positive results in due time. 

The socialist former PM in Canada, Chretien was faced with a similar challenge when his government was forced to carry out self-imposed austerity measures due to the rising debt in Canada. His government cut government spending across departments drastically and increased taxes on the rich. Cabinet Ministers were given marching orders to reduce spending.  The government witnessed a reduction in the debt to GDP ratio from 67 % in 93-94 to 34% in 1997.  More importantly, the resilience of Canada during the recent financial crisis was attributed to his tough actions several years ago.  The next government can take a page out of Canada’s book which has proved to be successful and must make tough decisions for our country’s sake.

The state of our economy, multiple downgrades of The Bahamas by credit rating agencies, shrinking revenues, growing debt levels and deficits are clear handwritings on the wall. Will the next government have the will, fortitude and courage to rescue us from this downhill motion? Will they put country over self and party politics? The Bahamas is crying out for and earnestly awaits the emergence of statesmen and stateswomen in place of politicians. 

Arinthia S. Komolafe is an Attorney-at-law.  Comments can be directed at arinthia.komolafe@komolafelaw. com.

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