Giving an overview of the Bahamian economy at the 47th National Convention of the Progressive Liberal Party, Minister of State for Finance, James H. Smith, said despite an IMF’s report citing a 2.9% growth, the economy in 2002/03 is weak and that this weakness is affecting the inflows of revenues into the Consolidated Fund.
Minister Smith said that even though expenditure is not out of step with the projections of the 2002/03 budget, the revenue situation makes it likely that The Bahamas could have a significant fiscal deficit in 2002/03.
Addressing the convention on Tuesday at the Wyndham Nassau Resort & Crystal Palace, Smith indicated that the revenue structure is intimately linked with the country’s national economic performance. Because of this, any small downturn in the economy could have a adverse effect on revenues. He said one of the challenges faced by the PLP Government is to correct the revenue structure so that it is less sensitive to severe shortfalls when the economy weakens.
“We need to seriously consider reducing our revenue dependency on customs duties and implementing a revised tax regime which is more equitable to low income earners and which could still yield the level of revenue needed to support our public services,” Minister Smith said. “We can do this without introducing an income tax. This matter is currently under review.”
The Minister said it may be necessary to change our tax regime to address potential budget deficits in the future. The reason is simple he added – fiscal deficits cannot be tolerated for long periods without causing economic dislocations.
Such dislocations, Minister Smith said could cause changes in tax policies to eliminate the deficit or even worse, include excessive Government borrowing to finance the deficit.
He stressed that an examination of the revenue trends for the fiscal year 2002/03 indicate that there is likely to be a considerable difference between the projected revenue and the revenue that is actually collected.
This difference if left unchecked, he said, could be in excess of $100 million although an original deficit of $180 million was projected.
“It is therefore of critical importance that we take steps to contain and if possible, reverse this unwelcomed trend as soon as possible,” he said. “We will need to urgently adopt measures to improve and expand revenue collection while at the same time, containing Government expenditure.
“These measures together with any investment inflows should mitigate any serious fall-out and I am pleased to report, that work in this area has already started.”
Minister Smith stated that when he made his first presentation on the outlook of the Bahamian economy in May, some things were not clear. Moreover, he said it is still not that much clearer as the outlook for the coming months is more difficult to assess due to uncertainties arising from the intervening developments in the external political and economic environment.
Noting the prospect of war in the Middle East, fears of international terrorism and the economic cost of enhanced vigilance, Minister Smith said The Bahamas must view the prospects for economic growth and development over the next two or three years with some degree of realism and prudence.
In his assessment of the economic and fiscal position of the country in May, the Minister illustrated that the Bahamian economy was facing a clear and present difficulty and that this difficulty arose as a result of the fall-off in tourism following the terrorist attacks in September 11. This, together with the sluggish U.S. economy adversely affected our earning from tourism.
Minister Smith also mentioned losses in the financial services sector as a result of the legislation passed by the former government in response to the ‘blacklisting’ by the Financial Action Task Force (FAFT). Continuing, he said the public finances were placed under additional strain because of hurricane Michelle and the Straw Market fire.
“Given the combined effect of those events, it became clear that the economy was not performing as well in 2001 as some would have led us to believe,” he said. “Indeed, one of the first acts by the PLP government was to utilise a U.S. $125 million loan facility which had been put in place by the previous administration to soften the impact of the economic slowdown.”
Nevertheless, the Minister said, there some hopeful signs that the dark clouds of uncertainties will gradually lift in the future. This would certainly occur he said if the situation in the Middle East were to become more stable and if the US and global economies were to renew the economic expansion the nation saw in the 1990’s. Likewise, the Minister said that he was confident that by 2003, there would be a firm return to strong and sustainable growth for The Bahamas.
Suggesting a positive way forward to improve the economy, Minister said the country must be ready to analyse the cost and benefits of any progressive projects so that the best possible deal could be engaged with international investors.
Because of a significant under-reporting of revenue, Minister Smith advised that this period of downturn must be utilised to train and put in place a stronger cadre of revenue administrators who can detect evasion and avoidance.
Stating that there will likely be demands for concession and incentives from Bahamian and international investors once the economy recovers, the Minister recommended that time be used to analyse the costs and benefits of the concessions already granted and eliminate or reduce those which make no sense.
“At the same time, we should look to international competition for investment and determine the most effective regime of concession and incentives for the Bahamian economy,” he said. “We should definitely look careful at the various programmes and facilities which we have in place to encourage Bahamian entrepreneurs and small medium-sized businesses and ensure that our regime fosters to the best possible advantage, Bahamian entrepreneurship.”
The Minister of State for Finance said during the coming months, various revenue agencies will concentrate on enhanced training. This will include extensive computer training for many officers as possible with the aim of increasing use in information technology in revenue administration. Furthermore, he said the agencies will also be given training in audit techniques and in inspection methods to better detect evasion and avoidance by tax dodgers.
“I am convinced that our economy will recover and we will be in a position to progressively implement the policies in ‘Our Plan’,” he said.
By Lisa Albury, The Nassau Guardian
