Nassau, Bahamas – The following is a Mid-Year Budget Contribution by S. Andre Rollins, M.P.:
I begin by refuting a comment that was made in this House on Monday, where it was said that we were not pressured by the IMF to introduce VAT. This is just not an accurate statement, Mr. Speaker.
Of course we were pressured by the IMF to introduce VAT because it was clear to the IMF, just as it should have been clear to the Bahamian public, that our government had just grown too big and too expensive to operate and our economy was not performing well enough to pay for it. There is absolutely no question about it, we were approaching the economic danger zone.
The press reported that a recent IMF mission led by Mbuyamu Matungulu encouraged the government to finalize the implementation of VAT. I believe the choice of word was intended to be diplomatic and if they wanted to be blunt, they would replace the word ‘encouraged’ with ‘warned’, Mr. Speaker. The IMF mission warned that without the additional tax revenue needed to reduce the government’s indebtedness, it would be harmful to investor confidence and the country’s prospects for economic growth and employment. We were told that introducing VAT would have resulted in less of an economic shock than the alternative of shredding government labor costs by an equivalent amount. That is why I voted YES to VAT, Mr. Speaker, and any responsible government under those exact same circumstances would have done the exact same thing.
NHI and The Economy
Did we need to increase government revenue in the interest of protecting our nation’s fiscal welfare? Absolutely! The question we all need to be asking is whether continued tax increases will be sustainable in the absence of a simultaneous increase in economic activity? The answer is a resounding No!
If the economy doesn’t grow, on average, businesses won’t experience a growth in profits, employees won’t receive a boost in wages and, therefore, neither businesses nor their employees can absorb an increase in taxes without a loss of profitability and disposable income. For a number of these businesses it will mean a choice between cutting jobs and staying in business. Unless we stimulate economic growth in this country, we should not be entertaining any discussion about introducing any more taxes on the poor and middle class than we already have with the imposition of VAT at 7.5%. That means no increase in the rate of VAT and, Mr. Speaker, that in this struggling economy we cannot afford the introduction of a National Health Insurance tax without risking further stagnation of our ailing economy.
Our economy is not performing as it needs to, Mr. Speaker. This is an incontrovertible fact! We have heard stated repeatedly that we need to achieve annual GDP growth of 5.5% to meaningfully reduce the rate of unemployment and simultaneously absorb the number of high school graduates. Our economy is currently not even performing at one quarter that rate. You can only impose taxes so much before you experience the law of diminishing returns – tax revenues decrease because you tax businesses and consumers more than they can bear to be taxed. Businesses close down; employees are sent home. In effect you tax the economy to death!
It is imperative that we make every effort to give it to the public straight, Mr. Speaker. No amount of banging on these tables will serve to alter the realities being experienced by the average Bahamian, young and old, black and white in our country. Not only are Bahamians in Fort Charlotte losing homes, Mr. Speaker, but even those in previously unheard of places like Spanish Wells in North Eleuthera. We cannot allow the Bahamian people to think that we in here live in a bubble, sir. For many in our country things are still awfully tough and have been for a long time. While speaking in optimistic terms and banging on these tables may give some of our people hope, it is only because they think we see things they do not yet see. Unless there are sure signs of renewed economic vibrancy in the near future, I urge restraint in our pronouncements as there is danger in creating unrealistic expectations that will not make the government’s already difficult job that much more difficult. Should we forecast doom ahead? Absolutely not! However, until we are certain that we are out of the economic woods, we should be careful not to cause the Bahamian people to believe that when they look up they shouldn’t be seeing trees, but economic blue skies and sunshine.
Until we are truly out of the woods, sir, we would be better served by tempering the public’s expectations. When we say that the economy has turned the corner the inference drawn from that statement by the public is that the economy is now healthy enough to support an increase in jobs and wages. But is it really?! Is the economy really healthy enough to accommodate an increase in jobs? Is the rate of unemployment low enough to give Bahamian laborers the degree of negotiating power to be able to name the price for their labor and if not met by their employers are they easily able to walk off of their jobs and quickly find another one? No, Mr. Speaker this is just not the case, and this is not my opinion, the macroeconomic numbers bear this out. The numbers tell us that in the aggregate there is inadequate demand for labor and the economy is still not performing well.
The Prime Minister suggested as much in a Friday, February 13 article in The Tribune, where he said in response to the call for an increase in the minimum wage that “though I have indicated we have turned the corner, that is the promise of investments to come. So I can’t base my view on minimum wage on what has not happened. I have to use the indicators of the economy as they are, to guide us on what we are doing.” He continued: “we are going to do so incrementally as our circumstances allow us to do so.”
Obviously our economy is not doing well if we are afraid that an increase in the private sector’s minimum wage from a mandatory minimum of $150 per week will hurt businesses and job security. So within this context of a poorly performing economy, how can businesses survive if we continue to increase taxes and how can we protect existing jobs or create new ones? Yes the nation’s revenue picture may be improving, but it is certainly not because our economy is improving.
In these circumstances, Mr. Speaker, it is irresponsible for us to come to this place and call for an increase in the size and, by extension, the cost of operating our government that will require us to ask already struggling businesses and consumers to pay more in taxes. This is exactly what the introduction of National Health Insurance will represent – an increase in the size and cost of our government – at a time when the economy in my humble opinion is simply not yet healthy enough to withstand another tax increase.
If the economy’s health does not improve, an increase in the size of government can only be supported by an increase in the rate or number of taxes.
Why do I say this? Even with the introduction of VAT, the level of economic activity is inadequate for the 7.5% rate of taxation to erase the existing fiscal deficit. In the prevailing environment of weak economic growth, assuming that the government will not increase its deficit spending, which the government has said it will not do, then in order for us to increase the size and cost of government, it can only occur if we intend to increase taxes even more.
Increasing the size of government in a poorly performing economy is, therefore, antithetical to the welfare of businesses and their employees – it is a zero sum game – for someone to win, someone else has to lose. The government wins by taking in more taxes needed to support a growth in its size, yes, BUT only at the expense of Bahamian businesses, employees and consumers. In these circumstances, for the size of the government to increase, the private sector must shrink. Until our economy begins to show improved signs of life, I will not be one of those calling for us to send it into further economic shock.
I am not opposed to NHI, Mr. Speaker, I am opposed to us imposing any more taxes on Bahamian taxpayers at this time. Furthermore, I cannot support any call to place more taxes on the backs of the Bahamian people when the government refuses to avail itself of the potential tax revenue to be gained from what a minister of the government has indicated is a $900 billion dollar industry! There should be no discussion about National Health Insurance until we implement a National Lottery. To do otherwise would not only be a dangerous shock, but a very unnecessary one in the face of actions taken by the government to leave untold millions of potential lottery revenue on the table.
On the topic of shocks, Mr. Speaker, our nation’s energy sector is a major impediment to our country’s economic growth. I call on the government to put an end to the delay in effecting reform in this sector as the prospects for improved economic health are significantly dependent on our ability to reduce the cost of energy to businesses and residential consumers.
There is no reasonable explanation for why we need to have the highest energy costs in this region. The reality is that we must put pressure on the business community to increase the average salary, then one easy way that government can do this is by effecting energy reform which will result in reduced electricity costs for businesses that they can – in part – pass on to their employees in the form of higher wages. Our economy needs to be stimulated, Mr. Speaker, and energy reform presents a significant opportunity for the government to do just that!
Mr. Speaker, I want to now touch on a subject that Mr. Paul Moss has raised recently on public radio and that is the subject of exchange control. In an open economy, there is something that economists refer to as the ‘open economy trilemma’, which basically says that when faced with the choice between exchange rate stability, monetary policy control and free capital movement, a country can only have 2 out of these 3 things at any one time. That means that if you want exchange control, in our case 1:1 parity with the U.S. dollar and monetary policy, that is the ability of the Central Bank to determine interest rates, there cannot simultaneously be the freedom of capital movements across our borders. Or, if you want monetary policy control and the freedom of capital movements across our border, you cannot also have exchange rate stability.
The Bahamas government has chosen to have exchange rate stability combined with monetary policy control by the Central Bank, and therefore chosen to forbid the free movement of capital across our border.
If we didn’t have this capital control feature, the U.S. interest rates would prevail in The Bahamas and local banks would have thousands of mortgages on their hands more expensive than the values of the adjusted local interest rates.
It has been revealed recently that there is almost $8 billion dollars in a single Swiss Bank belonging to Bahamians. That is 10 times more money than we have in U.S. reserves at our Central Bank that are not helping to buttress the Central Bank’s efforts to maintain our dollar’s parity with the U.S. dollar. Might I remind this House that we have been borrowing foreign currency at tax payer expense to boost our Central Bank’s reserves to ensure that we maintain this parity. So, the premium that Bahamians are having to pay for 1:1 parity with the U.S. dollar, in the form of high local bank interest rates, is all for naught because there are no effective capital controls!
If we have exchange control and free movement of capital across our border, it means there is absolutely no reason for the Central Bank to be imposing interest rates higher than those obtained in the United States on the backs of the Bahamian people – no reason other than to ensure that local banks receive rates of interest far superior to banks in America, or Canada, for that matter. In the face of the revelation of the billions of Bahamian owned currency in one Swiss bank, this only strengthens the argument that we should consider dollarizing the Bahamian economy because exchange control in The Bahamas has failed!
We are violating the tenets of the monetary trilemma because in the Bahamas, by insisting on having exchange control, control of monetary policy and freedom of capital flows across our border, we are telling the rest of the world that we want to have our cake and eat it, too! Interest rates for mortgages at Bahamian banks are 3-4 times those of American banks and the question is under the circumstances why?!
Aside from ensuring handsome bank profits, perhaps another motivation is making it easier to dictate winners and losers in our economy. Some may get offended when I suggest that, but I am suspicious, Mr. Speaker. So, unless I have failed to understand something, on behalf of the Bahamian public, I urge the minister of Finance in his wrap-up of this debate to explain how in the face of the failure to control capital flows across our border, we are still allowing such exorbitant rates of interest to be charged in the Commonwealth of The Bahamas?!