By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government must reduce the 70 per cent proportion of its payroll that goes towards salary deductions, a leading businessman yesterday warning it was causing a “remarkable contraction” in consumer spending and the wider economy.

Describing this as a “humungous problem”, Franklyn Wilson, the Arawak Homes and Sunshine Holdings chairman, said it explained why government ‘pay day’ no longer produced the sales spike many businesses once looked forward to.

And he suggested the figure, revealed in recent government presentations on Value-Added Tax (VAT), explained why some Bahamian commercial banks were so opposed to the Government’s Homeowners Protection Bill.

Mr Wilson said he suspected the chief concern for some banks was the limits the Bill proposed to impose on salary deductions, rather than fears it would alter the industry’s risk/return ratio and cause the mortgage market to grind to a halt.

He called on the Clearing Banks Association (CBA) to engage in “constructive conversations” with the Government about how best to tackle the salary deduction issue “in the national interest” without disrupting the industry’s business model.

“To me, the most significant thing that has come out in the press in the last week is that 70 per cent of the Government’s payroll goes to salary deductions,” Mr Wilson told Tribune Business.

“That one is a humungous problem. I believe the business community and all people in this economy need to look at the impact of that.

“When you take all the public service, and they have only 30 per cent of their income available for spending, that leads to a remarkable contraction in disposable income.”

Recent presentations given by John Rolle, the Ministry of Finance’s financial secretary, have shown that almost $20 million per month ($240 million per year) is deducted from civil service salaries to ensure they can meet their debt servicing obligations to the likes of banks and credit unions.

Of that sum, 69 per cent (almost $12 million) went to Bahamian banks, while another 17 per cent was sent to credit unions. Of the remainder, some 10 per cent ($2 million) goes on insurance, with the 4 per cent ‘balance’ headed elsewhere.”

In total, some $140 million of the Government’s annual payroll goes on salary deductions to the banks, with $41 million going to the credit unions and $24 million to insurance companies.

While the Central Bank of the Bahamas’ non-binding recommendations are that borrowers’ debt service ratios should not exceed 40 per cent of monthly income, the Government allows salary deductions up to 75 per cent of a civil servant’s take home pay.

And the Auditor-Genera’s recently-released 2010-2011 report revealed that even that 75 per cent threshold was being breached by the Government.

Analysing the implications, Mr Wilson told Tribune Business yesterday that many civil servants had to finance rent, and activities such as numbers, from the remaining 30 per cent of their salaries.

“Those who are religious and want to pay tithes, the general rule is 10 per cent of their salaries go to tithes. They’ve then got only 20 per cent left,” the Arawak Homes chairman added.

“It’s no wonder that churches are complaining their contributions are going down. When you have church incomes going down, that has implications, because all their charities and social programmes are challenged.”

As for the broader economy, Mr Wilson said: “There was a time in this town when every company looked forward to government pay day as impacting their sales.

“Now, only 30 per cent of government salaries directly affect every business in the country - $0.30 of every $1. With that 30 per cent some gamble, some pay tithes. You can see why there is a lack of velocity of money in this economy, and that cannot change even if the rate of unemployment is cut in half.”

He argued that some banks’ reliance on salary deductions as a means of securing loan repayments was why some institutions were so against the Government’s proposed Homeowners Protection Bill, which was proposing legal limits on this practice.

“The public now sees some banks’ opposition to the Homeowners Protection Bill was not for the good of the economy and the protection of risk,” Mr Wilson told Tribune Business.

“There are certain banks in this country pleading: ‘Don’t touch salary deductions.’. That’s what this was about.”

He added: “These figures show that the Government, in the national interest, has to do something about this.

“The reality is this: Seventy per cent of government payroll going on salary deductions is a number that cannot be allowed to grow, and it must be decreased. They have to change the rules on salary deductions.”

Mr Wilson said it would be “prudent”, given that many commercial banks “have made salary deductions such an important part of their business model”, to engage the Government in discussions on how to remedy this situation.

This, he added, would ensure banks were “not destabilised” while, at the same time, recognising that the ‘salary deduction’ model was out of control and damaging the Bahamian economy.

Urging the banking industry to direct its energies towards something “more productive” for the economy, rather than fighting the Homeowners Protection Bill, Mr Wilson said he understood that the sector had a responsibility to deliver returns for its shareholders.

Yet he added that this had to be counterbalanced with the greater good, namely the economy as a whole, and whether business models were sustainable.

“It’s only sustainable if it’s in line with the national interest,” Mr Wilson told Tribune Business. “A lot of things get out of control, grow more extensively than expected.

“When you get to 70 per cent of government payroll, it seems reasonable to conclude you can’t keep doing that. The cycle has to be broken at some stage.”