By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The government's fast-paced fiscal fix is being driven by its lack of trust in future administrations to correct multi-million dollar "imbalances", the deputy prime minister revealed yesterday.

KP Turnquest admitted to Tribune Business that the government's "aggressive" strategy was "not without risk", but said it had little choice due to uncertainty over whether its successors would share the same enthusiasm for fiscal consolidation.

Pointing out that The Bahamas' interest bill is now $100m greater than the next-largest budget line item, Mr Turnquest said the government cannot rely on increased economic growth alone to turn the fiscal tide.

He disclosed that its debt servicing bill would have risen by a further $80m in the upcoming budget year had it not implemented the 60 percent VAT rate hike, with such rising costs threatening to "eat up" any GDP growth.

While the 12 percent VAT rate is projected to suck an extra $400m from the Bahamian economy during the 2018-2019 fiscal year, Mr Turnquest suggested the blow would be cushioned by the fact that the $360m in arrears - some $172m of which will be paid this year - will be injected straight back via payments to vendors and suppliers.

Budget data shows that the government's tax take will have almost doubled within seven years if its short-term fiscal targets are hit, with revenues rising from $1.47bn in 2013-2014 to $2.885bn in 2020-2021 - a near $1.4bn or 96.2 percent increase.

The figures highlight the huge, and rapid, increase in monies paid to the public treasury to finance the explosive growth in the government's size, with total recurrent spending projected to increase by almost $1 billion over the same period - a 57.6 per cent rise to $2.56 billion.

Mr Turnquest, though, said this provided further support for the Government's corrective action as it showed how public spending had risen faster than the economy and private sector can sustain.

Many Bahamians have challenged the magnitude and pace of the Government's fiscal correction, arguing that the 12 per cent VAT and three-year arrears pay-off are too much, too fast, and threaten to drive the economy back into recession.

But Mr Turnquest argued yesterday: "This is an assessment we have made. We believe it is the right thing to do, and we are doing it over a reasonable period of time. We have put this correction off for many, many years, and are getting to the point where our debt financing costs are almost $100 million greater than the next most expensive Budget item.

"There's no way we can add $89 million to that next year. We have to address the problem. At the end of the day, somebody has to pay the bill. We can drag this out four-five years, and get to another administration. They may or may not choose to do something.

"We have an opportunity to fix it, and believe with an increase in VAT we have an opportunity to do that and bring in those savings we have talked about." The latter comment refers to the $100 million in import and Excise Tax reductions Mr Turnquest has promised to 'return' to taxpayers once the three-year arrears pay-off is completed.

The Government's three-year timeline is being driven by the need to hit the Fiscal Responsibility Bill's 0.5 per cent deficit target for 2020-2021, plus other factors such as the tax restructuring required for World Trade Organisation (WTO) membership.

But some observers, including Gowon Bowe, the Bahamas Institute of Chartered Accountants (BICA) president, have challenged the need for such haste while noting that it gets the worst of the fiscal consolidation out of the way before the next election cycle.

"Why the requirement for matters to be done in three years?" Mr Bowe told Tribune Business recently. "Is it just coincidence that this leads into the commencement of campaigning for the next election?

"External observers have never mandated timelines. They have criticised the absence of formal plans, with proper accountability through assessing the commitment to meeting targets set out in a formal plan. If the economy continues to grow, and deficits continue to reduce and move to surpluses, the timeline has greater flexibility."

Mr Turnquest yesterday admitted to Tribune Business that the Government was aware of the next election's timing, but not for the reasons many may think.

"There's no point in me hiding the fact we are cognisant of the next election deadline, but not from the point of view of being re-elected," he told this newspaper. "We have an opportunity to fix it while we're here, and if we go into another administration we don't know what commitment they will have to fix the fiscal imbalances.

"While we have an opportunity we're going to fix it. The numbers work out for a three-year term. We acknowledge it's not without risk. Yes, it's aggressive, but if we're going to fix the problem we have to be aggressive.

"The interest is growing. You're not going to fix the problem by relying on economic growth. The increase in interest alone can eat up the growth in GDP."

Mr Turnquest agreed that, given the scale of the sacrifice demanded from the Bahamian people, there was "no doubt" the Government had to deliver on its fiscal targets and produce real benefits that taxpayers can feel within the set timelines.

He rejected assertions that the VAT rate hike would not deliver the $400 million gross revenue increase projected by the Budget, adding: "Barring unforeseen events I feel that we ought to be able to make the targets.

"When it comes to revenue measures it's difficult to say with 100 per cent confidence because things happen, things change, but we feel we've been reasonable enough, conservative enough in our estimates to reach them."

The likes of Mr Bowe and Sir Franklyn Wilson have warned that a 60 per cent VAT rate increase does not necessarily translate into a 60 per cent revenue rise, as projected by the Budget. They have suggested that the increase, coupled with the creation of numerous exemptions, has created avoidance incentives and VAT compliance loopholes.

As for the explosive growth in the Government's tax take, Mr Turnquest said this largely reflected VAT's introduction as revenues were aligned with the true cost and size of the public sector.

"There's been consistent under-budgeting and consistent deficits over the term," he added of the 2013-2014 and 2020-2021 period. "It points to the fact expenditure is growing at a rate not sustainable by the growth of the economy, and the correction to fix it is necessary."

The Deputy Prime Minister has also spoken at length about the need to reverse the "upside down" nature of the Bahamian economy, and the previous administration's reliance on the public sector - rather than the private sector - to drive job creation and GDP growth.

When Tribune Business pointed out that the fall-out from the VAT rate hike might undermine this objective, Mr Turnquest replied: "One is not necessarily mutually exclusive to the other.

"Any retool is going to take a number of years because of the sheer size the public service has been allowed to grow into. Downsizing is not going to be easy; it's not going to be short-term. We start the process of retraining, outsourcing and reduce the deficit that way."

He added that the reduction and elimination of various Excise and import tariffs, driven partly by the WTO accession, would also give "more control and power" to the private sector.

VAT is a regressive consumption-based tax, which falls disproportionately on lower income Bahamians who see a greater percentage of their income eaten up by taxes. The inflationary impact from the 12 per cent rate will further raise living costs, and lower living standards and disposable income, which threatens to lower consumer spending, demand and overall economic activity.

Mr Turnquest, though, argued that paying off the Government's unfunded arrears will return $360 million into the economy over a three-year period as much of this sum is owed to Bahamian vendors and businesses.

"It's not as if we're taking it and pulling it out," he told Tribune Business. "It's going right back into the economy." The Deputy Prime Minister expressed hope that Baha Mar's opening, combined with the increase in stopover visitors and foreign direct investment (FDI) pipeline, would also "cushion some of the fall-out" from the VAT increase.