The cancer of debt
CFAL Economic view
Last week the Department of Statistics released the latest unemployment numbers. They were not pretty to say the least. Given that we are in the “silly” season we expect many political analysts to offer their own opinions as to why the employment numbers are so high. What we would like to see are some specifics addressing the myriad of issues facing us today (including the high level of unemployment) over the next 36 months. We can write and pontificate on why the unemployment rate is so high, particularly among the country youth, but will instead today focus on the debt cancer affecting on our national body.
One of the single biggest issues facing us is our national debt. We are fast approaching the point when we will no longer be able to borrow at favorable rates in the international market. Although the debt build-up was several years in the making, we still have time to change course and address some of the attendant issues. We cannot continue to run deficits along with those unfunded liabilities which we never speak about — i.e., civil servant pensions.
We are in urgent need of a plan to address unfunded pensions but also a plan to grow our economy and manage the debt problem. Debt is not all bad when used appropriately. It becomes a problem when we stop borrowing for development only and begin to borrow to meet interest payments and recurrent expenditures — i.e., civil servant salaries, etc.
The Bahamas is not alone in this regard. One by one, the countries of Europe are losing their ability to sell their bonds at an interest rate that is sustainable for their economies. They have seen their revenue bases eroded and have had to resort to severe and socially disruptive restructuring exercises. Even with central bank’s interventions to accommodate their spending by printing money together with the assistance of other countries, which tax their citizens to pay for the excesses, the debt burden still remains far too high.
Deficit must be addressed
We believe that dealing with the deficit is the single most important factor for the future of The Bahamas. Some would argue that crime and education are more important but that would be shortsighted. Whenever economies are doing well there is a tendency for crime and social ills to decline. Indeed, unless the country has the financial ability to provide funding to fight crime and provide education, the social condition would only get worse.
We believe that the major focus of this upcoming election should ultimately be about dealing with the deficit and putting the country on a path to achieving a sustainable budget deficit rate; one that is less than the growth rate of our country. By not dealing with this issue we run the real risk of creating many problems for ourselves including the likelihood of opening ourselves to harsh penalties such as those imposed by international agencies such as the International Monetary Fund (IMF). Continued economic imbalances could, in the long run, affect the exchange rate and our sacred one to one dollar peg to the U.S. dollar.
No one likes to talk about devaluation but we must face a new reality, we can’t afford to put our head in the sand like the ostrich. Instead, we have to develop a coherent plan to grow our economy.
Unless we seriously attempt to address our problems directly and urgently, we will face tough choices in the future. Choices, which are not pleasant for any government.
The growing debt and the deficits are a deadly cancer on the economy. Together they will deliver a mortal blow to the economy if not dealt with. Putting off treatment as we all know will not make the cancer go away by itself, and the cancer of our debt is clearly growing and malignant. It will soon overwhelm our national economic body. The treatment of a cancer is always accompanied by both cost and pain, whether on the personal or the metaphorical national level.
Problem can be fixed
The problem is solvable and indeed there may be many different solutions. Our difficulty is that we have not yet found the political will to decide on what type of treatment is needed and the will to change our way of doing things and move away from doing only those things which we are comfortable with. Change is difficult, but we cannot grow without change.
Our solutions must be politically feasible; we have an aging population requiring increasing health service which is growing in cost annually. Some estimates place the figure as high as 70 percent over the last decade. This is clearly not sustainable. We must address this issue as a matter of urgency. As our population ages, an increased burden is placed on the National Insurance scheme. Informed opinion suggests that National Insurance in its present construct won’t be able provide for all of us in the future unless fundamental changes are made. We should add here that National Insurance was never intended to provide 100 percent for us in our retirement.
We also need to address our tax structure. Why we continue to kick the can down the road is beyond us. We must deal with this issue now. It cannot be left for future generations to deal with. If we continue to ignore those problems, it is our considered view that our economy will become like some of our friends to the south.
If the government decides to raise revenue via tax increases, it may be useful to conduct an exercise to examine the different implications for various tax increases. Not all tax increases give the desired effect; some can have the reverse effect of further stalling revenue intake rather than increasing it. We won’t argue how we should spend our tax revenues. However, we do suggest that we should seek to collect them with as little negative impact as possible. Taxes have consequences.
Some appropriate level of government spending is required. We believe, however, that the spending should be targeted with a view towards creating new industries and employment opportunities for our citizens. Keynes did argue that deficit spending was a good thing in recessions. But he also assumed that the debt would be paid back in the next growth cycle. Must government and citizens forget the latter part?
There are some ideas that are fundamental to the growth of the economy, capitalism and free markets as we know them today. Thomas Hobbes argued that income measures what you contribute to society and spending measures what take away from it. Adam Smith argued that it is the wealth of nations and not the wealth of governments that matters. He argued it was more important to grow the economy and not government.
Without economic growth, the average person will be left worse off. If our population grows by one percent a year and at the same time our gross domestic product fails to grow by one percent, there is less for each person to share. It follows, therefore, that private sector growth is what is needed for general prosperity.
We should take the opportunity to learn from the crisis. Our economic structure as it currently stands, cannot be supported or sustained if we are to move forward with minimal pain. Our structure assumes that our government knows best how to allocate capital, a proposition that has been rejected in both theory and practice over the years.
We should never let a good crisis go to waste. Our economic structure as it currently stands is just unworkable if we are to move forward with minimal pain. Our structure assumes government knows best how to allocate capital, a proposition that has been rejected in both theory and practice over the years.
With regards to the problems facing The Bahamas in the next few years, we believe that there is no easy solution. We are convinced that there are no easy choices. Nevertheless, we are confident that the choices we eventually make will have both short-term and long-term consequences and we stand a better chance of success if we plan carefully.
•CFAL is a sister company of The Nassau Guardian under the AF Holdings Ltd. umbrella. CFAL provides investment management, research, brokerage and pension services. For comments, please contact CFAL at: column@cfal.com
Feb 22, 2012
