By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Davis administration last night admitted that the decades-old “structural imbalance” in the Government’s finances is a recipe for “economic calamity”, and pledged: “This fiscal insanity must end.”

The Ministry of Finance, seeking to justify increasing government revenues to a sum equal to 25 percent of Bahamian economic output, warned that “dire and painful consequences” will follow if public spending continues to exceed tax income by hundreds of millions of dollars on an annual basis.

With the $12bn national debt still matching, or close to, the economy’s overall size, the Government said relying solely on new and/or increased taxes to eliminate the fiscal deficit - which was equivalent to 7.4 percent of gross domestic product (GDP) in 2021-2022 - would require “a roughly 37 percent increase in the tax take” from households and businesses.

Acknowledging that an increase of this magnitude would likely plunge the Bahamian economy into recession, and be counter-productive to the job creating expansion it is seeking, the Davis administration confirmed its medium-term fiscal strategy will combine spending restraint - bringing fixed-cost public spending down to 20 percent of GDP - with tax enforcement and enhancement measures.

Conceding the existence of an annual “gap” between taxes that are collected and what should be paid, the Government reiterated that a combined $840m is owed to the Public Treasury in unpaid VAT, Business Licence fees and real property taxes. However, the Fiscal Strategy Report unveiled earlier this year revealed that revenues must increase by $1.3bn over the next four fiscal years - a jump of 55.7 percent - to achieve 2024-2025’s Budget surplus of $71.9m.

Referring to its election campaign promises to deliver “big and transformative change”, the Ministry of Finance paper said: “If the Government is to be successful in achieving this new direction and securing better economic outcomes for all Bahamians, specifically in terms of jobs and standard of living, it is undeniable that it must as a priority restore the fiscal health of the nation.

“Running never-ending deficits, one piling up on top of another, to the point that the amount of debt owed by the Government exceeds the size of the domestic economy is a prescription for fiscal and economic calamity. This fiscal insanity must end, and the Government that was elected last September is doggedly determined to do just that as a vital foundation for its transformative Blueprint for Change.”

The Bahamas has never run an annual fiscal surplus since Independence, and the Davis administration’s paper made clear its view that responsibility for this lies largely on the revenue side. To make its case, it noted how revenues equivalent to 20.2 percent of GDP in the 2021-2022 fiscal year were dwarfed by spending that was equal to 27.6 percent of economic output.

“The fundamental fiscal problem in The Bahamas is that government revenue, at 20.2 per cent of GDP in 2021-2022, comes nowhere close to being adequate to sensibly finance Government spending,” it added. “At an aggregate level, then, we face a structural imbalance between spending and revenue amounting to some 7.4 percentage points of GDP. Such a gap is clearly untenable and, if allowed to persist, could well lead to dire and painful consequences.”

Likely seeking to head-off counter arguments that wasteful spending, inefficiency and corruption under multiple administrations are equally, if not more, to blame for The Bahamas’ fiscal woe, the Ministry of Finance quickly added: “That is not to say that public expenditure is immune from review and assessment.

“Indeed, as explained in the Fiscal Strategy Report, the Government is determined to implement targeted reforms to enhance the effectiveness and efficiency of public spending.” However, it made clear that increasing annual revenues is the main focus and priority in the Davis administration’s bid to eliminate the fiscal deficit by the 2024-2025 fiscal year.

“How best to address this fiscal conundrum?” the paper asked. “One option would be to simply raise the amount of revenue collected from Bahamians to the full extent needed to finance the current level of government spending. That would entail a roughly 37 per cent increase in the tax take which, in and of itself, would evidently be highly counter-productive to the Government’s critical objective of significantly bolstering the rate of economic growth and job creation.

“An alternative solution would be to simply shred government spending to the point that it matches the current level of revenue. It is evident that such an approach would readily have severe and deleterious effects on Bahamian society, in terms of access to vital government programmes and services such as health care and education, to name only two..... Quite obviously, simple solutions are to be eschewed.”

It is unclear why the Government has focused on the 2021-2022 fiscal year to bolster its case given that this was still a period when The Bahamas was grappling with the COVID-19 pandemic. Lockdowns and other restrictions still curtailed economic activity and government revenue, while social assistance spending was still elevated, meaning that the 7.4 percentage point gap between expenditure and revenue was higher than normal.

Using current and real GDP figures from the Government’s Budget for 2022-2023, that 7.4 percentage gap translates into $981.53m and $824.36m respectively. The deficit for the current fiscal year is projected to be $564m or equal to 4.3 percent of GDP, a somewhat lower amount, but there can be no denying the existence of a structural fiscal imbalance.

The Ministry of Finance, meanwhile, argued that the Government’s current and projected spending levels “are nowhere near to being excessive internationally”, pointing to GDP ratios that are in the low to mid-30 percent ranges in Trinidad & Tobago, Belize, Jamaica and St Kitts and Nevis; 27 percent in Barbados; 25 percent in St Lucia; and 22 percent in Grenada.

Adding in capital spending equal to 3.5 percent of GDP would take the Government’s total spending over the medium to a sum equivalent to 23.5 percent of GDP, the Ministry of Finance added. “The sensible way forward is through a combination of spending restraint and revenue enhancement, and this is the cornerstone of the Government’s medium-term fiscal strategy,” it said.

“On one hand, the plan is not to cut the level of recurrent spending but, rather, to constrain its rate of growth such that its ratio to GDP declines over time to a more sustainable level of 20 per cent. Reforms and enhanced efficiencies in government operations will contribute to this goal.

“Reallocations will also be implemented to align spending to core government priorities as set out in the Blueprint for Change. These focused actions on recurrent spending will also facilitate a much-needed, sustained boost in capital expenditure to 3.5 per cent of GDP. The latter will be critical in underpinning the stronger long-term growth of our economy.”

Describing the 25 percent revenue-to-GDP target as “the appropriate counter-balance” to this level of spending, the Ministry of Finance said achieving it would also restore the fiscal headroom necessary to cope with post-hurricane rebuilding and other climate change-influenced disasters.

“At 25 per cent, the yield of the revenue system will be sufficient to fully finance both recurrent and capital expenditure while also leading to the gradual elimination of the annual deficit. Fiscal headroom will also be provided through which the Government can deal with unforeseen eventualities,” it added.

“While vital within the context of the Government’s fiscal strategy, a revenue-to-GDP revenue ratio of 25 per cent is not unreasonable in and of itself or when viewed internationally. Within the advanced G-7 nations, the revenue ratio amounts to some 36 per cent; in the Euro area it averages roughly 46 per cent. Latin American and Caribbean countries post an average ratio of 27 per cent with regional rates of 30-31 per cent in Jamaica, Barbados and Belize.”