By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government’s deficit for the first seven months of the current fiscal year breached the $400m mark as a key watchdog warned of “significant downside risks” to its fiscal forecasts and targets.

The Ministry of Finance, unveiling its January 2025 fiscal performance report, revealed it narrowly missed achieving a balanced Budget for the month via a near-92 percent cut in the deficit from $45.9m in the prior year to just $3.8m.

But the latter figure was still sufficient to push the total deficit for the first seven months of the 2024-2025 fiscal year through the $400m barrier, taking it to $401.8m - a sum more than five-and-a-half times’ greater than the $69.8m full-year deficit target.

The end-January figure is now some 575.9 percent higher than the Davis administration’s goal, meaning it will have to generate a $332m surplus - the amount by which revenue income must exceed the Government’s total spending - over the final five months of the 2024-2025 fiscal period to hit its year-end ambitions. And that sum is nearly five times’ greater than the $72m surplus it achieved in the 2023-2024 second half.

The magnitude of the required correction did not escape the attention of the newly-reformed Fiscal Responsibility Council, the watchdog with vetting the accuracy and reasonableness of the Government’s budgetary projections, which noted that this will have to be achieved amid “significant downside risks” - not least of which is the global economic fall-out from Donald Trump’s newly-enacted trade and tariff policies.

The Council (FRC), in its just-released report on the Government’s mid-year Budget, noted the wide gap between the actual half-year and projected full-year deficit, said: “While the Government has expressed optimism that the target deficit will be met, the FRC recognises that meeting the fiscal balance target will require revenue to outperform expenditure by $328.3m (now $332m) over the remaining six months of the year.

“The FRC finds that the presentation of more information supporting the Government’s position would have provided further insight into the rationale for the variance.” And the Council said the IMF’s cuts to The Bahamas’ and US economic growth outlook for 2025 - even before Mr Trump’s tariffs emerged - signalled that there are “significant downside risks to the fiscal forecasts” given that they are based on higher growth.

“The FRC notes that a key budgetary assumption for growth, in real GDP of 2.6 percent in fiscal year 2024-2025, is higher than the IMF’s revised forecast for the Bahamas of 1.9 percent and 1.7 percent in 2024 and 2025, respectively,” the Council added.

“The combination of a lower growth projection and anticipated deceleration suggests greater risk to budgetary forecasts for fiscal year 2024-2025. The FRC notes downside risk to the end-of-year fiscal outlook should actual growth fall short of the forecasts assumed by the Budget.”

The mid-year Budget statement shows real GDP growth projected at 2.6 percent for 2024-2025, a measurement that strips out inflation, and the FRC reiterated in its concluding statement: “Overall, the FRC finds that the Government’s programmed fiscal targets for fiscal year 2024-2025 are acceptable, albeit with downside risks.

“However, downside risks associated primarily with what could be less than favourable revenue performance during the second half of the fiscal year are noted.... It is also critical to note that rising geopolitical tensions spurred by the policies of the US government invite uncertainties around the growth prospects for the country’s main trading partner, presenting implications for domestic businesses and economic growth.

“Notably, the US’ April 2, 2025, unveiling of expansive tariffs on all countries, including a 10 percent tariff for The Bahamas, has been foreshadowed as the beginning of the global trade war, posing downside risk for the economy.”

The Council also said it would have been better for the Government to publish an assessment of how much VAT revenue it is foregoing as a result of slashing the rate to 5 percent for all unprepared food with effect from April 1, 2025, and how this will be compensated for.

Michael Halkitis, minister of economic affairs, previously said the Government is giving up around $30m per annum in VAT revenues due to the move but added that robust collections in other areas will more than make up for this.

However, the Council added: “The FRC is of the view that a presentation of the costing of the halving of the VAT rate to 5 percent on unprepared food, including on imported food, would have been appropriate as an assessment of the impact on VAT collections and wider implications for achievement of the fiscal balance target.”

And, while the Ministry of Finance’s fiscal reports signal that the monthly deficits are on a downward trend towards being eliminated, the Government will have to generate a substantial surplus over the 2024-2025 budget year’s final five months to come close to its $69.8m target.

The law mandates that a significant deficit target miss means the Government has to produce in Parliament an explanation for why this has occurred as well as a corrective action plan. It will be relying heavily on this current period, March through April, as this coincides with peak winter tourism and economic activity, as well as Business Licence fee payments and the bulk of real property tax collections.

Meanwhile, the Ministry of Finance disclosed that the near-balanced January fiscal performance was driven by a combination of increased revenues and reduced spending year-over-year. “Preliminary data on the fiscal outturn for January 2025 showed an estimated deficit of $3.8m compared with $46m in the prior year,” it said.

“This outcome reflected a 4.6 percent, $13.3m, growth in revenue receipts to $302.1m alongside an 8.6 percent, $28.9m, decrease in spending to $305.9m. Tax collections improved year-over-year by 10.2 percent ($25.8m) to $279m

“VAT receipts rose by $7.7m to $152.4m, reflecting improvement in the goods and services and realty components. International trade and transactions taxes grew by $12.5m to $69.5m, driven by gains in both departure taxes and excise duty,” the Ministry of Finance added. 

“Taxes on the use and permission to use goods increased by $5.4m to $21.1m, mostly due to an uptick in company and Business Licence fees. Non-tax revenue aggregated $22.9m for a 35.5 percent ($12.6m) decrease year-over-year owing to timing differences of rental receipts.”

As for spending, the Ministry of Finance said the Government’s fixed-cost spending in January was essentially flat with the reduction driven by a drop in its capital spending. “The $291.4m in recurrent outlays for the month represented an increase of 0.1 percent ($0.4m) from the corresponding period in the prior year,” the Ministry of Finance added.

“Public debt interest increased by $7.5m to $64.7m; subsidies were higher by $7.5m at $48.3m, and use of goods and services decreased by $18.4m to$55.9m, driven by lower finance charges and rental payments. Capital expenditures narrowed by $29.3m to $14.4m, which was inflated in the prior year due to ongoing infrastructural renovations.”

As for the Government’s direct debt position, the Ministry of Finance added: “During the review month, central Government’s debt outstanding decreased by an estimated $28.6m. The $120.3m in proceeds from borrowings was primarily derived from domestic currency sources (99.9 percent). Aggregate debt repayment of $149m was allocated between domestic (94.8 percent) and foreign (5.2 percent) currency redemptions.”