The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government’s revenue estimates were off by as much as 16 per cent at the recession’s peak, a key Ministry of Finance adviser yesterday describing this as creating “a very serious problem” that at one point blew the primary deficit up to $640 million.

James Smith, himself a former minister of state for finance in the 2002-2007 Christie administration, told Tribune Business that the higher fiscal deficits run by the Government from 2007-2008 onwards were created by overly optimistic revenue projections.

With government spending in each Budget tied directly to revenue estimates, Mr Smith said it was virtually impossible to adjust the former in time if the Government’s income failed to match expectations.

Suggesting that the Ingraham administration’s borrowing for capital works/infrastructure projects had masked the true problem, the bloated primary deficit, which is a function of recurrent revenues minus recurrent spending, Mr Smith said this was something that would “take some time” to get under control.

The good news coming from the International Monetary Fund’s (IMF) annual conference this week was that, unlike many developed countries, the Bahamas’ gross domestic product (GDP) growth estimates were maintained at 2.5 per cent for this year, and 2.7 per cent for 2013.

However, Mr Smith said their projects might be too high, suggesting the IMF was over-estimating the ‘multiplier effect’ of the $2.6 billion Baha Mar expansion on Cable Beach.

He told Tribune Business that Baha Mar’s economic impact during construction was “much less” than any of Kerzner International’s Paradise Island expansions, due to the workforce being dominated by Chinese labour.

But, while the IMF economic growth projections were the good news for the Bahamas, the grim reading was this nation’s gross central government debt-to-GDP ratio.

The IMF data showed just how sharply this had risen in the wrong direction over the past five years, growing from a respectable 32.6 per cent in 2007 to a 55.2 per cent in 2013.

The trajectory, or growth rate, of this ratio is the most worrisome characteristic for the Bahamas, although only Haiti, the Dominican Republic and Trinidad have better debt-to-GDP ratios in this region.

The Bahamas’ central government debt-to-GDP ratio rose to 38.1 per cent in 2009, then moved to 45.5 per cent in 2010, 49.5 per cent by 2011 and 52.6 per cent this year - steady march northwards.

“That speaks to both the denominator and numerator,” Mr Smith told Tribune Business of this data. “One is very sluggish growth - GDP is not moving at the pace needed to bring those numbers down, and the other is the increase in the debt. It will take some time to get the primary balance under control.”

And he added: “I’ve been looking at the numbers more closely, and while there’s been a clear increase in capital expenditure, I’ve been noticing an increasing primary deficit because revenue estimates have been missed by 8-10 per cent.

“I went back to 20-07-2008, and the deficit then was $640 million on the primary, due to the difference between projections and outturn.”

Mr Smith told Tribune Business that the Government had been badly missing Budget revenue projections “for some time”, dating back some five-six years.

The gap between these and actual outturn “became more pronounced” during the recession, and he added: “During the recession, the largest I’ve seen was around 2008-2009, about 16 per cent.”

Mr Smith suggested that the Ingraham administration’s estimates were based on the assumption that the Bahamian economy would turn around much more rapidly than it actually did.

When it did not, given that revenue estimates were the start of the Government’s Budget process, “if you get that wrong everything else follows”.

“You spend according to what your estimates are,” Mr Smith added. “If you told a guy he was getting $200 a week, he would make a budget to spend $200 a week. Pay him less, and that’s where it starts.”

Any future Budget surpluses would be used to pay past Bills, Mr Smith said, while the primary deficit was forcing the Government to borrow to cover civil service salaries - not invest in infrastructure projects that could be justified as “paying off” by generating future returns.

The expanded primary deficits were “in my view, a very serious problem”, Mr Smith told Tribune Business, and indicated the Government may have hired too many persons.

The situation, he added, also spoke to the need for tax reform, given that 70 per cent of revenues were linked to imports.

High unemployment and lower incomes meant reduced demand for imports, which translated into “a huge reduction in revenue that is not offset by a reduction in expenditure.

“Now we’re in a condition where we have to find ways and means by which the Government can bring down expenditure without seriously affecting how it deals with unemployment. But we can’t have both for ever,” Mr Smith added.

While the IMF’s growth estimates appeared to be largely based on Baha Mar’s impact, the Ministry of Finance adviser said: “I don’t think they have a grip on the multiplier effect from that. It will less, in my view, than Kerzner’s expansions by far.”

He explained that 50 per cent of construction projects in the Bahamas comprised labour, and given that Bahamians working on Baha Mar accounted for between 10-20 per cent of the total workforce, “the project will have a much lower multiplier”.

While crediting Baha Mar for ensuring the Bahamian economy had fared better in recent years than many others in the Caribbean, Mr Smith said its future was still largely tied to the US and the tourism industry.