The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government’s fiscal policy was yesterday likened to “filling a bucket with a hole at the bottom”, as the International Monetary Fund (IMF) warned that “accelerated” spending cuts were vital to stabilising the public finances.

K P Turnquest, the Opposition’s deputy leader and finance spokesman, told Tribune Business that the Fund’s fiscal consolidation projections did not match the Christie administration’s forecast that it will achieve a balanced Budget by 2017.

The IMF forecasts, contained in its full 2015 Article IV report on the Bahamas, predict that while the fiscal deficit will steadily decline from the 2.1 per cent of GDP projected for this fiscal year, it will still be 0.3 per cent in five years’ time - 2019-2020.

Expressing concern that one major economic ‘shock’, such as a hurricane-related catastrophe, could wreck these projections, Mr Turnquest said the IMF report showed Value-Added Tax (VAT) by itself could not solve the Bahamas’ fiscal woes.

Agreeing that tax increases/reforms had to be combined with public expenditure cuts and greater economic growth, the FNM deputy told Tribune Business: “If you look at the trends we’ve had over the last however many years, growth has only been about 1 per cent or thereabouts.

“But taking into account VAT at about 3 per cent of GDP, even with it we’re not going to get there [a balanced Budget].

“We haven’t done anything about expenditure. Expenditure is outstripping revenue performance, and we haven’t done anything about that,” he added.

“You’re filling this bucket, but there’s still a hole at the bottom.”

The IMF called for faster spending cuts over the medium-term to accompany VAT, warning that the new tax alone would not restore the Bahamas to “fiscal and debt sustainability.

“Currently, the fiscal consolidation plan envisages a small saving on expenditures reform,” the Fund’s Article IV report said. “Accelerated rationalisation of current expenditure in the context of a medium–term budgetary framework is therefore warranted to help preserve the hard-won benefits of the VAT, and help to restore fiscal and debt sustainability.

“Staff also urged the authorities to press ahead with plans to introduce fiscal responsibility legislation.”

Mr Turnquest, though, referring to the recent Bahamas Junkanoo Carnival and other taxpayer-financed events, said: “We keep finding ways to spend money, but not very many ways to save money and invest wisely for a return.”

Still, the Fund’s report acknowledged that “a substantial reduction in recurrent spending”, particularly on wages and salaries, and goods and services, had kept the 2014-2015 fiscal deficit below forecast.

However, the IMF’s forward-looking projections, contained in its newly-released full Article IV report on the Bahamas, showed that the central Government’s debt would fall by a mere 1.2 percentage points - from a peak 63.2 per cent of GDP in the current fiscal year to 62.1 per cent by 2019-2020.

This is despite the Fund agreeing that VAT will consistently add revenues equivalent to 3 per cent of GDP throughout the next five years, taking the Government’s total income above the 20 per cent threshold by 2018-2019.

This all suggests that VAT will enable the Government to ‘hold the line’ on its debt-to-GDP ratio, without making any substantial inroads cutting into the national debt as had been promised.

The IMF “agreed that the pace of consolidation planned by the [Government] was broadly appropriate, notably in view of the relatively weak growth outlook”.

It added: “Steadfast implementation of the planned fiscal consolidation is key to placing debt levels on a declining path......

“The large band of uncertainty on the growth outlook calls for continued fiscal vigilance. Staff recommended the identification of contingency measures for meeting fiscal targets, including offsetting measures, should downside risks materialise.

“Such measures should aim to protect growth enhancing capital spending given the large infrastructure requirements. In addition, with growth remaining tepid, staff underscored that fiscal consolidation is not only needed to achieve fiscal and debt sustainability, but also critical to rebuilding external buffers in the near term and to sustaining the [exchange rate] peg,” the Fund added.

“Over the longer term, measures would need to be taken in the area of pensions and health insurance to put these on a fiscally sustainable footing, notably in view of population aging.”

Mr Turnquest said the IMF’s report “falls in line with what we [the FNM] have been saying all along”.

He added that there “seems to have been a shift” in the IMF’s assessment of the Bahamas towards the negative, as its latest Article IV report was now “sounding the alarm”.

“They’re issuing a cautionary warning on this report,” he added.

“The lack of fiscal space and modest external buffers constrain the use of demand-side policies to stimulate growth,” the IMF added.

“Furthermore, the scope for fiscal stimulus to support the recovery is limited by low international reserves and the need to reverse the debt trajectory.”