The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government’s total spending increased by 26 per cent over the six fiscal years to end-June 2016, the Inter-American Development Bank (IDB) warning that it is prioritising the wrong areas for sustainable, long-term growth.

The IDB, in its just-published Caribbean Quarterly Bulletin, said the bulk of the spending increase had gone on civil service wages and the Government’s fixed costs, with recurrent spending up by 27 per cent since the 2010-2011 fiscal year.

This has outstripped the 18 per cent growth rate for capital spending, which pales alongside the Government’s $2.2 billion recurrent Budget, resulting in “short-term” economic impacts that fail to translate into sustained growth.

As a result, the IDB is urging the Government to reprioritise, and switch its primary expenditure focus away from fixed costs and into capital investments in education, health and other economic services.

“A decomposition of the Bahamas’ central government expenditure by economic and functional classifications shows that within the last six periods, 2010-2011 to 2015-2016, total spending has increased by roughly 26 per cent,” the IDB said of the Bahamas.

“Current expenditure grew by 27 per cent, while capital spending moved by 18 per cent. Within the functional classification, the largest increases were observed with Housing and Defense (both doubling); community and social services by 52 per cent, while general public service, including general administration, [increased] by 32 per cent.

“Education spending is projected to decline, while health care spending is estimated to increase by 5 percent.”

It is unclear whether the IDB has accounted for National Health Insurance (NHI), but the 32 per cent increase in ‘general public service’ costs refers to the continued expansion of the civil service and size of government, representing its fixed costs.

The IDB data also gives an insight into why the Bahamas continues to run $300 million fiscal deficits and have a national debt pushing towards $7 billion, and explain why Value-Added Tax’s (VAT) $1 billion-plus revenues have failed to eliminate the deficit.

Primary expenditure is the Government’s spending minus its interest payments (debt servicing costs), and the IDB said its own analysis of IMF and Central Bank data showed the Bahamas could generate positive ling-term economic growth if this was re-purposed.

“For policymakers, these results show that a long-term sustainable growth path can be achieved with investment in education, health, services related to the economy, such as air and shipping transportation, tourism and improved value chain linkages to agriculture and fisheries,” the IDB said of its analysis.

“The key conclusion, therefore, is that a restructured primary expenditure towards capital expenditure, investments in education, health and other economic services can be long-run growth positive, with no further increases in the overall fiscal position.”

This, though, will not be the case should the Government continue to focus the bulk of its spending on the civil service, fixed costs such as rents, and subsidies to loss-making corporations such as Bahamasair.

“Long-run growth and development were not influenced by current expenditure, which primarily included consumption of goods and services, personal emoluments, transfers, and subsidies,” the IDB said of its analysis.

“However, this category was found to be a short-term stimulus for the economy, and suited for providing a quick response to exogenous shocks to the economy (including natural disasters).”

The IDB said the National Development Plan, Vision 2040, had identified areas that “could place the economy on a sustainable path for long-term growth”, especially the focus on workforce development, the “efficiency and competitiveness” of transportation infrastructure, and energy reform.

“Our analysis indicates that a restructuring of primary spending towards targeted sectors can be long-term growth positive while maintaining fiscal prudence and reversing the current trajectory of the national debt,” the IDB said.

“Restructuring of primary spending, targeting key sectors with expenditure of capital on education, health and economic services, will significantly contribute to varied scale investment projects and will be long-term growth positive.

“Creative ways must be found that will help to enhance total factor productivity, the key driver of potential growth, while maintaining a balanced fiscal position.”