The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Central Bank yesterday intensified its call for “sustained controls” on government spending, after the fiscal deficit widened by a further $20 million in January to hit $295.3 million.

The regulator, in its newly-released March economic developments report, said the deficit for the first seven months of the 2016-2017 fiscal year was some 41.4 per cent, or $86.2 million, higher than prior year comparatives.

While it acknowledged that “the cumulative effects of Hurricane Matthew” were “partly” responsible for the Government’s increased ‘red ink’, the use of the word “sustained” suggests the Central Bank is raising its language over ever-increasing public expenditure.

“While the performance of VAT is expected to continue to positively impact the fiscal position, expenditure pressures are elevated from the hurricane rebuilding. Medium-term consolidation prospects remain contingent on sustained expenditure controls,” the Central Bank said in an analysis prepared by its research department.

Its March report said an $82.7 million, or 6.6 per cent increase, in government spending during the first seven months of the 2016-2017 fiscal year was “primarily” responsible for the expanded deficit. Revenues were down by only $3.7 million year-over-year to end-January 2017.

The Central Bank identified government’s recurrent, or fixed cost, spending as the main culprit, noting that this had increased by $70.1 million or 6.3 per cent year-over-year to $1.178 billion.

This, in turn, was driven by a $54.3 million or 10.4 per cent expansion in subsidies and transfer payments to loss-making corporations.

And, in particular, the Central Bank singled out a $26.9 million, or 21.3 per cent, increase in subsidies to the Public Hospitals Authority (PHA) to enable it to prepare for the National Health Insurance (NHI) scheme.

This suggests that the Christie administration has not cut back on its spending in other areas to compensate for the unexpected expenditure/borrowing incurred due to Hurricane Matthew, and is pushing ahead with new and expanded social programmes despite the strained fiscal position.

Gowon Bowe, the Bahamas Chamber of Commerce and Employers Confederation’s chairman, told Tribune Business that the Central Bank was subtly signalling that the Government needed to “stop draining the money supply” with its borrowing to finance deficits.

Acknowledging that continued weakness in the Government’s financial position will eventually “have a knock-on effect” on the Central Bank’s monetary policy, Mr Bowe said spending reform remains the “unseen” component for a fiscal turnaround.

“It’s always been said from the Chamber and Coalition for Responsible Taxation that fiscal turnaround is going to be three-fold - tax reform, expenditure reform and economic growth,” the Chamber chairman told Tribune Business.

“We’ve seen the tax reform, can now see some opportunities for economic expansion, but the one we can’t see is expenditure reform.”

Mr Bowe reiterated his call for the Government to adopt “programme-based spending”, rather than persist with the current system of simply allocating annual ‘block funding’ to ministries, departments, corporations and other public agencies.

He argued that this would improve governance, and produce greater accountability and transparency, by clearly linking spending to targets that could be easily measured.

“Until we can see either programme-based spending where the money is clearly accounted for in terms of success or failure, our position is always going to be: Are they keeping the belt as tight as possible?” Mr Bowe told Tribune Business.

He added that in the absence of programme-based spending, the private sector and fiscal analysts will also be questioning if the Government is “cutting back on the things they’d like to have, as opposed to ‘must haves’”.

With Bahamian households forced to make numerous sacrifices over the past decade, Mr Bowe said many felt the Government should do likewise by “foregoing things in the short-term” to ensure fiscal sustainability in the future.

Turning to the Government’s continued spending on social programmes, he reiterated: “We have to get to the programme-based spending so that there are clear objectives as to what is success or failure, and what is the target.

“With NHI, it’s not looking at the immediate effects but the long-term, looking at how we do all this in the future. That is the uncertainty that has left people doubtful at best on NHI.

“Universal Health Coverage (UHC) is the universal goal of all nations, no pun intended, but the cost of how you implement that is the key challenge.”

Mr Bowe said the Bahamas also had to assess whether it was “making the best use of resources” by continuing to finance loss-making government entities such as ZNS and Bahamasair.

For those that have private sector competitors, Mr Bowe said the Bahamas needed to determine whether the latter should take over these opportunities with Bahamasair, for example, restricted to servicing Family Island routes.

He added that the Central Bank had “a very important role to play” by “setting the tone” domestically, and advising the Government on how monetary policy impacts fiscal policy.

With the Central Bank responsible for monitoring the external reserves, balance of payments and interest rates, Mr Bowe said persistent fiscal weakness would ultimately impact monetary policy.

“The Central Bank has a fiduciary responsibility to observe the fiscal condition of the country and make representations about what should be done to improve it,” the Chamber chairman added.

“The Central Bank has started using the lever of interest rates, but in reality it doesn’t want to be the driver of economic growth. This means the Government’s drain on the money supply has to be decreased.

“The Central Bank would like to be in a situation where the money supply is not being called upon by the Government in terms of its borrowing.”

Given that Prime Minister Perry Christie stated that the half-year deficit was $275 million, the Central Bank’s data shows that it expanded by another $20 million in January. Total spending stood at $1.334 billion at end-January 2017, with total revenues at $1.039 billion.

“With regard to expenditure, current outlays grew by $70.1 million (6.3 per cent) to $1.178 billion, led by a $54.3 million (10.4 per cent) expansion in transfer payments to $578.9 million,” the Central Bank report said.

“Specifically, subsidies and other transfers rose by $49.8 million (13.7 per cent) amid a reclassification-associated increase in transfers to public corporations, by $34.1 million (73.2 per cent), and a $26.9 million (21.3 per cent) rise in subsidies to the Public Hospital Authority for the launch of National Health Insurance (NHI).”

Interest payments expanded by $4.5 million, or 2.8 per cent, due to a $4.4 million (8.9 per cent) increase in payments on the Government’s foreign loans.

“In addition, consumption expenditure expanded by $15.8 million (2.7 per cent) to $598.6 million,” the Central Bank added, “as personal emoluments advanced by $16.2 million (4.2 per cent), outpacing the slight, $0.4 million (0.2 per cent) fall-off in purchases of goods and services.”

The Government’s capital spending also rose, by $51.5 million or 48.9 per cent to $156.9 million, as outlays for hurricane rebuilding caused a $38.8 million (47.3 per cent) increase in infrastructure expenditure to $120.9 million.