By NEIL HARTNELL
Tribune Business Editor
nhartnell@tribunemedia.net
The VAT rate hike and deficit elimination will pave the way for the government to rescue NIB and address its multi-billion pension liabilities, the deputy prime minister confirmed yesterday.
KP Turnquest told Tribune Business it was "absolutely correct" to deduce that addressing the government's main fiscal woes was merely the first step in corrective action that will ultimately address other public sector threats - such as the projected exhaustion of the National Insurance Board's (NIB) $1.6bn reserve fund by 2030.
"As we get our deficit under control, it gives us the opportunity - with the growth trajectory we have - to start paying attention to our debt and paying it down, and dealing with those legacy issues that have been more or less ignored along the way," the deputy prime minister revealed.
He confirmed that the government's medium-term consolidation strategy, once it got beyond eliminating its current $300m-plus annual fiscal deficits, involved addressing both NIB and its unfunded public sector pension liabilities after Tribune Business identified both issues by name.
While Mr Turnquest did not mention it, tackling the latter two problems will likely require further sacrifice and pain from the Bahamian people, with the government seeking to spread this out rather than inflict an unbearable dose in one go.
Both NIB and the unfunded civil service pensions, if unaddressed, could add billions to the Government's already-$8 billion national debt should these liabilities materialise on to its balance sheet and require taxpayer-financed support.
The Inter-American Development Bank (IDB), in its 2018-2022 country strategy for the Bahamas, warned that NIB contribution rates must more than double to over 20 percent to prevent a long-term Bahamian pension crisis.
It projected that the Government's total pension liabilities - including those owed to the civil service and public corporation workers - will ultimately grow to 160 percent of GDP.
Pointing out that all Government pension commitments are "underfunded", the IDB said eliminating this deficit will require NIB contribution rates to rise from the present 9.8 percent to 20.3 percent.
"Beyond the medium term, pension liabilities for which the Government is directly responsible - including social security commitments, pensions and public entity pensions - amount to 160 percent of GDP and are underfunded," the IDB said. "Fully funding these pensions would require increasing the social security payroll tax from 9.8 percent to 20.3 per cent - a 107 per cent increase."
NIB contributions, which take the form of a payroll tax, are currently split 3.9 percent/5.9 percent between employee and employer, respectively. Should the IDB's forecast prove accurate, The Bahamas' 200,000-plus workforce will all take a further hit from reduced "take home pay" and suffer a loss of disposable income, leading to reduced living standards.
And the corresponding increase in employer contributions will cut into corporate profits and cash flow, acting as a significant drag on economic growth by deterring job-creating investment and expansion. With the Government's pension liabilities projected to exceed Bahamian economic output (GDP), the issue effectively represents an "iceberg" that can sink the economy long-term.
The Government will likely be hoping increased economic growth minimises the need for such a jump in NIB contributions, although the population demographics are unlikely to help as the Bahamian population starts to live longer.
And unfunded public sector pension liabilities are forecast to hit $3.7 billion by 2030 if no corrective action is taken - the same year that NIB's reserve fund will be exhausted if no reforms are enacted there. It all suggests that Bahamians, workers and taxpayers in particular, face a rough ride over the next decade to fix problems where the 'can has been kicked down the road' for too long.
Mr Turnquest, meanwhile, emphasised to Tribune Business that the 4.5 percentage VAT rate increase to 12 per cent was a "last resort" option taken when the Government realised there was no alternative to filling its $400 million 'funding gap'.
He revealed that the plan "crystallised" during the Budget preparation when the unpaid, unfunded bills from all government ministries and departments began stacking up on his desk.
And, despite hopes of reducing government spending "even more" during the 2017-2018 fiscal year, Mr Turnquest said the $360 million in unfunded arrears meant there was a much wider gulf between revenues and expenditure without measures such as the VAT hike.
"That's when it all crystallised," he told Tribune Business of the Budget process. "As you get the Budget submissions in and do the analysis, and see where you can reduce spending based on the past year, you then know where the revenue goal is. Then you do the analysis on the revenue and flush out what's left.
"We always knew we had a funding deficit. Even through the year we were looking at ways to increase the revenue. As we came into the Budget period, it starts to correlate and become a real focus as to what are the options."
Mr Turnquest added: "This is not a new phenomena. We had the same problem last year. We came into this year hoping to bring spending down even more, but we realised there's still this gap we have.
"No one wants to increase the taxes on the Bahamian people. When we started thinking about this [the VAT rate increase] it was an unfortunate thing and absolutely the last resort."
The Government rejected all other options, including deep spending cuts/civil service lay-offs and increased the near-$8 billion national debt through more borrowing, as unsustainable and not in its - or the country's - best interest.
The $400 million VAT revenue increase, which many sceptics have described as a questionable target, is designed to pay off $172 million in unfunded arrears during the 2018-2019 fiscal year and cover $79 million in previously under-budgeted spending commitments. A further $89 million is to cover interest costs on the Bahamas' existing debt.
Comments
DDK 6 years, 3 months ago
"The Government rejected all other options, including deep spending cuts/civil service lay-offs and increased the near-$8 billion national debt through more borrowing, as unsustainable and not in its - or the country's - best interest."
Why does the entire population have to be wretchedly taxed to maintain an unnecessarily large, largely inefficient, civil service that is seemingly rife with misconceived feelings of entitlement, AND its pensions?
realitycheck242 6 years, 3 months ago
NIB's high administrative cost along with the politicians using the organization as a piggy bank for gov projects, contracts and as an employment agency for friends and family is the reason for the crisis. The ILO and the IMF has issued many warnings to past administrations that this would be the result. . Whats the use having an investment committee if political interference is the order of the day.
John 6 years, 3 months ago
Fox News (Trump’s Lackey) is reporting that the US Government took in more tax money in the past six months than ever in the history of the US. And Fox reports that this is not the real effects yet of Donald Trump’s deep tax cuts but the premature effects as companies move operations back to theUS, hires more employees, increase wages and employee benefits and invest in new plants and equipment. According to Fox, over one million jobs have been created I’ve the past six months and the national unemployment rate is now 3 percent. AND TRUMP WANTS TO WITHDRAW THE USA from the WTO! In this country government seems to be headed in the direction opposite. They are attempting to choke additional tax dollars from businesses and residents and rushing to join the WTO. And despite drawing additional taxes from Bah Mar coming on stream, the increase in tourism and even the web shops, the government is not achieving its fiscal goals. Borrowing has not decreased, unemployment remains high and the appetite for tax revenue insatiable.
Porcupine 6 years, 3 months ago
https://www.paulcraigroberts.org/2018/0…
John 6 years, 3 months ago
The key is to growth is to make the business environment more friendly and encourage investment and stimulate growth. The signal the Minnis government is sending thus far (to local businesses) is if you become too successful we will tax you ore. And as long as government cannot achieve its fiscal goals you will get additional taxes despite your profitability.
John 6 years, 3 months ago
There is already a worker shortage in the US which will get even more severe in six months. Trump will have to relax it’s zero tolerance immigration policy. And if no jobs are created here The Bahamas will lose a lot of its job seekers to the US. And if nothing is done about the high rate of crime, high cost of living and lower standards of living, Bahamians, even those employed, will be leaving in droves to seek out those 7.5 million jobs now available in the US. Can the country afford more brain drain?
Porcupine 6 years, 3 months ago
What this government did not consider is a progressive taxation strategy and the idea that growing and modernizing the economy would benefit ALL Bahamians. But, the idea that the wealthiest among us should share in the PAIN was not even considered. So it is that the success of the masters of the universe have now educated all leaders of the world that this is the way it will be. TINA, or There Is No Alternative, is what is being used to describe the limited thinking in finding real solutions to our problems. We are actively promoting the rich to become richer, while dooming the poor to starve. Yes, it is simple as that. We have lost our compassion, and now believe in a cruel god. And, we go along with it, while proclaiming we are Christians, unlearned about history, economics, and simple mathematics. What a shame. We have known for a few generations now, the very real social benefits of a good education. Sadly, it seems we have missed the message and the obvious truth of the urgent necessity of understanding the fate of our world. This is not just a failure of Minnis and Turnquest. This is an indictment of "the people" for not having the wisdom of acting in a socially responsible manner. Minnis and Turnquest are merely representative of the lack of imagination and brainwashing that has occurred. Our fate had been sealed, by those at the top who know exactly what they are doing. You won't find this out on facebook, social media, CNN, FOX, the sports channel, or at the web shops. The chickens are coming home to roost and we don't even know enough to call them chickens.
Well_mudda_take_sic 6 years, 3 months ago
Just ask yourself: If the international agencies representing the interests of the developed countries are so concerned about the financial well being of the Bahamas, then why do they tirelessly encourage our feckless and feeble minded politicians to borrow willy nilly and tax the vast majority of the Bahamian people into poverty?
The international agencies never press for belt tightening in any meaningful way - it's something they give only occasional lip service to while putting their lending teat ('tit') to the mouths of our weak, small minded and undisciplined politicians. These foreign agencies are more interested in pushing us off of the cliff so that they themselves can call all of the shots on belt tightening down the road when it's too late for us. And we all know they aim to one day soon be in position to call all of the shots consistent with the interests of their own constituents in the developed countries. At that time the foreign vultures will be able to swoop in and pick our carcass (our national assets) clean for pennies on the dollar, leaving the vast majority of Bahamians hopelessly destitute and without control over their destiny forevermore.
bogart 6 years, 3 months ago
Agree DDK....Why does the ...entire .....population have to be taxed at painful levels ......to full back up the coffers.....and nobody no Directors...Heads....even ...gets chargred wid mismanagement.....of these funds...??????....not one single management ...ever called to give public commission account.........an jus like dat population by law have to pay more taxes to make up for already done gettin goosied !!!!!!
birdiestrachan 6 years, 3 months ago
A different day. A different bunch of lies
Well_mudda_take_sic 6 years, 2 months ago
International agencies like the IMF do not include unfunded pension liabilities of our public sector departments, agencies and government corporations in our national debt for a very good reason - they know that with the stroke of a pen the government of the day can unilaterally reduce these liabilities to pensioners rather than put the burden on Bahamian taxpayers to meet these outrageously generous commitments. Minnis and Turnquest will no doubt be exploring a suitable reduction in these pension benefits much to the chagrin of the pensioners concerned. Fair is fair given that in most instances the pension arrangements were very unfair to Bahamian taxpayers from day one. The required unilateral reductions in pension benefits will also need to be applied to existing retirees already collecting their pension benefits. All of these overly-generous and unfunded pension obligations will need to be settled for at most 50 cents on the dollar. Representations were long ago made to the IMF, Moody's, Standard & Poor's, etc. that our 'public sector' unfunded pension obligations should not form part of our national debt because of our government's ability to unilaterally reduce all future pension benefit payments with the simple stroke of its pen. Most public sector employees and retirees are unfortunately unaware of this fact. But, after all, if private sector employers and employees cannot count on receiving their meagre national insurance benefits, including the portion contributed by themselves, then why should our existing and former public sector employees expect to be able to count on receiving their overly generous pension benefits in the future.
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