The Tribune

* In the third of a four-part series, Hubert Edwards argues that a greater focus on foreign and Bahamian investment will be critical to breaking the low growth trap . . .

Whether we ever get to a balanced budget, and eliminate annual fiscal deficits, will be a function of economic growth combined with wise revenue and spending decisions. The national debt’s growth by some $4bn over the past five years suggests there is a perennial structural deficit in play. Contrasting fiscal year 2020-2021 versus 2021-2022 numbers, some $400m appears transitional. This compares relatively well with the average deficit of $473m mentioned in previous articles. Some may argue that a $73m difference is a significant amount, and I would readily agree. However, we do not yet know what that final position will be for a couple of reasons. The deficit for 2020-2021 is not yet confirmed, and we still have just under one month left in the current fiscal year. It could be beyond the $1.3bn forecast, and will give some insight into the accuracy of the $951.8m deficit for the upcoming 12 months. This projected deficit is important in any assessment. It is dependent on the revenue that The Bahamas will enjoy going forward. Therefore, if revenue is impacted such that we never get back to pre-COVID levels, then the current amount cited as being transitional will harden.

The deficits, actual and projected, for these three fiscal years all sit as the three largest deficits ever. The quality of new revenue measures has critical implications. Will the government be able to recover new and increased sources of revenue at the levels projected? Beyond the period under consideration, The Bahamas will incur public spending that reaches or exceeds $3bn, and revenue historically has always been short. Given there have been no balanced budgets (or surpluses) in The Bahamas’ history, the national debt’s growth signals a strong structural deficiency regardless of how it was caused.

If expected economic growth is unlikely to solve the matter, then we are clearly dealing with a structural challenge. The takeaway from this must be that regardless of whatever optimism exists for the return of tourism, and a normalisation of national and international commerce, there is a fundamental lack of growth that must be fixed. Only GDP expansion above historically anemic levels will reverse the country’s economic fortunes. Against that backdrop, I will leave the reader to contemplate whether the current budget has the ability to resolve this. If the arguments made to this point hold, then there is certainly no possibility of a 12-month budget finding the solutions. The issues are larger, deeper and significantly more nuanced than a one-year budget can solve.

Concessions and InvestBahamas

Two noteworthy developments in the current Budget are the attention given to making investment incentives more accessible to domestic investors, and the proposed creation of InvestBahamas. The budget communication highlighted the fact that domestic investors will now enjoy a range of concessions to either start or expand their small businesses, these being firms with annual revenue up to $5m. To draw on a popular cliché, the devil is in the details. However, if the details are structured and implemented such that this can play out positively, then there is the possibility of, over the longer term, enjoying an economic uplift from these policy measures. There is an important psychology at play here. Bahamians generally embrace the perception that foreign investors are better treated, and have more available to them. This is therefore a move in the right direction towards solving that negative perception. It will not be complete until there is demonstrative evidence that Bahamian investors will receive the same level of treatment as their foreign counterparts. Therefore the use of government concessions/incentives ought not to be limited to purchasing inputs for start-ups, and expanding businesses, but must naturally extend to access to crown land and facilitation by relevant government agencies.

The focus on InvestBahamas is crucial. The country has always been attractive to foreign direct investment (FDI). Over the last few decades, these investments have been focused mainly on the tourism industry. While these have been important, there are lingering questions and arguments as to whether The Bahamas benefits from these investments. There is also the very important concern over the return on investment that The Bahamas enjoys on the concessions it affords these projects. Addressing these matters, together with being more targeted and strategic; faster and more efficient; and balanced in focus and treatment between domestic and foreign investors is fundamental to the way forward. I believe The Bahamas has a set of hardcore structural issues that are impinging on the ease of doing business. An effective investment development/promotion agency must expend a significant amount of effort dealing with this.

To ensure sustainability and wealth creation, investments must impact The Bahamas far more than just creating jobs. This means more domestic players must be involved in the big economic plays. To get more Bahamians involved in their own right, InvestBahamas must look at matters such as the legislation that facilitates local investment. I submit that with some creatively-directed policy positions the Bahamas has a chance to move the needle in favour of greater growth.

FDI inflows will definitely help The Bahamas claw its way towards that five to six percent annual GDP growth target that is required to set the economy ablaze. A new promotional agency has to focus on the strategic targeting of industries with a view to developing additional sources of export revenue. One of the areas of concern for me in this year’s budget is the level of projected revenue. The projection is just less than $200m shy of the 2018-19 outturn of $2.426bn (2021-2022 total is $2.244bn). I reference this year for two reasons. First, it is the year with the highest level of actual revenue, and second, it is the last year pre-COVID and Dorian. The economy lost approximately $1bn as a result of the hurricane and, subsequently, 20 percent of GDP due to COVID.

The revenue numbers suggest a level of optimism that may not be reflected by reality. Even allowing for the return of tourism, this might be leaning a bit too much to the optimistic side. This lingering uncertainty is the reason why I believe that the ability to secure new investments is such an important game changer. Normal does not necessarily mean “as things were”. The messaging from this initiative should not be underestimated. It signals the country’s commitment to improve the ease of investing for local and foreign investors, and should positively influence and change those things which adversely impact the ease of doing business. With the country seeing FDI, as a percentage of GDP, noticeably waning in recent years, this move, effectively implemented, should tip the scales in its favour.

Tax Equity

Taxation has been mentioned multiple times before. Here I wish to focus on the idea of tax equity, as raised in the budget communication, with each person paying their fair share. There have been some tax increases, with high-end properties attracting an additional two percent of VAT above $2m when they are purchased. I have no issues with this and clarifying that VAT applies to all elements of the Airbnb rental, and trust they will both secure positive yields. I mentioned before that achieving projected revenues depends on realising projected inflows from these measures.

It is interesting that the desire for a progressive outcome is deeply rooted in the use of regressive taxes. Will the regressive system of taxation continue to serve The Bahamas? As currently structured it is near its maximum potency, having regard for levels of debt, increased interest costs and record-breaking deficits. There is a rule of thumb in taxation that holds that the higher you increase a particular tax measure, the more likely you are to see declining returns. Is VAT, a regressive tax, and the largest single contributor to national revenue, at or near its maximum? For a few years now, there has been discussion around whether the country should consider some form of income taxation. This progressive method of taxing seemingly does provide better quality answers to the issue of those making more, paying more. It is - and will remain - a very sticky matter, which strikes at the core of The Bahamas’ international financial services industry. If you had only listened to the prime minister’s build-up to the announcement of the new tax measures, and walked away thinking there was a new type of tax afoot, I think it would be totally forgivable. Maybe, just maybe, the way the build-up was styled is an admission in principle that the current tax regime does not always align with two basic conditions it should meet - adequacy and fairness. The possibilities are worth at least a fleeting thought.

To be continued...