The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government is targeting a first-ever Budget surplus of $71.9m by 2024-2025 without having to introduce new and/or increased taxes, its latest fiscal projections revealed last night.

The 2021 Fiscal Strategy Report, which was released at 11.20pm, forecast that the anticipated end to emergency COVID-related spending will enable the Government to lower its recurrent (fixed cost) expenditure to 20 percent of gross domestic product (GDP) by the 2025-2026 fiscal year.

This, coupled with achieving a 25 percent revenue-to-GDP target over the same timeframe, is forecast to achieve a near $72m Budget surplus for the fiscal year that closes at end-June 2025. And, the following year, that surplus, which measures the extent to which revenues exceed government spending, is forecast to expand further to $220.4m.

The Bahamas has a long history of sustained government deficits, which reached into nine-figure sums well before the COVID-19 pandemic sent budgetary ‘red ink’ above the $1bn mark. And many will likely view achieving a 25 percent revenue-to-GDP target, which implies a $700m income increase beyond current levels, as near impossible without new and/or increased taxes.

However, the Government is largely aiming to hit its target through greater enforcement. The Fiscal Strategy Report reiterated that it is targeting a $200m revenue increase over 24 months via the Revenue Enhancement Unit, while the updating of the real property tax roll is forecast to generate “an additional $100 million in revenue for New Providence properties alone.

“Work is commencing to update the real property tax roll on other islands to ensure more accurate real property tax assessments and revenue collection,” the report added.

“The overall impact of the revenue enhancement initiatives is a gradual increase in revenue collections over the medium term toward revenue targets of 21.5 percent of GDP in fiscal year 2022-2023; 23 percent in fiscal year 2023-2024; 24.5 percent in fiscal year 2024-2025; and 25 percent in fiscal year 2025-2026.”

Revenues, according to the Fiscal Strategy Report, are set to break through the $3bn mark in the 2023-2024 fiscal year - a more than $700m increase on the total projected for the current fiscal year. And they are forecast to grow further to $3.428bn and $3.642bn in the two subsequent fiscal years, meaning the Government’s income would have grown by $1.3bn in just four years.

Besides compliance, the Government will also be relying on faster economic growth to achieve its revenue and fiscal objectives. However, in the short-term it will continue to incur deficits that are forecast to be $415.2m in 2022-2023 and $197.3m in 2023-2024 as the nation’s finances begin the hoped-for downward glide path towards surplus barring any COVID or other unexpected shocks.

“The expenditure forecast is prepared with the assumption that the need for incremental COVID-19 health and safety measures, and income support measures, will be eliminated by the end of fiscal year 2021-2022, and achievement of the Government’s recurrent expenditure target of 20 percent of GDP by fiscal year 2025-2026,” the Fiscal Strategy Report said.

“By the beginning of the next fiscal cycle (June 2022), it is anticipated that funding for all forms of COVID-19 support would have fallen away. The forecasts anticipate maintaining a ratio of recurrent expenditures to GDP of no more than 20 percent of GDP over the medium-term horizon.

“Outlays for social assistance benefits - already narrowed by approximately $100m compared to fiscal year 2020-2021 - will maintain this level of expenditure over the medium term. As a reference, fiscal year 2020-2021 social assistance expenditure was inflated by an estimated $164.7m attributed to COVID-19 support and $40.4m in food assistance support.”

As for capital spending, the Government is aiming to limit this to an annual sum equivalent to 3.5 percent of Bahamian GDP. “After peaking at 3.7 percent of GDP in 2020-2021 (largely as a result of transfers to support small and medium-sized businesses), capital outlays are forecasted to contract to 2.7 percent of GDP in 2021-2022 as the need for immediate fiscal stimulus lessens with the expected gradual reflation of the economy,” the report said.

“Over the medium-term framework, capital transfers are assumed to level-off by fiscal year 2022-2023 as COVID-19 related assistance significantly falls due to continued economic rebound.

“Reallocations are expected to be invested in buildings other than dwellings as the Government undertakes greater investments into hospital buildings and infrastructure. As a result, capital spending by the Ministry of Health and Wellness is expected to increase by fiscal year 2022-2023 and over the medium-term.”

To contain spending, though, the Government said it will “curtail overall growth” in public sector jobs other than in areas such as education, health and national security. And it plans, by mid-2022, to resume the strategy outlined by the Minnis administration - suspended during COVID-19 - to obtain $100m in cost savings from the state-owned enterprises (SOEs) over the medium-term.

And the Government will also “pursue a strategy” to cap its multi-billion dollar civil service pension liabilities by requiring all new recruits to participate in a defined contribution plan where they contribute to their retirement income.

“An initial review and assessment of the Government’s existing defined benefit pension scheme has been completed by the accounting firm KPMG, which outlines the need for reform and modernisation,” the Fiscal Strategy Report said.

“Pension payments for fiscal year 2021-2022 equate to $124.7m or 4 percent of total recurrent expenditure. To limit the risk associated with future pension liabilities, government intends to pursue a strategy where all new employees will only be eligible to participate in a defined contribution plan, with a limit on the growth in pensionable salaries for existing employees.

“This strategy is estimated to improve cash flow by $6m over ten years.” However, the Government will likely need far more than that to deal with a multi-billion dollar issue that has been described as a ‘ticking timebomb’ by many.

And the Government has also included an additional $100m outlay in its 2022-2023 fiscal planning to cover the redemption of the $167.7m promissory note injected into BISX-listed Bank of The Bahamas as part of that institution’s 2017 bail-out. That is based on Bahamas Resolve, the bail-out vehicle, recovering 40 percent of the toxic loans removed from the bank’s balance sheet.