The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Ministry of Finance’s top official says the rebounding economy will help the Government restrain public sector wages to $660.5m in four years’ time - a sum $10m below the current Budget.

Simon Wilson told Tribune Business that the Government anticipates a “trade-off” where highly-prized civil servants are compensated more in line with their worth but the public sector’s overall size is reduced by transitioning workers over to an expanding private sector.

Questioned as to why the civil service wage bill for 2025-2026 is forecast to be below this year’s projected $675.1m, he also pointed to “one-off payments” and “clean-up” work in the 2021-2022 supplementary Budget that saw “lump sums” paid to public officials as well as salary adjustments.

“There are a couple of things with this that you have to bear in mind,” Mr Wilson replied, after the feasibility of the civil service wage bill projections was challenged on the basis that these costs will be impacted by inflation, increments and future industrial agreement settlements.

“Overall we expect to see an increase in individuals’ remuneration but we also expect to see the overall wage bill being held. There’s a trade-off here. As the economy expands, the pressure on the public sector workforce will be less, but individuals have to be compensated fairly. That’s what’s driving our belief in terms of what can be done.”

Mr Wilson said a better benchmark for civil service wage bill comparisons was the $613.2m paid out in the 2020-2021 fiscal year, meaning that the 2025-2026 projection was still an increase - albeit less than $50m in five years.

The Government’s spending projections, as well as its revenue forecasts set out in the 2021 Fiscal Strategy Report, came under fire yesterday from the Opposition Free National Movement (FNM). Kwasi Thompson, ex-minister of state for finance in the Minnis administration, queried the 55 percent projected increase in gaming taxes over the next four years.

These are set to rise from the present $54.1m to $84m by 2025-2026, while Stamp Taxes are forecast to rise by a similar magnitude 55.8 percent - to $91m from $58.4m - over the same period.

“How does the Government account for a decreased VAT rate yet it projects to collect more VAT?” Mr Thompson asked, with the tax forecast to rise from $926m this year to $1.1383bn in 2025-2026. “Stamp tax almost doubles and gaming taxes almost tripled? Will there be an increase to these taxes that is not being disclosed?

“The Government’s projections for expenditure are equally as disturbing, particularly the projections for the upcoming fiscal years. The Government claims that this is consistent with its plans articulated in the Speech from the Throne but the funding in their fiscal plan does not match. Their Fiscal Strategy Report 2021has planned significant cuts to very significant ministries that have the potential to hamper their effectiveness.

“In the next fiscal year beginning in July of this year, the Government projects to decrease compensation to employees by $70m. After making promises to the public service and the unions, we are stunned to learn that compensation to public servants will be reduced in four years when compared to now,” Mr Thompson added.

“Is the plan of the Government to cut public sector jobs? To cut increments and salaries? To further delay wage increases to public servants even after the economy rebounds? Did the government consult with the public service unions on this retrenchment in public sector salaries and other compensation?”

The Fiscal Strategy Report indicates much must go right for the Government to hit its projections. In particular, it says the forecasts are based on assumptions that include “no major external shocks in the short-term” despite COVID-19’s lingering presence and the potential to be hit by another Dorian-strength storm.

“Given the geographic location of The Bahamas in an area prone to experiencing hurricanes, increasing the risk of damage from natural disasters each year, the DSA (debt sustainability analysis) assumes that over the short-term, such exogenous shocks do not occur and that the economy firmly rebounds,” the report said.

“The DSA also assumes that over the medium term, any such natural disasters will be minimal in intensity upon making landfall.” The analysis also assumes there is no further deterioration in The Bahamas’s creditworthiness and access to credit over the same period.

Just how little margin for error The Bahamas has was reinforced by projections showing the impact a 1 percent contraction in economic growth could have on the country’s debt-to-GDP ratio, together with the impact of a -1 percent negative real interest rate shock (where inflation exceeds interest rates) and a COVID-style shutdown similar to what happened in 2020.

“Should output levels be retarded by a 1 percent contraction in projections, the subsequent debt-to-GDP ratio would exceed 130 percent by fiscal year 2026-2027,” the Fiscal Strategy Report said.

“While more moderate in its impact, the impact of a 1 percent increase in real interest rates also presents a threat to the sustainability of the debt to GDP ratio with levels of 120 percent being achieved by fiscal year 2026-2027.

“The impact of a negative 1 percent shock to the primary balance is more muted in its impact and places The Bahamas on a trajectory to maintain current debt-to-GDP levels in excess of 100 percent of GDP over the medium term,” the Fiscal Strategy Report added.

“In the more extreme scenario, should The Bahamian economy experience a ‘sudden stop’ in economic activity similar in magnitude and length as the border closures and reimposition of curfew measures, the impact on domestic macroeconomic conditions would be more severe.

“Reintroducing emergency order protocols and limiting economic activity would result in debt-to-GDP ratios approaching 140 percent by fiscal year 2026-2027.”