The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The government must achieve an “unprecedented and very challenging” four percent primary budget surplus for seven straight years to cut the debt-to-GDP ratio to 50 percent by 2030.

The Fiscal Responsibility Council, in its assessment of both the 2021-2022 Budget and the Davis administration’s supplementary changes, warned forecast fiscal trends will not be sufficient to hit the 50 percent ratio as mandated by the Fiscal Responsibility Act by the targeted 2030-2031 fiscal year.

A four percent surplus, equivalent to $463m a year on current projections, would be required each year between 2023-2024 and 2030-2031 if the government is to achieve its goal following the debt blow-out caused by COVID-19 and Hurricane Dorian.

Such a surplus has “never been achieved before” in Bahamian history, and Gowon Bowe, who represents the Bahamas Institute of Chartered Accountants on the council, said the government needed to set out “the new actions, revolutionary ideas and new steps” that will achieve this goal beyond simply releasing mere figures.

“Given the significant increase in public debt and upward pressures on global interest rates, in particular in the US, deliberate fiscal corrective actions by the Government are necessary to reduce the public debt to sustainable levels set out in the Fiscal Responsibility Act,” the Council’s report argued.

“The current trajectory of the primary balance over the forecast period will not achieve the established fiscal and debt targets, and to achieve the target debt-to-nominal-GDP (gross domestic product) ratio of 50 percent by fiscal year 2030-2031, a more aggressive primary balance trajectory is required over the medium term.”

Revealing the results of a debt sustainability assessment that it had conducted, the Council added: “The results of sensitivity analyses, varying the directly controllable variable of the primary balance, indicate that the debt-to-GDP target at the end of fiscal year 2030-2031, consistent with the announced revised deadline, is only achieved if a primary balance to GDP ratio of 4 percent is achieved beyond fiscal year 2023-2024.

“Attaining and maintaining this level of primary balance will be unprecedented and therefore very challenging. Further, targeting the current legislated fiscal balance threshold of a maximum deficit-to-GDP ratio of 0.5 percent will not achieve the debt-to-GDP target of 50 percent by the stipulated fiscal year 2030-2031.”

The primary budget measures by how much the Government’s revenue exceeds, or is less than, its fixed cost spending. Even though interest payments on the Government’s debt are stripped from this calculation, it has run a primary deficit in four of its last fiscal years.

These have ranged from a low of $101m in 2017-2018 to a peak of $925.7m in 2020-2021, when the Government’s revenues collapsed due to the COVID-19 economic shutdown. And the only primary budget surplus achieved during those five years, the $114.7m attained in 2018-2019, will have to be increased four-fold for each year in a seven-year period based on the Council report.

The Council’s sensitivity analysis detailed two other scenarios for the debt-to-GDP ratio. Taking a historical five-year primary balance-to-GDP ratio would bring the Government’s debt to just 68 percent of GDP by 2030-2031, an 18 percentage point difference.

Maintaining the $310.5m, or 2.3 percent of GDP, projected for the 2023-2024 fiscal year would achieve a slightly better outcome of 60 percent debt-to-GDP by 2030-2031, which would still be 10 percentage points off target. The analysis thus gives some idea of the extent of the task faced by the Government and taxpayers to restore the nation to fiscal balance.

Arguing that the Government needs to supply more details on how it will achieve its fiscal ambitions, and come back into line with the targets set by the Fiscal Responsibility Act, Mr Bowe told this newspaper: “You can make the statements and models that project that [4 percent surplus], but how are you going to achieve that when you have never done it before?

“Before you get there, what are going to be the new actions? What are going to be the revolutionary ideas that are put into play, and the new steps you are going to take, to achieve such an unprecedented surplus?

“That’s where there has to be more encouragement to be more detailed about your analysis of the future. The numbers can say anything, but how are you going to achieve them? In order to have credibility, in order to have trust in the numbers, there has to be steps articulated so the discerning public can tick off the boxes...this tax model changed, this expenditure generated returns.”

The Council’s report also argued that the 2021-2022 Budget, and the supplementary version passed by the Davis administration, failed to set out a long-term strategy to bring the Government’s finances back into line with the Fiscal Responsibility Act targets or explain how the current Budget fits into that vision. As a result, it recommended changes to the Act.

“The 2021-2022 Budget does not specify corrective mechanisms the Government expects to deploy to return to the fiscal path prescribed by the Fiscal Responsibility Act,” the report said.

“ Further, the 2021-2022 Budget does not present a framework to support the sustainability of its fiscal projections or to assess its consistency with the prescribed Fiscal Responsibility principles. As presented, the 2021-2022 Budget does not clearly set out how it incorporates the aforementioned fiscal adjustments, and it does not define the fiscal period that the exceptional circumstances are expected to be extinguished.”

The Government invoked the Act’s “exceptional circumstances” clause, which give it a waiver from meeting the stipulated deficit and debt ratio targets, due to the double blow inflicted by Dorian and COVID-19.

The initial targets were a deficit-to-GDP ratio of 0.5 percent or less by the 2020-2021 fiscal year, and a debt-to-GDP ratio of 50 percent by 2024-2025, but Dorian pushed these to 2024-2025 and 2028-2029, respectively. The debt-to-GDP target was then moved further back to 2030-2031.

“Flexibility in the fiscal rules, particularly in the context of exceptional circumstances, is required,” the Council’s report said. “However, the proposed extensions of the respective targets are not accompanied by a clear strategy to realign the fiscal accounts toward a trajectory consistent with the revised targets.

“Further, consideration should be given to amending Section 13(1)(C) of the Fiscal Responsibility Act requiring prescribed timeframes within which adjusted fiscal targets are to be realised; or formal communication of planned timeframes within which adjusted fiscal targets will be realised. Such enhancements would signal the commitment to fiscal prudence and ensure that fiscal policy is appropriately anchored.”

The Council also warned that the “scope” of its Budget assessment was “limited, as underlying macroeconomic assumptions and relevant estimates that support the 2021-2022 Budget have not been provided in the 2021-2022 Budget or separately to the Fiscal Responsibility Council by the Ministry of Finance”.

This restricted the Council’s ability to assess “whether the Budget allocations support priorities declared by the Government, and the ability to assess the credibility of inputs and variables”.