The Tribune

• MoF reports a near-tripling of the government's first-quarter fiscal deficit, reaching $58 million due to flat revenues and increased spending

• The IMF questions the government’s ability to meet its 0.9% of GDP deficit target, projecting a larger deficit of 2.6% of GDP.

Flat revenues and a $47m increase in total spending resulted in a near-tripling of the government’s first quarter fiscal deficit year-over-year.

The Ministry of Finance, releasing August and September’s monthly fiscal numbers last Friday just as Bahamians were heading home for Christmas, disclosed that the deficit for the three months to end-September 2023 hit $58m as compared to just $20.5m during the same period in the prior fiscal year.

This means the amount by which the Government’s total new spending exceeds its revenue income increased during the first quarter of the current 2023-2024 fiscal year, as expenditure growth outpaced modest revenue improvements.

Total revenues for the 2023-2024 first quarter rose by just $9.2m, or 1.4 percent, year-over-year to strike $663.7m as opposed to $654.5m during the prior year period.

While tax revenues were up by slightly more, rising by $29.2m or 5 percent to hit $603.7m as compared to $574.5m in 2022-2023, VAT collections improved by just $7.4m or 2.2 percent to reach $337.9m.

VAT, which is the Government’s main revenue source, accounting for almost 48 percent or nearly half its recurrent income, has to increase by a much greater 27 percent or $339m over the $1.252bn collected in 2022-2023 to hit this year’s target of $1.591bn.

And, to hit its full-year total revenue and tax targets of $3.319bn and $2.918bn, respectively, the Davis administration needs to increase its income by 16 percent and 15 percent compared to what it generated in 2022-2023.

This means that, to achieve the $462m increase in total revenues and $381m jump in tax income it has projected for the 2023-2024 full-year, the Government will have to grow its income at a much faster pace over the remaining nine months than it achieved during the first quarter.

But, while the Opposition will likely seize on the year-to-date data, one quarter does not make a full fiscal year and is not necessarily an indicator of how the 12-month outcome will look.

The $38m year-over-year increase in the deficit is not a material sum, and can easily be clawed back by the Government over 2023-2024’s remaining nine months. And then there is the cyclical nature of the annual Budget.

The first quarter in every fiscal year is traditionally the weakest as it coincides with the slowest part of the tourism season and therefore less economic activity. It is typically the second half of the Budget cycle that is key in determining the Government’s financial performance.

This is when it traditionally collects the bulk of its revenues, as the early part of the calendar year coincides with the peak winter tourism season and high point of economic activity. It is also when the Government collects its Business Licence fees, bulk of real property taxes and benefits from commercial vehicle licensing month.

Simon Wilson, the Ministry of Finance’s financial secretary, previously said the 2023-2024 second half will be vital to determining the full-year performance given that it is when a number of fee increases – cruise passenger departure levies and boat registration fees – kick-in.

However, the other key determinant of the fiscal year is the size of June’s monthly deficit, which is typically far larger than any of the preceding 11 months. This is because multiple government ministries, agencies and departments deluge the Ministry of Finance with bills it knew nothing about in a bid to have them paid before the financial year-end.

And the 1.4 percent revenue growth for the 2023-2024 first quarter was outpaced by the near-7 percent jump in total spending, which rose year-over-year from $674.8m to $721.7m.

Recurrent spending, accounting for the Government’s fixed costs such as public service salaries and rents, increased by more than $37m to $657.7m compared to $620.6m in 2022-2023. Total civil servant emoluments rose by $15.6m, growing from $192.8m to $208.4m.

The Ministry of Finance, in a statement on September’s performance, said: “During the review month, revenue receipts totaled $195.7m, a 0.4 percent decline from the prior year. Tax revenue accounted for $176.6m, dominated by VAT collections of $92m and international trade and transactions of $55.4m.

“Non-tax revenue collections totalled $19.1m with $18.2m obtained from the sale of goods and services. Public spending amounted to $240.5m, represented by $222.5m in recurrent outlays and $18.1m in capital expenditure.

“Key areas of spending include personal emoluments ($70.6m), the purchase of goods and services ($43m), interest ($34.8m), subsidies ($29.8m) and the acquisition of non-financial assets ($16.9m).

“The Government’s fiscal position for the month of [September] resulted in a deficit of $44.8m. Based on financing activities, central government’s outstanding debt decreased by $55m.”

The publication of the latest fiscal deficit comes as the likes of the International Monetary Fund (IMF) and Inter-American Development Bank (IDB) raise questions over whether the Government will hit its $131.1m, or 0.9 percent of GDP, deficit target for the current 2023-2024 fiscal year that closes at end-June.

The IMF, in its statement on the annual Article IV consultation with The Bahamas, estimated that the current fiscal year’s deficit will be “considerably larger than that expected in the Budget” at a sum equal to 2.6 percent of gross domestic product (GDP).

This is almost triple the Davis administration’s forecast of a deficit equivalent to 0.9 percent of GDP or total Bahamian economic output. The IMF’s prediction, if accurate, would mean that the GFS deficit - which measures by how much government spending exceeds its revenue income - would balloon to around $378.73m compared to the Government’s $131.1m forecast.

The IMF would likely have been shown the same fiscal data for August and September that has now been released to the Bahamian public, and factored this into the modelling and calculations that produced its $379m or 2.6 percent of GDP-equivalent deficit forecast.

The IDB, meanwhile, in a paper tackling the doubling of its crisis funding facility for The Bahamas to $200m, estimated that “the fiscal deficit will be at around 3 percent of GDP in fiscal year 2023 and around 2 percent in fiscal year 2024”. The latter figure would peg the deficit, based on the Government’s GDP Budget estimates, at around $290m.

Michael Halkitis, minister of economic affairs, said at end-November that the Government is “betting on our ability” to hit its fiscal targets and predicted that the Opposition and other critics will “be wrong again”.

He argued that the IMF, in particular, always took a far more conservative view of the revenue impact from enhanced enforcement, compliance and administration, believing such gains are effectively one-offs that are not recurring year after year, whereas the Davis administration’s view is more positive.

And Mr Halkitis added that the administration “have met or exceeded all of our projections”, which contrasts with its recent June and 2023-2023 fiscal year-end report. While the $533m deficit came in lower than the original $564m Budget projection, and first revised estimate of $575.4m, it was slightly higher than the final $520m estimate unveiled with May’s Budget.

Santander, the global bank, in a November 28, 2023, update for institutional investors on The Bahamas’ fiscal status, hailed the “important progress” made by the Davis administration in achieving a 2022-2023 fiscal deficit that came in below the original $564m target to give this nation some “near-term breathing room”.

However, its note warned that “the good news now might be behind us” with the Bahamian and world economy’s post-COVID reflation largely complete and this nation’s Budget lacking sufficient flexibility to make expenditure adjustments following the end to pandemic spending on subsidies and other relief.

Pointing out that debt servicing costs have increased significantly post-COVID, due to the debt blow-out that it and Hurricane Dorian produced, to now stand at 4.2 percent of gross domestic product (GDP) as opposed to 2.6 percent pre-pandemic, Santander asserted that “no clear plan” has been articulated as to how The Bahamas will achieve the magnitude of the correction it is targeting.

Openly stating that “the next phase for fiscal consolidation is much more challenging”, its report said: “The fiscal targets are now increasingly complicated on shifting a nominal -4 percent of GDP deficit to near balance this fiscal year and, still more important, consolidation to a 1.5-2 percent of GDP nominal surplus in fiscal years 2024-2025 and 2025-2026.” That amounts to a $389.5m correction, or reduction.

While agreeing that the Government’s “more ambitious trajectory” would be more beneficial to The Bahamas, in terms of easing the high interest and financing burden on Bahamian taxpayers, Santander reiterated it was “not clear” how the 2023-2024 targets will be realised given the absence of tax/revenue reform and “budget rigidity” given that most spending covers fixed costs such as salaries and rents.

It is now up to the Government, which is on the ground and much closer to the fiscal and economic situation, to prove that its forecast is more accurate than those of external observers. And it does not necessarily have to hit its $131.m deficit forecast dead on.

A further reduction in the deficit compared to last year’s $520m, likely in the region of $250m or below, would show the rating agencies, creditors, investors, IMF, IDB and the like that the Government is maintaining its fiscal consolidation trajectory and on course for a Budget surplus – albeit more slowly than forecast.