Govt will have to make some ‘painful decisions’

With stagnated revenue due to the COVID-19 pandemic, mounting government debt from recent heavy borrowing – and annual payments looming – noted economist Rupert Pinder said yesterday that there are only two options for the government to meet its debt obligations in the near term, either by way of raising taxes, cutting expenditures or both.

The government has maintained in recent months that it has no plans to raise or implement new taxes despite a projected deficit of $1.3 billion this fiscal year and a national debt of $9.8 billion and growing.

Pinder said the only reason those fiscal resuscitative measures may not be reflected in the upcoming 2021/2022 budget exercise may be the political climate of the country right now.

“I’m being quite frank here, any discussion with respect to not looking at taxes or expenditure reduction, you are just delaying the inevitable,” he said in an interview with Guardian Business.

“The reality of it is that we know we are smack in the middle of an election cycle.”

According to the Combined Nine-Month Fiscal Snapshot and Report on Budgetary Performance released last week, government revenue was down 30 percent at the end of the third quarter of this fiscal year while expenditure was up five percent.

The deficit stood at $878.2 million.

“In the short to medium term, we are very limited in the options that we have,” Pinder said.

“I mean, you can talk about all the fancy things from tax reform and this or that, the long and short of that is that those things are more long term on the horizon. In the short to medium term, we are very limited in what we can do. And the
options are: increase the level of taxation and cuts in terms of expenditures. Ideally, you want to grow this economy.

“If an economy is growing a lot, these issues, even in terms of your fiscal imbalances by way of deficit, is offset by growth in the economy. If there is growth in the economy, you get what we call in economics as revenue buoyancy – meaning, as the economy expands, even in the absence of any increases in tax rates, you collect more by way of revenue because you are now talking about a bigger pie.

“But the reality of it is that the economy, over the last [few] years, from a growth perspective, has been relatively stagnant.”

The government’s budgetary financing requirements were met through gross borrowings of $2.3 billion.

Domestic bond issuances aggregated $425 million.

The government refinanced $302.7 million of maturing bonds through a recent $425 million domestic bond issuance, and debt amortization payments stood at $1.08 billion at the end of the third quarter.

The government has not said if it will seek new financing in this upcoming budget cycle.

Pinder said with the amount of borrowing left to repay in the coming months, and the need to maintain operational costs, he would not be surprised if the government overshoots its deficit projections.

“The acting financial secretary was quoted in the papers recently as saying that they are on target,” he said.

“OK, fine, but bearing in mind that if you’re saying you’re on target, you’re talking about a record fiscal deficit of $1.3 billion and to the extent to which the numbers are indicative, there’s always the likelihood that the deficit could very well be more than what is forecast.

“It is unlikely, or there is a likelihood, however small, that the deficit might be less than what is projected, but given recent trends, that is unlikely.

“There is a greater likelihood that you would overshoot in terms of the deficit. Because the fiscal snapshot is done on a cash basis, it’s not accrual basis accounting. And in the case of accrual basis accounting, the revenue are recognized whether they are collected or not. You recognize it to the extent that it is earned already and the expenditures are recognized when they are incurred, notwithstanding that the payment may not have been paid out at that particular time. And that is critical.”

Notwithstanding some of the challenges, Pinder said The Bahamas still has a very strong brand and is appealing to international investors.

However, he said outside of a quick turnaround in economic growth, the government will have to, in short order, make the decision on how it will pay off its debts and meet its obligations while it awaits that growth.

“The long and short of it all is to really put things on a firm footing. You need growth rates that would far exceed even those achieved prior to COVID or return to GDP levels prior to COVID and prior to Dorian,” he said.

“Some of the growth that I see is needed to put us on a better footing, that is perhaps more medium to long term.

“And while that is where we would like to be in the short to medium term, the way that I see it is you will have to make some very painful decisions and the painful decisions are going to be by way of taxes.

“You can look at a broad-based approach. You can look at new areas of taxation rather than coming back to the same wells with the consumption based tax – and at the same time, you have to do some expenditure cuts.”

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