The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government was yesterday warned it is “playing with fire” through the $200 million year-over-year increase in recurrent spending, with a businessman suggesting this threatens to squander the ‘benefits’ from Value-Added Tax (VAT).

Dionisio D’Aguilar, the former Bahamas Chamber of Commerce president, told Tribune Business that the increase - which almost matched the Government’s $217 million net revenue rise - threatened to undermine the ‘fiscal prudence’ image it is trying to portray.

“The fact the Government has increased its spending by $200 million demonstrates they’re not exercising fiscal prudence,” he said yesterday.

“We cannot spend our way out of this. If you don’t exercise fiscal prudence, the economy is not growing and there is nothing on the horizon to lift your economy, you are playing with fire.”

Prime Minister Perry Christie on Monday effectively glossed over the Government’s $200 million year-over-year increase in recurrent spending for the six months to end-December, saying merely that the $1.085 billion was equivalent to 51.7 per cent of the full-year forecast.

However, Tribune Business analysis of the mid-year Budget data showed that recurrent spending for the 2015-2016 half year was up by 22.6 per cent from the prior year’s $885 million.

While VAT ensured that the Government’s revenues increased by $216.592 million, or 31.7 per cent, year-over-year, the spending rise ensured that the ‘recurrent deficit’ fell by just $17 million.

Recurrent spending represents the Government’s so-called fixed costs, such as public service salaries, rents and debt servicing payments.

Given the limited breakdown provided by the mid-year Budget, it was impossible to determine the primary factors driving the $200 million spending increase.

However, the details provided show that ‘personal emoluments’ and ‘allowances’, representing civil service salaries and other benefits, rose by a collective $26.958 million year-over-year.

At $322.8 million for the six months to end-December 2105, civil service salaries or ‘personal emoluments’ accounted for 29.8 per cent of the Government’s fixed-cost spending.

And the main factors driving the 41.3 per cent half-year GFS deficit reduction, based on the Government’s own figures, were the $43 million decline in capital (infrastructure, public works) spending, coupled with a $51 million year-over-year rise in debt principal redemption.

The latter is stripped out of the GFS deficit calculation, as it only measures new debt taken on. As a result, the deficit figures highlighted by the Prime Minister on Monday ‘benefited’ from the $113 million debt redemption.

Between the two - reduced capital spending and increased debt principal repayments - they accounted for $93 million, or 84 per cent, of the year-over-year GFS deficit drop for the 2015-2016 half-year.

Mr D’Aguilar yesterday said it was “admirable” that the Government had, as Mr Christie said, reduced the GFS deficit by almost 75 per cent from its $539 million peak in 2012-2013, provided this year’s $141 million forecast holds.

That, however, requires the Christie administration to produce a ‘$16 million surplus’ over the six months to end-June 2016, given that it has already “blown past” its full-year forecast by racking up $158 million in ‘red ink’ during the first half.

Mr D’Aguilar said the dramatic reduction in the fiscal deficit’s size over the past three years was the one achievement the Government could cling to in attempting to convince Standard & Poor’s (S&P) not to downgrade the Bahamas to so-called ‘junk’ status.

“It’s absolutely paramount that they keep their spending in check,” he told Tribune Business. “It will create a deep sense of anger if their spending continues to grow, and the debt does not fall.”

The Bahamas’ $6.5 billion national debt has continued to grow since VAT’s implementation and, while the growth rate has slowed, S&P’s fellow rating agency, Moody’s, last week expressed concern that it continues to outpace economic growth.

“The one redeeming feature of our economy is that the deficit has come down, and it’s the one thing the Government can hold on to in its forthcoming battle with the rating agencies,” Mr D’Aguilar said.

“With the unemployment rate at near 15 per cent, the debt-to-GDP ratio at near 70 per cent, the economy growing at an anemic 1-1.5 per cent, the ease of doing business getting worse, the national debt at $6.5 billion, there’s no good news.

“The only thing they can do is make sure they use those VAT revenues and funds prudently.”

Mr Christie on Monday described VAT revenues as buoyant and more than satisfactory in relation to our initial expectations”. The new tax generated $317.033 million in revenue during the 2015-2016 first half.

Mr D’Aguilar, though, expressed concern that the Government might use the 2016-2017 Budget to increase its spending with a general election imminent.

“What worries me is that we’re about to enter into an election year, and desperate governments do desperate things to get re-elected, going crazy on spending money,” he added.

“We don’t have that headroom. If we get one more downgrade, people will start talking the ‘D-word’.”