By NEIL HARTNELL
Tribune Business Editor
The Bahamas and other Caribbean nations “cannot escape their debt challenges” without implementing so-called fiscal rules, an Inter-American Development Bank (IDB) study recommending this nation impose spending controls.
An IDB paper on developing fiscal sustainability in small states argued that limiting the Government’s recurrent (fixed cost) and total spending, in order to bring the Budget back in line with a target debt-to-GDP ratio, would generate “higher consumer welfare in the Bahamas” than any other option.
The paper’s authors, Allan Wright, Kari Granade and Ankie Scott-Joseph, effectively warned that the Bahamas will be unable to effectively tackle its $7 billion national debt burden unless it imposes discipline on successive governments through binding rules.
“This study contends that Caribbean countries cannot adequately surmount their fiscal and debt challenges in the absence of binding rules that are geared toward entrenching fiscal discipline, curbing fiscal procyclicality, and improving budget transparency and credibility,” the IDB paper’s authors wrote.
“Given the persistence and scale of the fiscal and debt problem in many Caribbean countries, the authors view the urgent adoption of fiscal rules as a critical development priority for the Caribbean.
“Improving fiscal governance and strengthening institutions are imperative not only to curb fiscal procyclicality and reduce indebtedness, but also to restore medium-term fiscal sustainability to better support socioeconomic development.”
The IDB study said ‘fiscal rules’ are intended to promote sustainable economic growth, while at the same time limiting government budget deficits and the growth of the national debt.
It added that there were several types of fiscal rules, most involving set debt-to-GDP ratio or balanced Budget targets - both of which, if adhered to, contain the fiscal deficit and national debt.
Other methods identified by the IDB paper included spending rules that limit the Government’s total, recurrent and spending, something it said was used to “control the size of government”.
Finally, revenue rules were used to boost or reduce tax burdens by setting “revenue ceilings or rules”.
The IDB paper used two yardsticks to measure the impact of these so-called fiscal rules in the Bahamas and other Caribbean state, namely the impact on consumer welfare (change in household consumption) and affect on key economic variables such as employment, investment and GDP.
“Expenditure rules, which simulate adjustments in public spending based on deviations from the targeted debt-to-GDP ratio, provide higher consumer welfare in the Bahamas (0.18 difference) relative to discretionary fiscal policy than any other rules,” the IDB paper found.
“In the Bahamas and Barbados, a revenue rule (which simulate adjustments in revenue based on deviations from the targeted debt-to-GDP ratio) was considered the second-best rule for improving welfare.”
When it came to the key economic indicators, the IDB found that so-called ‘revenue rules’ produced the least volatility for the Bahamas.
The IDB study’s conclusions were yesterday seized upon as backing calls, made continuously by the private sector and others over the past three years, for the Bahamas to pass a Fiscal Responsibility Act and other reforms to make the Government more transparent and accountable over its taxation/spending plans.
Robert Myers, a principal with the Organisation for Responsible Governance (ORG), told Tribune Business that he “100 per cent agreed” with the IDB authors’ conclusions.
He added that their findings mirrored calls made by the likes of ORG for Fiscal Responsibility and Freedom of Information Acts, a government ombudsman and a State Services Act “to improve the management and efficiency of government”.
Mr Myers said the Bahamas lacked a culture of fiscal responsibility and accountability, both within the public sector and the major political parties.
“It mimicks what we’ve been saying,” he added of the IDB report. “To that I would add the culture in the Government; they don’t seem to want to do it. So we have this real culture that is adverse to being fiscally accountable and responsible.”
The Christie administration failed to deliver on promises, made in the February 2015 mid-year Budget presentation, to initiate a public consultation on introducing a Fiscal Responsibility Act.
Such an Act would force the Government to be more accountable and transparent in the management of the public finances, and require it to return to Parliament for approval to raise more money if it had to exceed the limits approved in the annual Budget.
Some have argued that ‘fiscal rules’, which go further than this by setting targets the Government cannot exceed, would lock or ‘box in’ the administration such that it would not be able to effectively respond to emergencies, such as Hurricane Matthew.
However, given the Government’s inability to control its spending, and concerns expressed by RBC’s chief Caribbean economist that it is squandering the region’s best VAT, many observers believe there is no choice but to impose discipline on it.
The IDB study noted that the Bahamas’ gross public debt, as a percentage of GDP, had almost tripled between 2000 and 2015, jumping from 24.5 per cent to 65.7 per cent.
Over the same period, this nation’s overall fiscal balance had deteriorated from -0.5 per cent of GDP to a 4.4 per cent deficit come 2015.
The study added that many Caribbean countries, as the Bahamas has done with Value-Added Tax (VAT), initiated fiscal consolidation programmes “amid acute economic weaknesses” to tackle this.
But it added that “political and socioeconomic realities thwart large-scale fiscal consolidation in downturns”, and pointed to difficulties in aligning revenues with government spending.
“The Caribbean has been unable to link development strategies and plans to medium-term fiscal planning and current year appropriations and execution,” the IDB study said.
“There are also significant gaps in budget credibility, as several countries consistently execute budgets that differ significantly from approved budgets. Comprehensiveness and transparency are also problematic areas.
“Moreover, there exist challenges in procurement planning and execution, and poor linkages between budget preparation, procurement planning, and execution systems. Oversight and governance of procurement, weak monitoring of contract compliance, non-compliance with bidding processes by procurement agencies, and non-transparent bidding processes are additional areas where most countries face challenges.”