By NEIL HARTNELL
Tribune Business Editor
The VAT rate hike and deficit elimination will pave the way for the government to rescue NIB and address its multi-billion pension liabilities, the deputy prime minister confirmed yesterday.
KP Turnquest told Tribune Business it was "absolutely correct" to deduce that addressing the government's main fiscal woes was merely the first step in corrective action that will ultimately address other public sector threats - such as the projected exhaustion of the National Insurance Board's (NIB) $1.6bn reserve fund by 2030.
"As we get our deficit under control, it gives us the opportunity - with the growth trajectory we have - to start paying attention to our debt and paying it down, and dealing with those legacy issues that have been more or less ignored along the way," the deputy prime minister revealed.
He confirmed that the government's medium-term consolidation strategy, once it got beyond eliminating its current $300m-plus annual fiscal deficits, involved addressing both NIB and its unfunded public sector pension liabilities after Tribune Business identified both issues by name.
While Mr Turnquest did not mention it, tackling the latter two problems will likely require further sacrifice and pain from the Bahamian people, with the government seeking to spread this out rather than inflict an unbearable dose in one go.
Both NIB and the unfunded civil service pensions, if unaddressed, could add billions to the Government's already-$8 billion national debt should these liabilities materialise on to its balance sheet and require taxpayer-financed support.
The Inter-American Development Bank (IDB), in its 2018-2022 country strategy for the Bahamas, warned that NIB contribution rates must more than double to over 20 percent to prevent a long-term Bahamian pension crisis.
It projected that the Government's total pension liabilities - including those owed to the civil service and public corporation workers - will ultimately grow to 160 percent of GDP.
Pointing out that all Government pension commitments are "underfunded", the IDB said eliminating this deficit will require NIB contribution rates to rise from the present 9.8 percent to 20.3 percent.
"Beyond the medium term, pension liabilities for which the Government is directly responsible - including social security commitments, pensions and public entity pensions - amount to 160 percent of GDP and are underfunded," the IDB said. "Fully funding these pensions would require increasing the social security payroll tax from 9.8 percent to 20.3 per cent - a 107 per cent increase."
NIB contributions, which take the form of a payroll tax, are currently split 3.9 percent/5.9 percent between employee and employer, respectively. Should the IDB's forecast prove accurate, The Bahamas' 200,000-plus workforce will all take a further hit from reduced "take home pay" and suffer a loss of disposable income, leading to reduced living standards.
And the corresponding increase in employer contributions will cut into corporate profits and cash flow, acting as a significant drag on economic growth by deterring job-creating investment and expansion. With the Government's pension liabilities projected to exceed Bahamian economic output (GDP), the issue effectively represents an "iceberg" that can sink the economy long-term.
The Government will likely be hoping increased economic growth minimises the need for such a jump in NIB contributions, although the population demographics are unlikely to help as the Bahamian population starts to live longer.
And unfunded public sector pension liabilities are forecast to hit $3.7 billion by 2030 if no corrective action is taken - the same year that NIB's reserve fund will be exhausted if no reforms are enacted there. It all suggests that Bahamians, workers and taxpayers in particular, face a rough ride over the next decade to fix problems where the 'can has been kicked down the road' for too long.
Mr Turnquest, meanwhile, emphasised to Tribune Business that the 4.5 percentage VAT rate increase to 12 per cent was a "last resort" option taken when the Government realised there was no alternative to filling its $400 million 'funding gap'.
He revealed that the plan "crystallised" during the Budget preparation when the unpaid, unfunded bills from all government ministries and departments began stacking up on his desk.
And, despite hopes of reducing government spending "even more" during the 2017-2018 fiscal year, Mr Turnquest said the $360 million in unfunded arrears meant there was a much wider gulf between revenues and expenditure without measures such as the VAT hike.
"That's when it all crystallised," he told Tribune Business of the Budget process. "As you get the Budget submissions in and do the analysis, and see where you can reduce spending based on the past year, you then know where the revenue goal is. Then you do the analysis on the revenue and flush out what's left.
"We always knew we had a funding deficit. Even through the year we were looking at ways to increase the revenue. As we came into the Budget period, it starts to correlate and become a real focus as to what are the options."
Mr Turnquest added: "This is not a new phenomena. We had the same problem last year. We came into this year hoping to bring spending down even more, but we realised there's still this gap we have.
"No one wants to increase the taxes on the Bahamian people. When we started thinking about this [the VAT rate increase] it was an unfortunate thing and absolutely the last resort."
The Government rejected all other options, including deep spending cuts/civil service lay-offs and increased the near-$8 billion national debt through more borrowing, as unsustainable and not in its - or the country's - best interest.
The $400 million VAT revenue increase, which many sceptics have described as a questionable target, is designed to pay off $172 million in unfunded arrears during the 2018-2019 fiscal year and cover $79 million in previously under-budgeted spending commitments. A further $89 million is to cover interest costs on the Bahamas' existing debt.