By NEIL HARTNELL
Tribune Business Editor
Private sector executives yesterday warned “our worst nightmare has come true” after the government unveiled record deficit spending that will carry the national debt past the $10bn mark by June 2022.
K Peter Turnquest, deputy prime minister, told the House of Assembly that the $1.3bn deficit projected for the upcoming 2020-2021 budget year represented what he described as “the biggest fiscal response in 100 years” to the twin multi-billion dollar challenges created by the COVID-19 pandemic and Hurricane Dorian.
Unveiling a record fiscal deficit, with revenues down by more than $900m compared to the previous fiscal year’s forecast, Mr Turnquest said the government had elected to undertake massive borrowing to keep the economy “afloat” rather than let it be overwhelmed by COVID-19’s economic lockdown and 30 percent-plus unemployment rate.
Repeating several times that the Bahamas needed to seize the moment to “transform a crisis into opportunity”, he argued that the government “cannot be tepid in our response” and adopt the “do nothing or do too little” approach as this would leave the economy in a “much less desirable place” to ultimately recover from the pandemic.
However, the Budget projections accompanying Mr Turnquest’s presentation confirm that the scars and impact of COVD-19 will continue to impact both the economy and the Government’s fiscal position for many years to come.
For the Government is currently forecast to run an $813.4m deficit, measuring by how much its spending exceeds its revenue, in the subsequent 2021-2022 Budget year. If that comes true, it will be the second highest deficit in Bahamian history behind this year’s $1.327bn, and even higher than the $773.7m worth of “red ink” that will be incurred in the present 2019-2020 period.
This “unprecedented” deficit and borrowing, combined with those two years, means The Bahamas will have added more than $2.9bn to its national debt within a three-year span. And, according to the Budget projections, will take the Government’s direct debt beyond the $10bn mark by June 2022.
Predicted to hit hit $9.5bn, a sum equivalent to 82.6 percent of Bahamian gross domestic product (GDP) this fiscal year, the Budget forecasts project this will steadily rise to $10.32bn in 2021-2022 and $10.614bn in 2022-2023. The debt-to-GDP ratio is forecast to peak at 85.6 percent in 2021-2022 before dropping to 83.1 percent the following fiscal year as economic growth returns to a higher level than 2019-2020.
However, the debt projections in the Budget forecast do not contain the guarantees the Government has given on behalf of the public corporations (usually around 6-7 percent of GDP) or the multi-billion dollar civil service unfunded pension liabilities. As a result, the total national debt is likely much higher.
Rick Lowe, an executive with the Nassau Institute think-tank, told Tribune Business of the Government’s financial position: “That’s unreal. Unreal. Our worst nightmare has come true.” While the Government announced no new or increased taxes in the 2020-2021 Budget, he argued that such moves were inevitable once the economy recovered given that the massive debt increase had to be repaid.
“It’s got to be paid sooner or later,” Mr Lowe added. “The taxpayers, the citizens are going to have to pay for it. They’d better figure out how to unleash this economy. This is going to be a slow grind because they’ve stopped the economy [to combat COVID-19’s spread]. You can’t simply stop an economy and expect it to reboot in a heartbeat. It ain’t like turning a dial.
“It’s pretty grim, and it’s going to be a very slow grind getting out of this. They’ve got to free up the economy, and they have to do some trimming of the civil service. They’ve got to open up the economy, let foreigners in and do what they’ve got to do to get people investing.
“They’ve got to reduce some of the red tape. They’ve got to encourage investment, and realise how important the business community is. All successive governments have done is look at the private sector as something to drain taxes from. It is a vehicle for taxation, yes, but if they keep tightening the regulations people are going to look for alternatives,” Mr Lowe added.
“With the reduced profit margins and increased taxation, the incentive isn’t there to do business. They’ve got to tweak it to encourage businesses to grow and new ones to pop up to sustain the recovery, but you can’t keep milking the same cow.”
Mr Lowe added that the combination of two catastrophic events, Dorian and the COVID-19 economic shutdown, had “put us over the edge and precipice we’ve been approaching for decades”.
Mr Turnquest’s Budget presentation, which concentrated on the Government’s immediate response to the continued pandemic and hurricane fall-out, made no mention of how The Bahamas will repay the increased debt it now plans to take on. The only two options available are via economic growth or new and increased taxes that will likely be imposed at some point in the future.
James Smith, former minister of state for finance, yesterday voiced similar sentiments to Mr Lowe by telling this newspaper: “The question you asked is one no attempt was made to answer: How are we going to pay for this borrowing? How are we going to service this debt?”
He suggested it was unwise to pledge no new and increased taxes, recalling the self-inflicted damage the late US president, George H. W. Bush, did to his 1992 re-election campaign when he told voters: “Read my lips: No new taxes.”
Cautioning the Government against boxing itself in, Mr Smith nevertheless acknowledged that the 30 percent-plus unemployment rate - coupled with the continued tourism shutdown - meant the Government was experiencing a “shrinking tax base” and fewer persons and activities to tax even if it wanted to go this route.
Mr Turnquest, meanwhile, said the $900m fall-off to the $1.76bn in revenue projected for the 2020-2021 fiscal year represented a decline equivalent to 35 percent of the Government’s annual average income. VAT revenues, in particular, are forecast to fall by 31.6 percent year-over-year to $666.318m on account of reduced economic and consumption activities.
“When I presented the Budget Communication last year, we estimated the Government would generate $2.6bn in revenue,” Mr Turnquest said. “We are forecasting revenue of only $1.7bn next year because of the dual external shocks of Dorian and COVID-19. That amounts to revenue that is $900m below where we were this time last year, when the economy was experiencing positive, and steady, economic growth.
“What does this all mean? Mr Speaker, the impact of our revenue shortage is one of the reasons for the large deficit we are forecasting this year. The $900m in lost revenue potential is equivalent to some 35 percent of total Government annual spending on average. The fall-off in planned revenue is an unparalleled blow from these unprecedented economic shocks.”
Mr Turnquest explained that the Government rejected the imposition of new and/or increased taxes to cover its $1.3bn deficit due to fears this would further undermine the strength and pace of any economic recovery from COVID-19. He also acknowledged that the tax base had shrunk with tourism’s contribution likely “minimal to marginal” prior to November-December 2020 (Thanksgiving and Christmas) despite the planned July 1 re-opening.
“We cannot be tepid in our response. There is a substantial cost to implementing the Resilient Bahamas Plan,” Mr Turnquest said, referring to the Budget’s title. “But the prospect of doing nothing - or of doing too little - would lead us to a much less desirable place.
“The biggest set of twin setbacks in the last 100 years calls for the biggest fiscal response in 100 years. The Bahamian people should rightly want to know why the Government finds itself projecting such a high deficit of $1.3bn.
“The answer is relatively straightforward. It is because the alternative options are much worse. It is a lot easier to keep a person afloat than fighting to drag them back to the surface. Our economy is like that. We are investing in our restoration plan to avoid a dramatic scale back that would submerge the economy and leave Bahamians out at sea, without a life raft.
“We are borrowing to keep Bahamian families, communities and businesses above water and to keep the economy afloat, as we see our way through this extraordinary time.”