* In the second of a four-part series, Hubert Edwards argues that the Government had limited options with the 2021-2022 Budget due to a paucity of resources
By HUBERT EDWARDS
Let us assume for a minute that you are the prime minister and minister of finance, meeting with the financial secretary. You are having a meeting to strategise for the budget following two years of record deficits. What is the likely nature of the conversation? What are the things you would be insisting on having, and not having, in the budget this year? What trade offs would you be open to making? You unfurl your strategy map, and look at the factors in play: Revenue, growth, expenditure, deficit, debt, reserves, the pegged exchange rate and taxes. Consider, therefore, in the face of high unemployment, a disrupted economy, high debt and low revenue, what your trade-offs will be. Should there be an increase in taxes? How will this affect potential recovery, and an-already stretched private sector and general population in the midst of a global financial crisis? Would you ignore the state of your medical infrastructure, which COVID-19 has exposed as weak, and which is exacerbated by the archipelagic nature of the country? Would you ignore the private sector, especially the lower echelons thereof, which can absorb some of the unemployed? Are you minded to inject foreign currency into the economy to preserve the external reserves, and continue protecting the pegged exchange rate? What about social sector support? Would you not secure allocations for public sector emoluments and pensions, and give support to state-owned enterprises (SOEs)?
I outline this to indicate the choices in the face of limited resources are not easy. I certainly would not argue that this budget as presented is optimal, but there are some realities that we must face and accept. In that regard, I believe many of the areas covered by the budget were necessary, make sense and reflect the challenges currently being experienced. Therefore, the allocations for hospitals, for small businesses and job creation etc are reasonable. I am, though, open to argue the amount of the allocations and how they will be implemented. Some will clearly present greater challenges than others. For example, creating jobs by means of tax credits. Apart from the “devil being in the details”, its potential is significantly wrapped up in the demand for labour. I hope that there will be positive near-term developments to buoy this effort. It is extremely important that people get back to work, and that the government is able to shift its social assistance in ways that are likely to be more productive for the economy. A government unemployment benefit is clearly inferior to forgone revenue that pays for employment.
The level of capital spending is a good indicator of the level of economic activity likely to be generated in The Bahamas. More importantly, capital expenditure is a signalling of investment in The Bahamas’ future through infrastructure such as airports, hospitals and ports. In recent years, despite reduced inflows of foreign direct investment (FDI) and constrained local investments, this number as a percentage of GDP fluctuates within a narrow band of two percent to four percent of gross domestic product (GDP). This continues to be rather low, in my view, and why the use of public-private partnerships (PPP) as stated in the budget communication is so important. PPPs form one of the pillars of this new budget, and should be followed through with greater urgency and diligence. This concept has not really caught on but, with the debt stock where it is currently and government spending constrained, and the ability (or desire) to raise taxes limited, this avenue offers valuable options and dovetails into ambitions to better engage local investors in public infrastructure projects. As part of innovative and creative strategies going forward, PPPs will have to become a more tangible factor in the provision of public goods. While this may very well mean that the cost will change, it is a viable alternative to direct tax increases and borrowing, and can facilitate domestic wealth creation, so must therefore be better leveraged.
I must readily admit that the discussion around tourism strikes me as needing a deeper level of consideration. The prime minister’s goal of securing diversification through home porting, and smaller ships doing inter-island tours, needs to be better unpacked. Here are a few points. Diversification is directed towards one of the lower ends of the tourism sector, namely the cruise ship business. While any incremental revenue will always be a positive, and low hanging fruit is never to be ignored, in the context of planning for tangible future wins, questions must be asked of the higher-earning spectrum of the tourism sector. Big wins demand big moves. The issue of home porting, in my humble opinion, may still not have the legs anticipated when the idea first emerged. I truly believe that, given the logistics and issues of convenience for their market, cruise companies are more likely to home port in Florida. The stance taken by US health regulators has driven the move to home port in Nassau, I believe. While I hope that I am wrong, I would not be hanging my strategic hat on securing any major gains from this industry. That said, I strongly agree with leveraging the cruise industry to derive greater gains through small businesses. This is clearly the way to go in order to domesticate more of the tourism value chain. However, more attention should have been given to agriculture and marine resources in the budget as they represent one of the best sources of diversification for the country. They represent some of the best areas to leverage linkages with tourism, and should always have national prominence given the impact on food security.
Minimum Corporation Tax
The absence of any discussion on a global minimum corporate tax must have been apparent to those following the issue. It was somewhat of a surprise that it was not covered by the budget communique. This issue has potential competitive implications for The Bahamas. This was underlined by the subsequent statement by the Ministry of Finance. I agree with the current consensus that The Bahamas does not have much to worry about here. From my perspective the greatest concern is potential disruption in the offshore arena overall. Based on our understanding of the nature of the offshore market, it would be wise not to assume there are no connections between The Bahamas and other international financial centres (IFCs). It is often said that big money runs in small circles. It is my view that between the European Union (EU) and the US, we may face a spot of bother longer term. The squeeze will be consistent as companies, countries or nation blocs seek to justify their moves by post COVID-19 economic recovery needs.
We must note the “social conscience” approach that has emerged in these discussions. Statements such as tax losses for “small countries” represent 50 percent of their health budget. Or, using the taxes regained, “country Z” could pull a third of it children out of poverty, whole “country Y” of taxes could pay 34 million nurses etc. This shift is important and is winning traction. I do not believe that this issue will go away. In fact, the approaches will, in my view, keep getting narrower, more clinical and more efficient, as the evolution of the OECD, EU and US efforts has shown over the years, with the greatest progress achieved when there is a meeting of minds and alignment of initiatives. The EU and the US are on the exact same page right now. We should therefore continue to pay careful attention to this matter as it evolves with a view to protecting our financial services sector.
Cyclical or structural weaknesses
I could take many approaches in discussing the current budget. However, there is the deep urge to take the assessment outside the confines of the present year. Why is this important? In this budget cycle there has been an unusual but understandable focus on structural deficits.
The current budget projects a deficit of $951.8m. This follows a projection of $1.3bn for the fiscal year 2020-2021. We are yet to see where this figure will settle, but to-date all released information has it firmly within that range. However, I would not be surprised if this number was to terminate higher, say in the region of $1.5bn or more. The Bahamas has been perennially running deficits. The current levels are unusual and a function of the significant shock to the tourism sector created by COVID-19. The demand side shock experienced in this sector, the single most dominant economic contributor to GDP, is a major cause of the higher- than-usual deficits. As a byproduct of fighting the health crisis, a disruptive suite of treatments, which include lockdowns, curfews and restrictions, has hurt the economy. This, too, is a major contributor to the deficit as it created a supply side shock across the local economic landscape.
The reality, if one cares to look back, is that The Bahamas’ deficits have been relatively high for a number of years. Going back to 2013-2014, we see a deficit of $333m. This has fluctuated between a range of $215m (2018-2019) to a high of $833m (2019-2020) prior to COVID-19. The average deficit over that seven-year period is $473m. Over the same period, except for one year, the national debt was always increasing. If one argues that cyclical deficits are a function of major shifts (shocks or booms, negative or positive) in the economy, and that a structural deficit is a function of “normal growth”, then the deficits over fiscal 2020-2021 and 2021-2022 must be a combination of both. Over the last decade, the country’s economy grew by less than 1 percent annually, on average. Taking into account recent adjustments due to the COVID-19 crisis, the economy has actually declined or experienced overall negative growth. I submit that the recent movement, which tipped it over, is fully cyclical but there is a significant amount of information to be gleaned as to the health of the economy once we adjust for that “abnormality”. For a number of years now, one leading financial expert has argued - and continues to argue - that the growth needed to address the country’s economic growth challenges is between five to six percent over at least a sustained five-year period. The likelihood of this happening on the current path is extremely low. On average, the possibility of a country in the region seeing that type of growth is also extremely low. But if there is any country in the region which can achieve this, it is most certainly The Bahamas.
To be continued...