The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A Cabinet minister yesterday conceded that the Government’s target of increasing annual revenues by $1.3bn in four years is “optimistic”, but argued: “We believe we’ll make it.”

Senator Michael Halkitis, minister of economic affairs, told the weekly media briefing given by the Prime Minister’s Office that the economy’s “bounce back”, as well as the tax enforcement and compliance measures that the Government is implementing, gave it confidence it will “meet those targets”.

With Moody’s now echoing concerns first raised by Tribune Business that the Fiscal Strategy Report’s revenue forecasts are “overly optimistic”, he referenced the Government’s just-released 2021-2022 fiscal half-year performance report in retorting: “But I would point to the fact we are out-performing target (see other article on Page 24).

“Yes, we think they’re [the revenue forecasts} optimistic, but there are some things we’re doing to meet those targets.” Mr Halkitis pointed to the measures unveiled by the Government, and further detailed in the Fiscal Strategy Report, such as the revival of the Revenue Enhancement Unit; recent real property tax revaluation and enforcement; and use of risk-based audits.

“Their view is it’s optimistic,” Mr Halkitis added of the credit rating agency’s assessment. “Our view is, yes, it’s optimistic, but we see that all reports are that the economy is bouncing back in terms of tourism, the economy is opening and employment levels are increasing. We’re pursuing efforts to do a better job of collecting revenues so we believe we’ll make it.”

Moody’s, though, was more sceptical in its assessment of the Fiscal Strategy Report. “The Government’s assumptions about revenue growth may prove overly optimistic, risking a more gradual path to fiscal consolidation,” the rating agency said in a commentary issued this week.

“Unexpected shocks along with implementation slippage are two key risks to the projections. Efforts to improve efficiency could fall short and force the Government to pursue contentious tax-raising measures......

“We assume a more gradual increase in revenue than the Government’s assumptions, but expect the Government to make up for any shortfalls in revenue by reducing spending in order to comply with fiscal targets.”

Moody’s added that the Government had raised its full-year revenue forecasts for 2021-2022, as a percentage of gross domestic product (GDP), from 18.2 percent to 20.2 percent on the basis of a quicker economic rebound that saw its income outperform expectations by $162m during the six months to end-2021.

“The authorities target a 4.8 percentage point of GDP increase in tax revenue between fiscal 2022 and fiscal 2026, bringing total revenue to 25.6 percent of GDP by fiscal 2026,” Moody’s said. Its assessments follows Tribune Business’ Monday report which argued, too, that the Government’s revenue projections are too aggressive notwithstanding the half-year performance.

Simon Wilson, the Ministry of Finance’s financial secretary, told Tribune Business that some “new tax measures” will be required to achieve the projected 55.7 percent increase in government revenues over the next four years - an objective critical to achieving a forecast $71.9m Budget surplus by the 2024-2025 fiscal year.

Kwasi Thompson, ex-minister of state for finance in the Minnis administration, described some of the forecasts as “very extreme” with a $220.4m Budget surplus forecast for 2025-2026. And Moody’s added: “Similarly, support for state-owned enterprises (SOEs) and the removal of pandemic-related spending are key risks to expenditure assumptions.

“The authorities expect reduced pandemic-related spending to reduce expenditure as a percentage of GDP to 24 percent in fiscal 2025 from the fiscal 2021 peak of 32.5 percent. The authorities assume that COVID-19-related fiscal support measures will be rolled back completely by the end of fiscal 2022, reducing recurrent expenditure to 20 percent of GDP by fiscal 2026 from 24.9 percent in fiscal 2022.”

Moody’s predicted that The Bahamas’ debt interest payments, as a percentage of revenues, will “peak” this year at a sum equivalent to 24 percent of gross domestic product (GDP), with the Government’s direct debt having already reached this point at 89.4 percent of GDP.

“The factors most likely to affect the Bahamas’ credit quality are the pace of fiscal consolidation, how quickly the government returns to fiscal deficits consistent with reducing its debt, and how the Government meets its relatively large financing needs over the next two years without putting downward pressure on debt affordability and increasing liquidity risk,” Moody’s said.

“Financing needs and liquidity risk will remain elevated over the next two years, with gross financing needs above 20 percent of GDP in fiscal 2022 and 2023.”

The Fiscal Strategy Report indicates much must go right for the Government to hit its projections. In particular, it says the forecasts are based on assumptions that include “no major external shocks in the short-term” despite COVID-19’s lingering presence and the potential to be hit by another Dorian-strength storm.

“Given the geographic location of The Bahamas in an area prone to experiencing hurricanes, increasing the risk of damage from natural disasters each year, the DSA (debt sustainability analysis) assumes that over the short-term, such exogenous shocks do not occur and that the economy firmly rebounds,” the report said.

“The DSA also assumes that over the medium term, any such natural disasters will be minimal in intensity upon making landfall.” The analysis also assumes there is no further deterioration in The Bahamas’s creditworthiness and access to credit over the same period.

Mr Halkitis, when asked yesterday about the potential for another Dorian-strength storm to blow The Bahamas’ economic and fiscal recovery off-course, acknowledged that the Government had to remain “cautious” because of the recent experience with the Category Five storm and COVID-19.

Acknowledging that “anything can happen”, he said the Government was “seeking to rebuild what we call the headroom and get our debt levels back to 50 percent of GDP or even lower in the medium-term” so it has “the wherewithal” to respond quickly in such circumstances.