The 2022-2023 Budget has generated vibrant, robust discussion in certain quarters and an uncanny level of silence in others. I believe this is a sign of the complexities involved. Objective assessment suggests there are positive aspects to the Budget, but that these also come with significant associated risks. In seeking to provide fair, objective and balanced commentary, I will readily admit that it is not so easy to navigate the current Budget communications. The issues are more complex in the post-COVID environment of significant disruption and ever-increasing uncertainty. One should, however, always be reminded that a Budget is a set of projections based on assumptions, all of which carry risk of not materialising. The major issue with the current Budget is the extent to which normal risks have been heightened and new vulnerabilities have emerged.
Before looking at these risk factors, let us set a framework for understanding where we are. First, the Budget is highly reflective of the administration’s manifesto, Our Blueprint for Change. The 10-point framework to “recover, rebuild and ultimately revolutionise the economy” is dominant throughout. Three areas that stand out the most are: “compassionate social relief and strengthened security”; “a plan for each island”; and “Bahamian empowerment”. These are captured in the priorities stated by Prime Minister Philip Davis QC in presenting the Budget. These are intended “to help Bahamians cope with a cost of living crisis”; “the creation and expansion of jobs and ownership opportunities for Bahamians”; and “addressing various security issues to make our communities and homes safer, and our borders more secure”.
Speaking to the Progressive Liberal Party’s (PLP) stance on taking office, the Mr Davis said: “We were keen not merely to jumpstart the economy to stimulate economic activity and growth, but to do so in compassionate ways that brought hope and dignity back to people.” While there is room for discussion, debate and disagreement, it is useful to see the Budget within this context. These are the priorities and, in executing them, the Prime Minister said the expected outcomes will achieve three things. First, it will put the administration “firmly on course to continue to rescue the economy”. Second, these objectives will “help us navigate some of the new challenges facing the global economy”. Finally, achieving them will “maximise the opportunities and deliver the growth necessary to support national development”. Any analysis that loses sight of these issues risks ignoring the fact that it acknowledges the urgent need to rescue the economy, along with the known headwinds and global influences acting against achieving this goal. The Budget clearly states the need for growth and, importantly, the three main priorities outlined by the Prime Minster are all significantly “people centric”. This focus will naturally create tensions given known macroeconomic pressures.
Numbers alone will not tell the full story. Before diving into the numbers, developing a reasonable appreciation for the thinking and priorities of the Budget can help avoid emotional responses or utterances. An initial high-level assessment, guided by the stated intentions, taking into consideration the fiscal, social and economic realities, current economic performance to-date, and factoring in announced policy changes, provides a sound basis for interrogating the information presented. This approach allows for a sober, inquisitive exploration of the effects and changes. For example, how does a particular policy shift affect the overall debt and country’s creditworthiness? What other approach to reforms for state-owned enterprises (SOEs) is possible given the absence of cuts to their subsidies? What can be gleaned from the trajectory of the projected deficit? How does forecast revenue stack up against previous best performances, and what were the conditions then compared to now? By doing this, it is possible to avoid getting too deep into the weeds, making comparisons based on popular lines or heads, and just targeting those that might carry the greatest emotive value.
Based on this approach, I noted that the Budget represents a very complex, interwoven story indicative of the delicate challenges that The Bahamas faces. Overall, the Budget was excellent in dealing with social support (all measures to directly benefit citizens), and in seeking to protect the most vulnerable segments of the population. However, there were tensions given the decision not to hike taxes, as this places pressure on the limited fiscal space. The Budget represents a very delicate balancing act seeking to navigate the tensions created by the high inflationary environment and a recovering economy, with revenue arguably buoyed by inflation. Finally, I note that the failure to have a fuller discussion regarding the national debt and debt management strategy is likely the most significant area of risk to the Government’s overall plans.
Following its recent declaration in January that The Bahamas’ fiscal projections may be overly optimistic, Moody’s delivered its assessment of the 2022-2023 forecasts. In my view, the credit rating agency provided a very balanced statement that, in general, is not as pessimistic as some seem to suggest. The report points out the positive trajectory for the fiscal deficit, which is forecast to drop from $758.6m this year to a projected surplus in 2024-2025, and concludes that this is a favourable development from a credit rating perspective. The report acknowledges the deficit remains elevated due to the overhang of liabilities left behind by the previous administration, while highlighting the reduction from January’s estimates - a fall from 7.4 percent of GDP to 6 percent. It indicates the reduction will mainly be driven by the current economic recovery, with fiscal consolidation being more rapid than previously expected. Importantly, the report points to the fact that the projections are consistent with economic recovery.
It then notes certain risks to achieving these results. These include the cost of debt. In an environment with increasing risk premiums, and a continued need for borrowing, the risk is whether the cost of debt as projected may increase and consequently expand the deficit. Then there is the reliance on collections and enforcement as a means of increasing revenue intake versus implementing new taxes. Essentially, there is the risk that efforts might fail to yield the expected results and thereby widen the deficit. Finally, restraining spending as projected over the next two fiscal periods could adversely affect opportunities for economic growth. We saw this before 2017, where while our trading partners were showing reasonable growth, but The Bahamas stagnate at annual GDP growth rates of 2 percent or less. The Moody’s message is that the projected reduction in the fiscal deficit is a credit positive, but there are clear risks. The collections/enforcement approach might not be enough, the cost of debt may increase, and holding spending could hurt economic growth. It is a very important and potent message that should not be underestimated or ignored.
VAT at 10 percent, and without zero-rated and exempt items, has generated significant discussion. Coupled with high inflation, it has drawn varying questions, especially about its impact on poor persons. VAT is the most significant contributor to national revenue, and therefore this kind of attention is inescapable and will continue. This is especially so when one considers that the projections appear to be built on the assumption that the adjustments will prove to be sustainably revenue positive. To determine whether this is the case, we need more information than has been reported to-date and should consider the impact inflation may have on current performance. As we focus on the objectives and the potential risks in the Budget, having regard for the level of VAT revenue increase projected, it will be important to monitor actual performance. VAT has proven to be one of the most efficient and predictable taxes for The Bahamas, and any results below projection could have serious implications for overall fiscal performance.
Taking all the points made here into consideration, one major takeaway must be that the margin of error for economic and fiscal management, in this and subsequent years, is very narrow. Before the Budget, I expressed the view that this could be one of the most important budgets in the history of the country. I maintain the view that this budget, and the others up to 2024-2025, will be defining for The Bahamas. Despite the numerous issues and numbers to be discussed and analysed, this Budget is all about the national debt. The outcomes are directly linked to the national debt, and the extent to which the country might secure growth is linked to the extent to which the $10.5bn-plus national debt is managed.
If there are weaknesses in the projections, the risk factors highlighted by Moody’s and others may come into play. However, if the administration has done its homework and rigorously modelled the numbers, as expected, then based on the trajectory of the deficit’s decline things should be generally fine. The words of the Prime Minister make for sober reflection as he conclude his concluded his presentation: “This is a time of great challenge for our country, but also a time of great opportunity. The perils are real – but so is the promise of what we can become if we move forward together.” How we choose to explore, understand and navigate the nuances of this Budget and act accordingly will be fundamental in how these perils will be managed to secure positive outcomes.
NB: Hubert Edwards is the principal of Next Level Solutions (NLS), a management consultancy firm. He can be reached at firstname.lastname@example.org. He specialises in governance, risk and compliance (GRC), accounting and finance. NLS provides services in the areas of enterprise risk management, internal audit and policy and procedures development, regulatory consulting, anti-money laundering, accounting and strategic planning. Hubert also chairs the Organisation for Responsible Governance’s (ORG) Economic Development Committee. This and other articles are available at www.nlsolutionsbahamas.com.