Governance reformer defends Fiscal Act on govt ‘latitude’ concern


Matt Aubry, executive director of the Organization for Responsible Governance. Photo: Shawn Hanna/Tribune Staff


Tribune Business Editor


THE Bahamas must strike “a balance between functionality and best practice”, a governance reformer said yesterday, after its fiscal responsibility law was criticised for giving government “too much latitude”.

Matt Aubry, responding to an Inter-American Development Bank (IDB) report, told Tribune Business that no one could have anticipated the Fiscal Responsibility Act’s so-called “escape clause” being employed “so drastically” by the Minnis administration due to the devastating fall-out from Hurricane Dorian and the COVID-19 pandemic.

He spoke out after the IDB report, Economic Institutions for a Resilient Caribbean, argued that the Act as currently written gives the government too much freedom to deviate from the fiscal targets it contains - particularly the goal of keeping the annual fiscal deficit at or below the equivalent of 0.5 percent of gross domestic product (GDP).

The report also lamented that the Act does not contain a timeline for when the government must bring the deficit, and other indicators such as ratios relating to the national debt, back in line with the objectives and targets it sets.

“The Fiscal Responsibility Act provides substantial flexibility to the government in its fiscal conduct,” the IDB study said, “in addition to the 0.5 percent of GDP annual compliance margin. The escape clause does not include quantitative thresholds (in terms of the severity of economic downturns or natural disasters) for its activation by the government.

“Moreover, the Fiscal Responsibility Act does not set any specific guidelines on the time profile of the correction programme to be presented by the government to Parliament following the use of the escape clause or other deviations from the numerical rules.

“This latitude is not in line with best international practices. While it may be justified in the current initial phase of adoption of the rules, it would be desirable to set more specific requirements for the activation of the escape clause and for the correction of deviations from the rules, at the latest during the first review of the Fiscal Responsibility Act.”

Mr Aubry said there had been discussions over whether the Fiscal Responsibility Act should be more specific, in terms of detailing the circumstances when the government could activate the “escape clause” and the timeline it had to bring its finances back in line, when the legislation was first discussed.

However, uncertainty over the circumstances in which it would be triggered, even though The Bahamas faces an annual threat from major hurricanes, resulted in a more liberal approach despite recognition that more specifics would “remove a lot of the latitude for one administration to stray from the intent of the legislation, which is to set a course to bring it back in line with a particular objective”.

“I think that when we set that legislation forward as a country, we didn’t anticipate that clause would ever be used so significantly and drastically in such a short period of time,” Mr Aubry told this newspaper.

“There are so many unknowns that it’s hard to clarify. We should continue to strive to improve our legislation, and make if reflective of best practices, but it’s more important we understand as a country how we use that clause to allow the country to restabilise before we apply another level of definition.

“There has to be a balance between functionality and best practice, and I think there will be a push and pull going forward. As a country we’re just getting out of the gate with this legislation, and we have to make sure it’s fully functioning and then identify areas we need to improve.”

“The Fiscal Responsibility Act undoubtedly represents a major step in strengthening the fiscal framework in The Bahamas,” the IDB report conceded.”First, as regards the 50 percent of GDP debt ceiling, it must be recognized that the adverse impact of COVID-19 on the public finances makes its attainment in the next few years very difficult.

“In its October 2020 regional economic outlook, the IMF projects the debt to rise sharply from around 59 percent of GDP at the end of 2019 to 82 percent of GDP by end-2021. A part of this increase reflects the operation of automatic stabilisers and exceptional COVID-19-related spending, which will unwind over time.”

However, given The Bahamas’ vulnerability to climate change and natural disasters, the IDB study urged that the country remained committed to the 50 percent debt-to- GDP target - something that the Ministry of Finance’s latest projections estimate will not be achieved until the beginning of the next decade.

“There is a clear case for significantly lengthening the period of convergence to the ceiling,” the report agreed. “Decisions about the specific timing and path of convergence should probably be postponed to later in 2021, when hopefully the course of the pandemic will become clearer not only in The Bahamas but also in the countries from which most of its tourism originates.”

However, the IDB document said there was “a clear need to strengthen the analysis of fiscal risks” and the discussion of efforts to mitigate them. And, when it came to the Fiscal Responsibility Act, it warned that “the criteria for dismissal of non-performing members seem too broad and could hinder candor in the assessment of budget proposals”.


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